How Comparative Advantage Affects Your Job

Comparative advantage is a principle in economics that explains how fair and free trade helps everyone involved and it’s an idea that I believe will affect everyone’s job, more than it already has, in the United States. Wikipedia has a detailed page explaining comparative advantage but essentially the idea is that two people, groups, countries, etc. that are better at different things benefit from focusing on their strength and “trading” with each other.

Here’s a simple example. Let’s take two people, Jim and John. In one hour’s time:

  • Jim can catch 5 fish or gather 2 lb. berries,
  • John can catch 1 fish or gather 10 lb. berries.

Jim is a better fisherman, John is a better berry gatherer. It benefits both to focus on their strengths and trade for what they lack if exchange rates are favorable. What is a favorable exchange rate? As long as the rate is better than 1 fish for 10 lb. of berries, John will trade. As long as the rate is better than 2 lb. of berries for 5 fish, Jim will make the trade.

Let’s say the exchange rate is one fish for two pounds of berries. Jim can fish for an hour and then trade one of those fish for 2 lb. of berries. After an hour, he has 4 fish and 2 lb. of berries, which is 4 fish more than if he was bumbling around the forest looking for berries. Likewise for John, he can gather 10 lb. of berries, trade in 2 lb. for a fish and end up 8 lb. of berries ahead. Get the idea? We’re better off doing what we do best and trading for the rest.

So, how does this affect you or me? Outsourcing. There are billions of people outside of the United States and the reality is that the cost of labor is extremely cheap in many countries. A lot of corporate call centers are located in India because the cost of living there is ridiculously cheap relative to the United States. Why do so many products originate in China? Again, cost of doing business is much lower there. (Before you complain about dealing with Indian CSRs and poisonous Chinese products, remember that Americans love cheap stuff and ultimately it’s American corporations choosing to work with particular subcontractors, responsibility is on American companies)

How do you protect yourself? Find a job that cannot be outsourced. Easy to say, not as easy to do! What are some jobs that cannot be outsourced? These are jobs where the work products cannot be easily transported or not legally transported.

  • Work products not easily transported: A car mechanic’s job will likely not get outsourced because he or she need to be near the cars he or she is working on. A doctor has to be near his patients. However, there are aspects of those jobs that can be outsourced. Perhaps one day a car mechanic’s diagnosis can be akin to the outsourcing of x-ray examinations. The x-rays themselves are easily transported, but the patient may not be.
  • Work products that can’t be legally transported: A great example of this work in the defense field. Product designs and configurations are easily transported but cannot be under law. If you work in the defense industry, it’s unlikely your job will be outsourced.

That’s comparative advantage in a nutshell, why outsourcing works, and how one can best protect themselves in these changing times.

 Frugal Living, Personal Finance 

When A $945 Espresso Machine Makes Sense

Espresso ShotsTim Clark, author of The Prosperous Peasant (my review), has a blog called Soul Shelter and he posted a guest article last week where the author’s friend Dave, a multi-millionaire from the dot-com boom, bought an espresso machine for $945. At first I reacted the same way as the author, “It must be nice to be able to afford a high-end, fully automatic espresso maker, I mused aloud.” But as the article continued, I saw the logic.

“OK, consider this: One double latte costs three dollars at a coffee shop, so your outside coffee-drinking habit comes to six dollars a day for you and your wife. That’s $2,190 per year in after-tax dollars,” Dave extrapolated. “Assuming you’re in the 27 percent tax bracket, that means you have to earn $3,000 before taxes to pay for those lattes. That’s more than a month’s wages for a substitute teacher here in the state of Oregon.”

I don’t spend $3 at a coffee shop each day but he and his wife do. I don’t spend $2,190 per year in after tax dollars on double latte’s, but he and his wife do. I don’t have to $3,000 before taxes to pay for coffee each day, but he and his wife do. For him, the $945 espresso machine makes perfect sense even after you factor in the cost of milk, beans, etc. It may not make sense for me, but for him it makes perfect sense.

This is basically the reverse of the monthly payment math trick. The monthly payment math trick is where a salesperson tricks you into paying more for something by justifying it in terms of monthly payments. If I were to argue that he’s making a bad decision, I’d be falling for the trick in reverse by focusing on the $3 a cup cost versus the $1000 espresso machine. When you do the math and find total cost, his logic is sound. You could argue that he shouldn’t be spending $3 on a double latte every day but then you’re not talking money anymore, you’re getting into personal preferences.

