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Week 2 · Module overview

Week 2 — Comparative Advantage, Specialization & the Gains from Trade

Principles of Microeconomics Free sample edition

Why this matters

Two roommates splitting the cooking and a small business owner hiring out her bookkeeping face the same question as whole countries: who should do what, when one side is faster at everything?

In plain language

People and countries rarely make everything they use; they focus on a few things and trade for the rest. This week explains why that works, even when one side is better at everything, an idea David Ricardo set out in 1817. The key is to compare what each side gives up, not how fast each side works. A producer that gives up less to make a good has a comparative advantage in it (a lower cost, counted in the other good it could have made). When each side leans toward that good and trades, both can end up with more, which economists call the gains from trade (the extra goods both sides get by trading instead of working alone).

  • Already covered: Week 1 showed that every choice has an opportunity cost and drew the production possibilities frontier.
  • This week: absolute and comparative advantage, the opportunity-cost table, the terms of trade, the gains from trade, and the trade debate.
  • How they connect: comparative advantage is opportunity cost compared across two producers.
  • Where we're going next: Week 3, Demand, opens the unit on the supply-and-demand model.

Focus

If one partner is faster at everything, why should anyone else do any of the work?

By the end of this module, you should be able to:

  • [ ] tell absolute from comparative advantage with numbers
  • [ ] build an opportunity-cost table with units
  • [ ] test a trade rate against the range between two costs
  • [ ] prove the gains from trade and label positive and normative claims

To-do

Plan your week

  1. Read Chapter 2 (~35–45 minutes), then the lecture and slides.
  2. Work the lecture tutorial (60–90 minutes).
  3. Do the practice exercises (15–25 minutes).
  4. Do the Model Workshop (about 90 minutes), discussion, and assignment.
  5. Take the quiz.

This week's checkpoint: name each partner's comparative advantage at the food stand from its cost table.

You've got this

Say the units out loud, take it in order, and ask your instructor early if stuck.

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