Word of The Day – Comparative Advantage

Comparative advantage – a win/win way to trade

Definition: Comparative advantage is gained when two parties each specialize in making a different kind of product and exchange them with the other party

Discussion:

When asked during the Town Hall debate about how they would bring back jobs to America, the candidates for President of the United States had two very different answers. The distinction between the two could be crucial for the next generation of American workers.

(1) Romney said he would “level the playing field“. This was in order to make American workers more competitive with workers in other countries. This attempt to increase equality of American and foreign workers apparently means many Americans would wind up being paid the same low wages as foreign workers. Moderator Candy Crawley questioned whether it would even be possible to accomplish this. Could Americans live on the pittances foreigners get paid? I wondered if this goal is the reason there is pressure to build a wall along our border with Mexico to keep Mexican day workers out of the US. Should we expect to see unemployed Americans soon be encouraged to take these jobs at the same low wage rates?

(2) Obama said that we would need to use education and training programs to raise the skill levels of American workers so they could be paid more than foreign workers. This is an economic model of domestic and foreign trade called “comparative advantage“. The solution gives workers in both countries (or regions of a country) a unique competitive advantage. We can trade high-end products made by skilled Americans to other countries. Other countries can trade cheap products made by unskilled foreign workers to us.

As an economic theory of trade, comparative advantage makes sense. In the real world, with many countries trading, it may not be so simple.