Meditations and Learnings

Meditations and Learnings

Comparative Advantage and Wages

If not for the fact it is sad, it would be funny how countries of varying development levels all fear trade! The countries with lower productivity fear it because they worry they can’t compete with high-skilled workers abroad. The more people in more productive countries fret that the lower wages abroad put them at risk.

This is entirely backwards: trade maximises the wages of the workers in each country, given their level of productivity. When Sudan sells cotton to China, and China sells computers to Sudan, both can specialise, and both get what they want.

In this example, 1 tonne of cotton is $1000, and 1 computer is $1000. Sudan can make 5 tonnes of cotton or 2 computers, and China can produce 6 tonnes of cotton or 10 computers. Sudan earns $5,000 by focusing on cotton, and China makes $10,000 by focusing on computers. If China tried to do both, make 3 tonnes of cotton and 5 computers, it would have made $2,000 less. If Sudan tried the same thing, it would have lost $1,500.

The generated wealth doesn’t go into the pockets of the business owners - the demand is what is driving the entire business! There are now 5 tonnes of cotton where there would have been 5.5, but 10 computers instead of only 6! Somebody’s buying computers, and it’s the more productive workers in their respective countries.