47
Interdependence
and the Gains
from Trade
C
onsider your typical day. You wake up in the morning and pour yourself
juice from oranges grown in Florida and coffee from beans grown in Brazil.
Over breakfast, you watch a news program broadcast from New York on
your television made in China. You get dressed in clothes made of cotton grown
in Georgia and sewn in factories in Thailand. You drive to class in a car made of
parts manufactured in more than a dozen countries around the world. Then you
open up your economics textbook written by an author living in Massachusetts,
published by a company located in Ohio, and printed on paper made from trees
grown in Oregon.
Every day, you rely on many people, most of whom you have never met,
to provide you with the goods and services that you enjoy. Such interdependence
is possible because people trade with one another. Those people
providing you with goods and services are not acting out of generosity. Nor
is some government agency directing them to satisfy your desires. Instead,
Chapter
3
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48	 PART I	 INTRODUCTION
people provide you and other consumers with the goods and services they produce
because they get something in return.
In subsequent chapters, we examine how an economy coordinates the activities
of millions of people with varying tastes and abilities. As a starting point for this
analysis, in this chapter we consider the reasons for economic interdependence.
One of the Ten Principles of Economics highlighted in Chapter 1 is that trade can
make everyone better off. We now examine this principle more closely. What exactly
do people gain when they trade with one another? Why do people choose to
become interdependent?
The answers to these questions are key to understanding the modern global
economy. Most countries today import from abroad many of the goods and services
they consume, and they export to foreign customers many of the goods and
services they produce. The analysis in this chapter explains interdependence not
only among individuals but also among nations. As we will see, the gains from
trade are much the same whether you are buying a haircut from your local barber
or a T-shirt made by a worker on the other side of the globe.
3-1 A Parable for the Modern Economy
To understand why people choose to depend on others for goods and services and
how this choice improves their lives, let’s look at a simple economy. Imagine that
there are two goods in the world: meat and potatoes. And there are two people in
the world—a cattle rancher named Rose and a potato farmer named Frank—each
of whom would like to eat both meat and potatoes.
The gains from trade are most obvious if Rose can produce only meat and
Frank can produce only potatoes. In one scenario, Frank and Rose could choose
to have nothing to do with each other. But after several months of eating beef
roasted, boiled, broiled, and grilled, Rose might decide that self-sufficiency is
not all it’s cracked up to be. Frank, who has been eating potatoes mashed, fried,
baked, and scalloped, would likely agree. It is easy to see that trade would allow
them to enjoy greater variety: Each could then have a steak with a baked potato or
a burger with fries.
Although this scene illustrates most simply how everyone can benefit from
trade, the gains would be similar if Frank and Rose were each capable of producing
the other good, but only at great cost. Suppose, for example, that Rose is able
to grow potatoes but her land is not very well suited for it. Similarly, suppose that
Frank is able to raise cattle and produce meat but he is not very good at it. In this
case, Frank and Rose can each benefit by specializing in what he or she does best
and then trading with the other person.
The gains from trade are less obvious, however, when one person is better at
producing every good. For example, suppose that Rose is better at raising cattle and
better at growing potatoes than Frank. In this case, should Rose choose to remain
self-sufficient? Or is there still reason for her to trade with Frank? To answer this
question, we need to look more closely at the factors that affect such a decision.
3-1a Production Possibilities
Suppose that Frank and Rose each work 8 hours per day and can devote this
time to growing potatoes, raising cattle, or a combination of the two. The table
in ­Figure 1 shows the amount of time each person requires to produce 1 ounce of
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 49
each good. Frank can produce an ounce of potatoes in 15 minutes and an ounce of
meat in 60 minutes. Rose, who is more productive in both activities, can produce
an ounce of potatoes in 10 minutes and an ounce of meat in 20 minutes. The last
two columns in the table show the amounts of meat or potatoes Frank and Rose
can produce if they devote all 8 hours to producing only that good.