The bottom line is that you should always be doing the math. A commenter, Hank, said that his mantra this year is to “just do the math.” When you do the math, the answer is usually pretty clear. In this case it’s crystal clear, once you get past the $945 up-front cost. The other comments for this post are pretty good too, I think many of the commenters know each other so it makes for some lively debate.

What are your thoughts on the purchase?

(Photo: asurroca)


I Can’t Solve A Rubik’s Cube

Rubiks Cubes, Balls, etc.When I was younger, I remember fiddling around with Rubik’s Cubes and was reminded of that when Jason Kottke blogged about speedcubing with the Fridrich Method. I could never solve the Rubik’s Cube and my friends who knew one of the algorithms, of which there are more than fifty, used to brag about how they could solve it in such and such a time.

Well, none of them came close to the world record holder. Yu Makajima can solve a Rubik’s cube in 8.72 seconds when he has two hands:

The dude can solve it in 14.56 seconds when he has to do it one-handed:

The most amazing part is that there’s no rushing, no sense of panic as time elapses, just calm and collected twisting of the edges.

(Photo: farnea)


New Regulation on Credit Card Unfair Practices Approved

This week, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration, after receiving a bazillion comments (really 65k+) on Regulation AA (Unfair or Deception Acts or Practices, by financial institutions in connection with consumer credit card accounts and overdraft services for deposit accounts), approved changes that make credit cards more friendly to consumers. While it will be until July 1st, 2010 before the regulations take effect, here’s what will change.

(Click to continue reading…)


Why Jewelry Makes A Wonderful Gift (Not!)

Meg Marco of The Consumerist posted this hilarious clip from Current TV where Sarah Haskins makes mockery of jewelry, jewelry advertising, and the whole concept of shiny carbon and pretty rocks in a wrapped 3 minute, 31 second robin’s eggshell blue box. Just some background, the clip is part of a recurring feature called Target Women on a show called infoMania. Target Women makes fun of something that media or marketing targets towards women. All this is hosted on Current TV, which bills itself as “the world’s leading peer-to-peer news and information network” and it has a ton of great content on it (like great smart content, not just videos of monkeys smelling their fingers and falling off trees).

I need to find myself a woolly mammoth (and a HUGE red bow) because I’m tired of jewelry face. Haha, wonderful video. (This one about Lessons for 2008 is great too)

Want to get hooked on Current? This is what got me hooked. Check out this video where Kaj Larsen and Christof Putzel go to a gun market in Mogadishu, Somalia in search of AK-47s. Yes, you read that all correctly… a gun market… in Mogadishu (site of the Black Hawk Down incident)… to buy an AK-47. If all that wasn’t insane enough, they brought a video camera. Actually, that’s not a bad idea… I should buy an AK-47 for my wife for Christmas!


Win A Copy of TaxCut Tax Prep Software

TaxCutLast week, through the generosity of Home Depot, Crystal B. won herself a $100 Home Depot gift card. This week, we have H&R Block’s TaxCut to thank as we start preparing for year end tax moves that can save us big bucks come April 15th. (Beyond this all I have are books, unless a company steps up for the holidays!)

The fine folks at TaxCut are giving away two copies of their software to BFP readers. Why are they doing this? Well in part because it’s near the end of the year so people have tax planning on the brain and because they’re not dummies, they see TurboTax getting absolutely slammed on for their pricing changes. Either way, you are the beneficiary because you have a chance to win one of two copies.

I’ve reviewed both products in the past and have used both products in the past, if you’re a huge TurboTax fan, TaxCut isn’t that different outside of some color changes. The bottom line is that both follow the tax code, both will find you deductions to save you money, and both will save you some gray hairs on your way to April 15th. The biggest advantage TaxCut has over TurboTax, from what I can see, is that you can prepare as many returns and print as many as you want with the software. E-filing, which is the best method out there if you want your tax rebate faster, costs ten bones a piece.

Now, before you enter, please check to see if you qualify for free tax preparation because if you can get it for free, there’s no sense trying to win software where you have to pay $10 to e-file.

If you can’t get it for free, simply leave a comment below with a tax-related story and I’ll select a winner for the first copy. The story can be some tax mistake you made, a gripe you have with TaxCut or TurboTax, your best tax tip, or something else tax related (jokes are always popular!). You will also be competing against email subscribers, who are entered in all contests. If you subscribe via email, you’ll have the chance to get two entries into the contest.

