How Comparative Advantage Affects Your Job

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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.

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One Response to “How Comparative Advantage Affects Your Job”

  1. dong says:

    The example is actually one of absolute advantage since Jim is better at catching fish, and John is better at gathering berries ABSOLUTELY. Strictly economically speaking the better example of comparative advantage example would be:

    Jim catches 5 fish a hour and gather 5 lbs of berries.
    John catches 1 fish a hour and gather 3 lbs of berries.

    In that example Jim is better at fishing and gathering berries. The real beauty of comparative advantage is that trading partners don’t actually need to be better but rather just better at something else. In the case above, John has a comparative advantage in gathering berries. John is better off just concentrating on gathering berries even though Jim is better at in absolute terms.

    Jim can spend 3 hours and get 15 fish, and john can get 9 lbs of berries in that 3 hour span. Jim can then trade 5 fish to John for 6 lbs of berries, and end up with 10 fish and 6 lbs of berries which is still better than he could have done on his own. John ends up with 5 fish and 3lbs of berries which is way better than he could’ve done.

    The real nugget of comparative advantage is that it’s effective regardless of the overall productivity levels. We have Ricardo to thank for figuring this one out.

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