Panel (b) of Figure 1 illustrates the amounts of meat and potatoes that Frank
can produce. If Frank devotes all 8 hours of his time to potatoes, he produces
32 ounces of potatoes (measured on the horizontal axis) and no meat. If he devotes
all his time to meat, he produces 8 ounces of meat (measured on the vertical
axis) and no potatoes. If Frank divides his time equally between the two activities,
spending 4 hours on each, he produces 16 ounces of potatoes and 4 ounces of
meat. The figure shows these three possible outcomes and all others in between.
This graph is Frank’s production possibilities frontier. As we discussed in
Chapter 2, a production possibilities frontier shows the various mixes of output
that an economy can produce. It illustrates one of the Ten Principles of Economics in
Chapter 1: People face trade-offs. Here Frank faces a trade-off between producing
meat and producing potatoes.
Figure 1Panel (a) shows the production opportunities available to Frank the farmer and Rose the
rancher. Panel (b) shows the combinations of meat and potatoes that Frank can produce.
Panel (c) shows the combinations of meat and potatoes that Rose can produce. Both
production possibilities frontiers are derived assuming that Frank and Rose each work
8 hours per day. If there is no trade, each person’s production possibilities
frontier is also his or her consumption possibilities frontier.
The Production Possibilities
Frontier
(a) Production Opportunities
Minutes Needed to
Make 1 Ounce of:
Amount
Produced in 8 Hours
Meat Potatoes Meat Potatoes
Frank the farmer 60 min/oz 15 min/oz 8 oz 32 oz
Rose the rancher 20 min/oz 10 min/oz 24 oz 48 oz
4
8
Potatoes (ounces)
16 32
A
0
Meat (ounces)
(b) Frank’s Production Possibilities Frontier
If there is no trade,
Frank chooses this
production and
consumption.
12
Potatoes (ounces)
24
B
0
Meat (ounces)
(c) Rose’s Production Possibilities Frontier
48
24
If there is no trade,
Rose chooses this
production and
consumption.
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50	 PART I	 INTRODUCTION
You may recall that the production possibilities frontier in Chapter 2 was
drawn bowed out. In that case, the rate at which society could trade one good
for the other depended on the amounts that were being produced. Here, however,
Frank’s technology for producing meat and potatoes (as summarized in
­Figure 1) allows him to switch between the two goods at a constant rate. Whenever
Frank spends 1 hour less producing meat and 1 hour more producing potatoes,
he reduces his output of meat by 1 ounce and raises his output of potatoes by
4 ounces—and this is true regardless of how much he is already producing. As a
result, the production possibilities frontier is a straight line.
Panel (c) of Figure 1 shows the production possibilities frontier for Rose. If
Rose devotes all 8 hours of her time to potatoes, she produces 48 ounces of potatoes
and no meat. If she devotes all her time to meat, she produces 24 ounces of
meat and no potatoes. If Rose divides her time equally, spending 4 hours on each
activity, she produces 24 ounces of potatoes and 12 ounces of meat. Once again,
the production possibilities frontier shows all the possible outcomes.
If Frank and Rose choose to be self-sufficient rather than trade with each other,
then each consumes exactly what he or she produces. In this case, the production
possibilities frontier is also the consumption possibilities frontier. That is, without
trade, Figure 1 shows the possible combinations of meat and potatoes that Frank
and Rose can each produce and then consume.
These production possibilities frontiers are useful in showing the trade-offs that
Frank and Rose face, but they do not tell us what Frank and Rose will actually
choose to do. To determine their choices, we need to know the tastes of Frank and
Rose. Let’s suppose they choose the combinations identified by points A and B in
Figure 1. Based on his production opportunities and food preferences, Frank decides
to produce and consume 16 ounces of potatoes and 4 ounces of meat, while
Rose decides to produce and consume 24 ounces of potatoes and 12 ounces of meat.