For the second copy, you’ll have to join Twitter, follow me, and @bargainr me a tax related story (same types as above). Please be sure to include #BFPtaxcut in the message so I can find it easily on search. Of those tips, I’ll select a second winner.

Here’s an example message (is this a joke or a tip? you decide!):

@bargainr #BFPtaxcut Don’t earn money and you don’t pay any taxes!

This contest will be running through the weekend until next 5PM Monday, December 22nd, when I’ll select two winners. Void where prohibited. Good luck!

If you’re in the contest mood, ChristianPF is giving away a ton of stuff including two iPods, two copies of TaxCut, spatulas, books… and a partridge in a pear tree.

 Your Take 

Your Take: Acceptable To Tip Less in a Recession?

Tip Jar at a CoffeehouseKimberly Palmer of Alpha Consumer asked her readers this week whether you should tip less during a recession. There was your typical philosophical discussion about the merits of tipping (think about the opening scene of Reservoir Dogs) but it seems as though, based on the callers into NPR’s Talk of the Nation, a show that Kim was on, people, based on empirical evidence, felt it was acceptable to tip less.

I don’t think it is. I worked once as a banquet waiter and so was not subject to per-ticket gratuities and I wasn’t compensated as if I were subject to per-ticket gratuities. I was paid a handsome $10 an hour for my banquet waiter duties and the only tips I ever saw were for getting drinks for people. I may be a little biased, but not terribly so.

I think that if you don’t think you can afford to tip fairly, you should be using the services are expect tips. You can cook your own food for far less than eating out, so if money were really the issue then you wouldn’t be ordering or dining out, you’d be cooking yourself.

As for the philosophical qualms people have about tipping, our society has made it a norm. Some food service staff are paid less because there is an expectation that they will be compensated by patrons for their service through tips. If you don’t like it, don’t blame the waiter or waitress, blame the system and blame the restaurant owner for perpetuating it.

What are your opinions about tipping? Do you think it’s acceptable to tip less when money is tight? What about the philosophical angle about how tipping has really stretched itself into other areas or how tipping in general is really a terrible compensation system?

(Photo: mwichary)


Return of Layaway

Layaway PLan SignWhen I was much younger, I remember going with my parents to department stores like Sear’s and JCPenney (a tradition I would continue with my wife, about a dozen years later) and the one department I never understood was the “layaway department.” When I asked my parents, they didn’t know what it was either because at the time, they paid cash for everything (didn’t have cash? save until you do!). I didn’t learn until many years later that layaway was where you could have the store hold something while you made regular payments, then you could keep it when you fully paid it off. Layaway was tossed into the gutter when credit cards became the norm, but now they’re making a come back.

I think layaway is fantastic. My parents strategy of saving up money before buying something, while prudent, was risky because the item could go out of stock while they were saving. With layaway, you could put a deposit, save money through regular payments, and then be assured the product was yours when you saved up enough money. There are service fees and cancellation fees involved with layaway, so it’s not a free service, but it beats paying 20% interest on a credit card. With the credit crisis and people being saddled with so much credit card debt, I think the return of layaway should be a welcomed thing.

How Does Layaway Work?

Layaway works different at each store but basically you select your items, bring them to the register, and request that they be put on layaway. You often have to put down a deposit (some dollar amount or a percentage of the total) and pay a non-refundable service fee. Layaway isn’t indefinite and isn’t available for all products at a store. They often exclude certain hot items (electronics) or things that are not easily layaway-able (like food, plants). Finally, there is often a time limit on how long you can put things on layaway.

It sounds like a lot of rules but it isn’t, check out Sears’ Layaway policy (it’s only 2 pages):

  • Available products: Sears Full Line, SEars Hardware, Sears Grands, Sears Essential Stores. Must be in-store merchandise.
  • Down payment: $15 or 20%, whichever is greater.
  • Non-refundable service fee: $5, $1 in Maryland ($5 if products greater than $500).
  • Cancellation fee: $10.
  • Deadline: Stores cancel and return all layaways on December 26th.

See? Not too tricky but it’s also not free, I suppose you have to pay for the right to store the item so it’s not entirely unfair.

Have you bought anything on layaway?

(Photo: notramstolimestreet)

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