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0 pointsrahimnathwani9y ago0 comments

"Cotton should be planted where there is the most fertile soil etc."

Nitpick: this statement is about absolute advantage, whereas Ricardo emphasised comparative advantage: https://en.wikipedia.org/wiki/Comparative_advantage#Ricardo....

Imagine that you're better than me at everything (both programming and needlework). You can program three times as fast, and sew twice as fast as I can. Does that mean you should do all your own programming and sewing? No.

However small my contribution, I can save you some time by doing some sewing for you. In that saved time, you can do more programming than I could have achieved in the time I spent sewing. So in sum we're better off. So, there are potential gains from trade.

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reddytowns9y ago

Yes, but at a certain threshold that is no longer true due to logistics. For instance, I could try to sell back all the plastic bags I got at the grocery store, and even if I folded them flat, made sure they were clean and ready to reuse, no matter the price, the grocery store owner would with all likelihood refuse to buy them from me.

Because, regardless of how much money would be saved from buying my bags over the ones fresh from the factory, it wouldn't be able to cover the logistical cost to the company's workflow.

rahimnathwaniOP9y ago

My simplified example was designed to demonstrate the difference between absolute advantage and comparative advantage, and show that there are gains from trade, even when one party has absolute advantage for all output goods.

There is no doubt that transactions costs and other friction make some potential exchanges uneconomical. So, what you say is true. But it doesn't help or hinder my explanation, and is irrelevant to the point I was trying to make.

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