3-1b Specialization and Trade
After several years of eating combination B, Rose gets an idea and goes to talk to
Frank:
Rose:	Frank, my friend, have I got a deal for you! I know how to improve
life for both of us. I think you should stop producing meat altogether
and devote all your time to growing potatoes. According to my calculations,
if you work 8 hours a day growing potatoes, you’ll produce
32 ounces of potatoes. If you give me 15 of those 32 ounces, I’ll give
you 5 ounces of meat in return. In the end, you’ll get to eat 17 ounces
of potatoes and 5 ounces of meat every day, instead of the 16 ounces
of potatoes and 4 ounces of meat you now get. If you go along with
my plan, you’ll have more of both foods. [To illustrate her point, Rose
shows Frank panel (a) of Figure 2.]
Frank:	(sounding skeptical) That seems like a good deal for me. But I don’t
understand why you are offering it. If the deal is so good for me, it
can’t be good for you too.
Rose:	Oh, but it is! Suppose I spend 6 hours a day raising cattle and
2 hours growing potatoes. Then I can produce 18 ounces of meat and
12 ounces of potatoes. After I give you 5 ounces of my meat in exchange
for 15 ounces of your potatoes, I’ll end up with 13 ounces of
meat and 27 ounces of potatoes, instead of the 12 ounces of meat and
24 ounces of potatoes that I now get. So I will also consume more of
both foods than I do now. [She points out panel (b) of Figure 2.]
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 51
FIGURE 2The proposed trade between Frank the farmer and Rose the rancher offers each of them a
combination of meat and potatoes that would be impossible in the absence of trade.
In panel (a), Frank gets to consume at point A* rather than point A. In panel (b), Rose gets
to consume at point B* rather than point B. Trade allows each to consume more meat and
more potatoes.
How Trade Expands the Set of
Consumption Opportunities
(c) The Gains from Trade: A Summary
Frank Rose
Meat Potatoes Meat Potatoes
Without Trade:
Production and Consumption 4 oz 16 oz 12 oz 24 oz
With Trade:
Production 0 oz 32 oz 18 oz 12 oz
Trade Gets 5 oz Gives 15 oz Gives 5 oz Gets 15 oz
Consumption 5 oz 17 oz 13 oz 27 oz
GAINS FROM TRADE:
Increase in Consumption +1 oz +1 oz +1 oz +3 oz
4
5
8
Potatoes (ounces)
16 17
32
A
A*
0
Meat (ounces)
(a) Frank’s Production and Consumption
Frank's production
and consumption
without trade
Frank's
consumption
with trade
Frank's
production
with trade
12
13
Potatoes (ounces)
2412 27
B
0
Meat (ounces)
48
24
18
B*
(b) Rose’s Production and Consumption
Rose's
consumption
with trade
Rose's
production
with trade
Rose's
production and
consumption
without trade
Frank:	 I don’t know. . . . This sounds too good to be true.
Rose:	It’s really not as complicated as it first seems. Here—I’ve summarized
my proposal for you in a simple table. [Rose shows Frank a copy of
the table at the bottom of Figure 2.]
Frank:	(after pausing to study the table) These calculations seem correct, but
I am puzzled. How can this deal make us both better off?
Rose:	We can both benefit because trade allows each of us to specialize in
doing what we do best. You will spend more time growing potatoes
and less time raising cattle. I will spend more time raising cattle and
less time growing potatoes. As a result of specialization and trade,
each of us can consume more meat and more potatoes without
­working any more hours.
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52	 PART I	 INTRODUCTION
Quick Quiz  Draw an example of a production possibilities frontier for Robinson
Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish.
Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself?
Does he face the same limits if he can trade with natives on the island?
3-2 Comparative Advantage:
The Driving Force of Specialization
Rose’s explanation of the gains from trade, though correct, poses a puzzle: If Rose
is better at both raising cattle and growing potatoes, how can Frank ever specialize
in doing what he does best? Frank doesn’t seem to do anything best. To solve
this puzzle, we need to look at the principle of comparative advantage.
