Economics: The Law of Comparative Advantage
So far, we have only been talking about what economics is like for one country, or one nation, or one kind of good. But obviously, there many people, many countries, and many goods being bought and sold. We are going to talk about one of the laws of economics that applies to several people or countries, and several goods, at once: the Law of Comparative Advantage.
The Law of Comparative Advantage says that each nation should produce, or each person bring, whatever good is cheapest for them to bring. Why? Because each nation, and each person, is trying to practice economics which is the efficient allocation of scarce resources. Because resources are scarce or limited, they should be allocated where they get the most results. Resources are different for each nation and person, so each nation and person has a different way of allocating scarce resources efficiently.
For example, say you and your group of classmates need to meet together to make a popsicle-stick tower. Because you are a group, it is inefficient for each of you to bring popsicle sticks, glue, string, paint, and the guide picture.
Instead, you randomly assign each person to bring something. One person brings the popsicle sticks, one person brings glue, one person brings paint, and so on and so forth. It is more efficient because you only need some glue, some popsicle sticks. If each of you brought everything, you would have too much glue, too many popsicle sticks.
There is an even more efficient way to assign who will bring what. Say that one student’s older brother still has popsicle sticks left over from his last project, and another student’s mom makes crafts with glue. Another student’s dad runs an art supplies shop, and so on and so forth. It would be inefficient if the student whose brother still had popsicle sticks brought the string instead. It would be inefficient if the student whose mom makes crafts with glue brought paint instead.
The Law of Comparative Advantage states that each person should bring what it would cost him the least to bring. If each student brought what costs them almost nothing, the overall cost of the group would be low, and the opportunity cost for each student would also be low. If ever the students needed more supplies, then they’d have extra to buy it with because they were able to save on the first set of materials.
That is the simplest description. However, the Law of Comparative Advantage is mostly applied to nations. Each nation practices economics by focusing its resources on whatever is cheapest for it to make. It depends on the resources that the nation has, and the situation for each nation.
For example, the Philippines would not be ordering many invisible dog fences from the U.S., because it is rare for Filipino houses to have no physical fences. Because they have no need, the Law of Comparative Advantage does not apply to that particular good between those particular countries.
To review, the Law of Comparative Advantage states that each nation should produce, or each person bring, what is easiest and cheapest to produce or bring. This way, each nation and person can properly practice economics.