The elves will be much better at making some things than anybody else (let’s say wooden trains), but they will be only a little better than other people at producing other things (let’s say board games and chocolate). The elves have a comparative advantage in producing wooden trains. If they specialise in producing wooden trains, they can trade the excess production – which everyone else will value highly because they can’t do it as well – for lots of board games and chocolate that they can make better, but only a little better, than other producers. Specialisation in goods where they have comparative advantage will be far more efficient. It will take the elves less time to put together the full order list for Santa, allowing them more time to enjoy the Northern Lights. And it will provide an explanation for why the chocolate in the stocking will have ‘Made in the USA’ printed on it.
It may sound inconsequential but it is a powerful – and comforting – real-world conclusion. Is China going to end up manufacturing everything? No. Is Brazil going to dominate global markets for all agricultural produce? No.
Comparative advantage was first set out by Robert Torrens in an essay on the Corn Laws in 1815. It concluded that Britain – at the time the emerging ‘workshop of the world’ – should buy wheat from Poland, even if a bushel could be produced cheaper in Britain than Poland. David Ricardo then took the plaudits for comparative advantage in his Principles of Political Economy in 1817. For a good contemporary exploration of comparative advantage, see Tim Harford’s fun Undercover Economist.
Source: British Embassy Newsletter
The British Embassy
3100 Massachusetts Avenue, Washington, DC, 20008, USA