As a first step in developing this principle, consider the following question: In
our example, who can produce potatoes at a lower cost—Frank or Rose? There are
two possible answers, and in these two answers lie the solution to our puzzle and
the key to understanding the gains from trade.
3-2a Absolute Advantage
One way to answer the question about the cost of producing potatoes is to
compare the inputs required by the two producers. Economists use the term
­absolute advantage when comparing the productivity of one person, firm, or nation
to that of another. The producer that requires a smaller quantity of inputs to
produce a good is said to have an absolute advantage in producing that good.
In our example, time is the only input, so we can determine absolute advantage
by looking at how much time each type of production takes. Rose has an
absolute advantage both in producing meat and in producing potatoes because
she requires less time than Frank to produce a unit of either good. Rose needs
to input only 20 minutes to produce an ounce of meat, whereas Frank needs
60 minutes. Similarly, Rose needs only 10 minutes to produce an ounce of potatoes,
whereas Frank needs 15 minutes. Based on this information, we can conclude that
Rose has the lower cost of producing potatoes, if we measure cost in terms of the
quantity of inputs.
3-2b Opportunity Cost and Comparative Advantage
There is another way to look at the cost of producing potatoes. Rather than comparing
inputs required, we can compare opportunity costs. Recall from Chapter 1
that the opportunity cost of some item is what we give up to get that item. In
our example, we assumed that Frank and Rose each spend 8 hours a day working.
Time spent producing potatoes, therefore, takes away from time available for
producing meat. When reallocating time between the two goods, Rose and Frank
give up units of one good to produce units of the other, thereby moving along the
production possibilities frontier. The opportunity cost measures the trade-off between
the two goods that each producer faces.
Let’s first consider Rose’s opportunity cost. According to the table in panel (a)
of Figure 1, producing 1 ounce of potatoes takes 10 minutes of work. When
Rose spends those 10 minutes producing potatoes, she spends 10 minutes less
absolute advantage
the ability to produce a
good using fewer inputs
than another producer
opportunity cost
whatever must be given
up to obtain some item
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 53
producing meat. Because Rose needs 20 minutes to produce 1 ounce of meat,
10 minutes of work would yield 1/2 ounce of meat. Hence, Rose’s opportunity cost
of producing 1 ounce of potatoes is 1/2 ounce of meat.
Now consider Frank’s opportunity cost. Producing 1 ounce of potatoes takes him
15 minutes. Because he needs 60 minutes to produce 1 ounce of meat, 15 minutes
of work would yield 1/4 ounce of meat. Hence, Frank’s opportunity cost of 1 ounce of
potatoes is 1/4 ounce of meat.
Table 1 shows the opportunity costs of meat and potatoes for the two producers.
Notice that the opportunity cost of meat is the inverse of the opportunity cost
of potatoes. Because 1 ounce of potatoes costs Rose 1/2 ounce of meat, 1 ounce of
meat costs Rose 2 ounces of potatoes. Similarly, because 1 ounce of potatoes costs
Frank 1/4 ounce of meat, 1 ounce of meat costs Frank 4 ounces of potatoes.
Economists use the term comparative advantage when describing the opportunity
costs faced by two producers. The producer who gives up less of other goods
to produce Good X has the smaller opportunity cost of producing Good X and is
said to have a comparative advantage in producing it. In our example, Frank has
a lower opportunity cost of producing potatoes than Rose: An ounce of potatoes
costs Frank only 1/4 ounce of meat, but it costs Rose 1/2 ounce of meat. Conversely,
Rose has a lower opportunity cost of producing meat than Frank: An ounce of
meat costs Rose 2 ounces of potatoes, but it costs Frank 4 ounces of potatoes.
Thus, Frank has a comparative advantage in growing potatoes, and Rose has a
comparative advantage in producing meat.
