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why trade if you have absolute advantage to produce a good?

  1. profile image46
    janethorwellposted 7 years ago

    why trade if you have absolute advantage to produce a good?

  2. don_08 profile image52
    don_08posted 7 years ago

    You would only trade if you had absolute advantage over ONE good : for example Sam can make 4 chairs with 8 pieces of wood where as Pat can make 1 Chair from 8 pieces of wood. Sam has absolute advantage in only making chairs but compare it to the making of tables Pat can make 2 tables with eight pieces where as Sam cannot build any tables. You only trade with absolute advantage if you have only advantage to one area ? So Sam can trade Chairs for some tables !! I hope it makes sense good luck !!

  3. vaguesan profile image81
    vaguesanposted 7 years ago

    What don said,
    You might be able to produce one thing well, but to try and produce everything you need is impossible. It's much better to specialize and gain maximum efficiency and trade for what you need, rather than trying to produce everything you need badly.

  4. Evan G Rogers profile image75
    Evan G Rogersposted 7 years ago

    Even if you have an absolute advantage in EVERY SINGLE CAPACITY, trade can easily be seen as advantageous.

    We'll use $/hour as a unit of productivity -- I.e., $20/hour is twice as productive as $10/hour. Doing so can lead to problems if we carry it too far, but for this discussion it is safe.

    For Example: If Doctor #1 can see patients for a value of $50/hour, research diseases for $30/hour, and write books about how to be healthier for $15/hour... but Doctor #2 can only see patients for $40/hour, research diseases for $25/hour, and write books for $10/hour...

    ... then it's still worthwhile to trade between the two.

    Without trade, Doctor #1 would spend 33% of his time dedicated to each task. that would be 33% of a 40 hour week to treating patients, 33% to research, and 33% to book writing -- and Doctor #2 did the same --- this would net Doctor #1 a total of about $1266.67 each week, and it would net Doctor #2 a total of about $1000.  Between the both of them, that equals about $2266.67 (Here, both doctors did each job a total of 66% of their total labor hours)

    But if Doctor #1 instead decided to dedicate 66% of his time towards treating patients, and 33% towards research, and then hire doctor #2 to split his time 33% towards research and 66% writing books, then -- the same amount of work is done -- but the total amount drawn in is about $2310. Doctor #1 would draw in about $1700, and about $610 would be Doctor #2. This looks bad for Doctor #2, but we also have to remember that Doctor #1 is trading with doctor #2, so likely #1 would pay #2 a few extra bucks. - To make the trade profitable for both parties, #1 could pay #2 about $400.... yet #1 would still be making about $40 or so more than he would have without trade.

    Through trade, even though Doctor #2 sucked horribly in each category, they together were able to generate about $45 more than they would have independently of one another.

    Both jobs were done in the same quantities: a total of 66%. But because of specialization, they all benefited even though Doctor #2 sucked.

    I will happily admit that the numbers are completely made up - but it doesn't really matter: Surely through the soon-to-be 7 Million people on this planet a more profitable combination can come about. The numbers might be made up, but it could have been anything in any amount - Trade allows specialization, and specialization generates wealth.