Sunday, November 6, 2011

Grow the Pie

Grow the Pie

What does comparative advantage mean to me as an individual? It is easy to think of it on a large scale, such as the comparative advantage of a certain region or the collective comparative advantages of a nation or people, But what about at the personal level? Where does comparative advantage have an effect on my life?

The answers to these questions are complicated, but with simple logic one can come to understand their pertinence. I understand comparative advantage as the ability to produce something with relatively the smallest opportunity cost compared to anyone you have the ability to trade with. With this in mind I wonder where my comparative advantage lies. Can I have many comparative advantages?

The answer is yes; a person can have many comparative advantages and usually has several. This is what allows us to trade an exchange in our benefit; if we could not make something at a lower base level cost than someone else then there would be no reason to trade at all. Mutually beneficial trade hinges on the hope that whatever you are exchanging will be worth less to you than what you receive. With comparative advantage, this means that you can produce something of obvious value at such a low cost to yourself that it becomes advantageous to produce for exchange purposes. Since people values change continually then it would be smart to have many things you can produce at a comparatively low cost to ensure you always have something to exchange for what you want. This makes the total wealth of each of us bigger by default, growing out metaphorical economical pie.

For myself, I look at this also in the labor exchange. People exchange labor for wages, ergo they produce labor and in return they are given money. If I can produce labor for a lower cost to myself than others it is in my best interest, and also in society’s best interest, if I produce that labor in exchange for acceptable wages. But also it is up to me to determine the worth of my labor to make sure that the exchange is profitable. This is why I would choose a job close to my home at 10$ an hour over a job far away from my home at 12$ an hour. This is because the opportunity cost is much higher to travel farther from my home and over time makes the ten dollar an hour job more economical.

All in all, the individual effects of comparative advantage are the ability to gain through mutually beneficial trade, the mechanisms used to determine the cost of producing labor in exchange for wages, and a way to benefit society by producing goods at low costs. When someone actively pursues their comparative advantages it benefits not only them, but also those who they trade with by saving them the time needed to produce that good or service themselves. It is this essential function of a market place that allows the economic pie to grow, whereas participating in things that are not ones comparative advantage would shrink that delicious pie. Since I work, and I would like to gain wealth throughout my life, I think it is definitely in my best interest to pursue my unique comparative advantages.

No comments:

Post a Comment