Although it is possible for one person to have an absolute advantage in both
goods (as Rose does in our example), it is impossible for one person to have a
comparative advantage in both goods. Because the opportunity cost of one good
is the inverse of the opportunity cost of the other, if a person’s opportunity cost of
one good is relatively high, the opportunity cost of the other good must be relatively
low. Comparative advantage reflects the relative opportunity cost. Unless
two people have the same opportunity cost, one person will have a comparative
advantage in one good, and the other person will have a comparative advantage
in the other good.
3-2c Comparative Advantage and Trade
The gains from specialization and trade are based not on absolute advantage but
on comparative advantage. When each person specializes in producing the good
for which he or she has a comparative advantage, total production in the economy
rises. This increase in the size of the economic pie can be used to make everyone
better off.
The Opportunity Cost of Meat and
Potatoes
Table 1
Opportunity Cost of:
1 oz of Meat 1 oz of Potatoes
Frank the farmer 4 oz potatoes 1/4 oz meat
Rose the rancher 2 oz potatoes 1/2 oz meat
comparative advantage
the ability to produce
a good at a lower
opportunity cost than
another producer
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54	 PART I	 INTRODUCTION
In our example, Frank spends more time growing potatoes, and Rose spends
more time producing meat. As a result, the total production of potatoes rises from
40 to 44 ounces, and the total production of meat rises from 16 to 18 ounces. Frank
and Rose share the benefits of this increased production.
We can also look at the gains from trade in terms of the price that each party
pays the other. Because Frank and Rose have different opportunity costs, they can
both get a bargain. That is, each of them benefits from trade by obtaining a good
at a price that is lower than his or her opportunity cost of that good.
Consider the proposed deal from Frank’s viewpoint. Frank receives 5 ounces
of meat in exchange for 15 ounces of potatoes. In other words, Frank buys each
ounce of meat for a price of 3 ounces of potatoes. This price of meat is lower than
his opportunity cost for an ounce of meat, which is 4 ounces of potatoes. Thus,
Frank benefits from the deal because he gets to buy meat at a good price.
Now consider the deal from Rose’s viewpoint. Rose buys 15 ounces of potatoes
for a price of 5 ounces of meat. That is, the price of potatoes is 1/3 ounce of meat.
This price of potatoes is lower than her opportunity cost of an ounce of potatoes,
which is 1/2 ounce of meat. Rose benefits because she gets to buy potatoes at a
good price.
The story of Rose the rancher and Frank the farmer has a simple moral, which
should now be clear: Trade can benefit everyone in society because it allows people to
specialize in activities in which they have a comparative advantage.
3-2d The Price of the Trade
The principle of comparative advantage establishes that there are gains from
specialization and trade, but it raises a couple of related questions: What determines
the price at which trade takes place? How are the gains from trade shared
­between the trading parties? The precise answer to these questions is beyond the
scope of this chapter, but we can state one general rule: For both parties to gain from
trade, the price at which they trade must lie between the two opportunity costs.
In our example, Frank and Rose agreed to trade at a rate of 3 ounces of potatoes
for each ounce of meat. This price is between Rose’s opportunity cost (2 ounces of
potatoes per ounce of meat) and Frank’s opportunity cost (4 ounces of potatoes
per ounce of meat). The price need not be exactly in the middle for both parties to
gain, but it must be somewhere between 2 and 4.
To see why the price has to be in this range, consider what would happen if it
were not. If the price of meat were below 2 ounces of potatoes, both Frank and
Rose would want to buy meat, because the price would be below each of their
opportunity costs. Similarly, if the price of meat were above 4 ounces of potatoes,
both would want to sell meat, because the price would be above their opportunity
costs. But there are only two members of this economy. They cannot both be buyers
of meat, nor can they both be sellers. Someone has to take the other side of the deal.
A mutually advantageous trade can be struck at a price between 2 and 4. In this
price range, Rose wants to sell meat to buy potatoes, and Frank wants to sell potatoes
to buy meat. Each party can buy a good at a price that is lower than his or her
opportunity cost. In the end, each person specializes in the good for which he or
she has a comparative advantage and is, as a result, better off.
