Trade and Specialization • Adam Smith in Wealth of Nations, written in 1776, writes about the benefits of specialization. ○ One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a particular business, to whiten the pins is another; it is even a trade by itself to put them into paper; and the important business of making a pin is, in this mannar, divided into about eighteen distinct operations… Those ten persons, therefore, could make among them upwards of 48,000 pins in a day. But if they had all wrought separtely and independently… they certainly could not each of them have made twenty, perhaps not one pin in a day. • Modern example: I, Pencil: The Movie Market Economy vs. Command Economy • In a market economy, production and consumption decisions are the result of decentralized decisions by individuals and firms. • In a command economy, industry is publicly owned and the government makes decisions on the allocation of goods and services. • Most economies are mixed. Specialization and trade are what makes countries prosper. Absolute Advantage • A coutry or individual is simply better than another country or individual in producing a particular product. Comparative Advantage • A country or individual has a LOWER opportunity cost than another country or individual in producing a particular product. • Examples 1 • Examples 2 • Examples 3 Comparative Advantage & PPF Graph • Flatter slope will have comparative advantage in the x-axis good. • Steeper slope will have comparative advantage in the y-axis good.
