Teaching Comparative Advantage and International Trade: Pitfalls and Opportunities

Article excerpt

ABSTRACT

This paper discusses pitfalls and opportunities in teaching (and writing about) comparative advantage at the introductory or "principles" level of instruction. We propose that instructors might improve their treatment of this topic by using fractions to represent relative opportunity costs, the true basis of comparative advantage. Using that simple instructional device can be a very effective way to convey the essence of comparative advantage and develop less-than-obvious implications for international trade, such as the fact that domestic firms compete against other domestic firms - not just their foreign counterpoints - in the determination of comparative advantage, patterns of trade, and shares of global markets.

INTRODUCTION

A young schoolboy is struggling with his first-ever lesson on fractions.

He cannot understand why 10/50 is less that ½.

"I just don't get it," he says. "Obviously 10 is bigger than 1 ."

"Of course," explains his teacher, "but you must also consider the denominator."

"Yes, I know," the student responds, "but 50 is really bigger than 2."

We might find such an exchange amusing, but economics principles students routinely make essentially the same mistake when they first encounter the theory of comparative advantage. Fortunately, grasping the essence of comparative advantage is as easy as understanding why Vi is greater than 10/50.

The fundamental axiom of comparative advantage is well known in the context of international trade: A country has a comparative advantage in the production of a good or service if its marginal opportunity costs of production are lower than the marginal opportunity costs of another country producing the same good or service. Consider the following table depicting production possibilities for two countries.

The table indicates that Country A must forego production of 10 widgets to produce 3 extra gadgets, while Country B could produce 2 extra gadgets at an opportunity cost of 8 widgets. Thus Country B has the comparative advantage in producing widgets (and Country A in producing gadgets). Comparing the marginal opportunity costs of these two countries is analogous to comparing the values of two fractions, in this case 1 0/3 relative to 8/2. In order to see which has the larger value, one must compare entire fractions, not just numerator to numerator or denominator to denominator. When economics students first contemplate comparative advantage and international trade, they are apt to make the mistake of comparing like products across national boundaries, ignoring production of different products among domestic producers - widgets in Country A to widgets in Country B. But such comparisons say nothing about opportunity costs within a country, the true basis of comparative advantage. The mistake is exactly the same as that of the young schoolboy who compares numerators to numerators of fractions, or denominators to denominators.

This paper discusses pitfalls and opportunities in teaching (and writing about) comparative advantage at the introductory or "principles" level of instruction. The issues raised here have importance beyond academics and questions of pedagogy. Many policy debates revolve around the appropriate extent and form of government intervention in international trade. Various interested parties and constituencies argue that protectionism, in one form or another, is needed to save domestic jobs, nurture "infant industries," uphold environmental standards, or promote any number of other alleged benefits. To make informed judgments about the costs and benefits of protectionist policies, economics students must understand the rationale for free trade, and the consequences - obvious and subtle, intended and unintended - of policies that would alter the nature of trade across national boundaries.

IN THE BEGINNING: THE RICARDIAN DISTINCTION BETWEEN ABSOLUTE AND COMPARATIVE ADVANTAGE

Scholars generally credit David Ricardo with first articulating the principle of comparative advantage and its implications for international trade. …