Quick Quiz  Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His
friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity
cost of catching 1 fish? What is Friday’s? Who has an absolute advantage in catching fish?
Who has a comparative advantage in catching fish?
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 55
3-3 Applications of Comparative
Advantage
The principle of comparative advantage explains interdependence and the gains
from trade. Because interdependence is so prevalent in the modern world, the
principle of comparative advantage has many applications. Here are two examples,
one fanciful and one of great practical importance.
3-3a Should Tom Brady Mow His Own Lawn?
Tom Brady spends a lot of time running around on grass. One of the most talented
football players of all time, he can throw a pass with a speed and accuracy
that most casual athletes can only dream of. Most likely, he is talented at other
physical activities as well. For example, let’s imagine that Brady can mow his
lawn faster than anyone else. But just because he can mow his lawn fast, does
this mean he should?
To answer this question, we can use the concepts of opportunity cost and comparative
advantage. Let’s say that Brady can mow his lawn in 2 hours. In that
same 2 hours, he could film a television commercial and earn $20,000. By contrast,
The Legacy of Adam Smith
and David Ricardo
Economists have long understood the gains from trade. Here is how
the great economist Adam Smith put the argument:
It is a maxim of every prudent master of a family, never to attempt
to make at home what it will cost him more to make than to buy. The
tailor does not attempt to make his own shoes, but buys them of the
shoemaker. The shoemaker does not attempt to make his own clothes
but employs a tailor. The farmer attempts to make neither the one
nor the other, but employs those different artificers. All of them find
it for their interest to employ their
whole industry in a way in which
they have some advantage over their
neighbors, and to purchase with a
part of its produce, or what is the
same thing, with the price of part
of it, whatever else they have occasion
for.
This quotation is from Smith’s 1776
book An Inquiry into the ­Nature and
CausesoftheWealthof­Nations,which
was a landmark in the analysis of
trade and economic interdependence.
Smith’s book inspired
David Ricardo, a millionaire
stockbroker, to become
an economist. In his 1817 book Principles
of Political Economy and Taxation, Ricardo
developed the principle of comparative advantage as we know it today.
He considered an example with two goods (wine and cloth) and two countries
(England and Portugal). He showed that both countries can gain
by opening up trade and specializing based on comparative advantage.
Ricardo’s theory is the starting point of modern international
economics, but his defense of free trade was not a mere academic
exercise. Ricardo put his beliefs to work as a member of the British
Parliament, where he opposed the Corn Laws, which restricted the
import of grain.
The conclusions of Adam Smith and David Ricardo on the gains
from trade have held up well over time. Although economists often
disagree on questions of policy, they are united in their support of free
trade. Moreover, the central argument for free trade has not changed
much in the past two centuries. Even though the field of economics has
broadened its scope and refined its theories since the time of Smith
and Ricardo, economists’ opposition to trade restrictions is still based
largely on the principle of comparative advantage.
FYI
David Ricardo
Bettmann/CORBIS
“They did a nice job mowing
this grass.”
©CliffWelch/IconSMI/Corbis
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56	 PART I	 INTRODUCTION
Forrest Gump, the boy next door, can mow Brady’s lawn in 4 hours. In that same
4 hours, Gump could work at McDonald’s and earn $40.
In this example, Brady has an absolute advantage in mowing lawns because he
can do the work with a lower input of time. Yet because Brady’s opportunity cost
of mowing the lawn is $20,000 and Gump’s opportunity cost is only $40, Gump
has a comparative advantage in mowing lawns.
The gains from trade in this example are tremendous. Rather than mowing his
own lawn, Brady should make the commercial and hire Gump to mow the lawn.
As long as Brady pays Gump more than $40 and less than $20,000, both of them
are better off.
