THE THEORY OF COMPARATIVE ADVANTAGE

One of the most important ideas in economics is comparative advan- tage, originally propounded by David Ricardo, a British economist and politician of the early 1800s. The proposition is simply that nations, societies, and members of those societies collectively benefit most by specializing in what they do best, even if some parties are "absolutely" more efficient producers than others.

To follow the argument, imagine two people, A and B, on a desert island, who have only two jobs to do: collecting coconuts and fishing. Assume that they agree that both items are of equal value ­ 1 coconut is worth 1 fish. Person A is better than Person B at both tasks (see Table 2.1).

The problem is to decide how A and B should spend their time.

-	Coconuts	Fish
Person A	20	20
Person B	10	16

A could tell B, "You are a bad worker, so stay out of my way and do nothing". The result of this would be a maximum production capacity of either 20 coconuts or 20 fish per day. B may be a less productive worker, but he can still make a contribution. To find the most productive way of dividing their labor, they look at the "opportunity cost" of the alternatives (see Table 2.2).

Table 2.2 Opportunity cost

-	Produced	Opportunity cost
When A collects coconuts	20 coconuts	20 fish not caught
When B collects coconuts	10 coconuts	16 fish not caught
When A catches fish	20 fish	20 coconuts not collected
When B catches fish	16 fish	10 coconuts not collected