You’re Dividing the
ChoresWrong
By Emily Oster
No one likes doing chores. In happiness
surveys, housework is ranked down there
with commuting as activities that people enjoy
the least. Maybe that’s why figuring out
who does which chores usually prompts, at
best, tense discussion in a household and, at
worst, outright fighting.
If everyone is good at something different,
assigning chores is easy. If your partner
is great at grocery shopping and you are
great at the laundry, you’re set. But this isn’t
always—or even usually—the case. Often
one person is better at everything. (And let’s
be honest, often that person is the woman.)
Better at the laundry, the grocery shopping,
the cleaning, the cooking. But does that mean
she should have to do everything?
Before my daughter was born, I both
cooked and did the dishes. It wasn’t a big deal,
it didn’t take too much time, and honestly I
was a lot better at both than my husband.
His cooking repertoire extended only to eggs
and chili, and when I left him in charge of the
dishwasher, I’d often find he had run it “full”
with one pot and eight forks.
After we had a kid, we had more to do and
less time to do it in. It seemed like it was time
for some reassignments. But, of course, I was
still better at doing both things. Did that mean I
should do them both?
I could have appealed to the principle of fairness:
We should each do half. I could have appealed
to feminism—surveys show that women
more often than not get the short end of the
chore stick. In time-use data, women do about
44 minutes more housework than men (2 hours
and 11 minutes versus 1 hour and 27 minutes).
Men outwork women only in the areas of “lawn”
and “exterior maintenance.” I could have suggested
he do more chores to rectify this imbalance,
to show our daughter, in the Free To Be You
and Me style, that Mom and Dad are equal and
that housework is fun if we do it together! I could
have simply smashed around the pans in the
dishwasher while sighing loudly in the hopes he
would notice and offer to do it himself.
But luckily for me and my husband, I’m an
economist, so I have more effective tools than
passive aggression. And some basic economic
principles provided the answer. We needed to
divide the chores because it is simply not
efficient for the best cook and dishwasher
to do all the cooking and dishwashing. The
economic principle at play here is increasing
marginal cost. Basically, people get worse
when they are tired. When I teach my students
at the University of Chicago this principle, I
explain it in the context of managing their
employees. Imagine you have a good employee
and a not-so-good one. Should you make the
good employee do literally everything?
Usually, the answer is no. Why not? It’s
likely that the not-so-good employee is better
at 9 a.m. after a full night of sleep than the
good employee is at 2 a.m. after a 17-hour
workday. So you want to give at least a few
tasks to your worse guy. The same principle
applies in your household. Yes, you (or your
spouse) might be better at everything. But
anyone doing the laundry at 4 a.m. is likely to
put the red towels in with the white T-shirts.
Some task splitting is a good idea. How much
depends on how fast people’s skills decay.
To “optimize” your family efficiency (every
economist’s ultimate goal—and yours, too),
you want to equalize effectiveness on the final
Economics within a
Marriage
An economist argues that you shouldn’t always unload the dishwasher
just because you’re better than your partner at it.
In the News
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 57
imports
goods produced abroad and
sold domestically
exports
goods produced domestically
and sold abroad
task each person is doing. Your partner does
the dishes, mows the lawn, and makes the
grocery list. You do the cooking, laundry, shopping,
cleaning, and paying the bills. This may
seem imbalanced, but when you look at it, you
see that by the time your partner gets to the
grocery-list task, he is wearing thin and starting
to nod off. It’s all he can do to figure out
how much milk you need. In fact, he is just
about as good at that as you are when you get
around to paying the bills, even though that’s
your fifth task.
If you then made your partner also do the
cleaning—so it was an even four and four—
the house would be a disaster, since he is already
exhausted by his third chore while you
are still doing fine. This system may well end
up meaning one person does more, but it is unlikely
to result in one person doing everything.
Once you’ve decided you need to divide up
the chores in this way, how should you decide
who does what? One option would be randomly
assigning tasks; another would be having each
person do some of everything. One spousal-advice
website I read suggested you should divide
tasks based on which ones you like the best.
None of these are quite right. (In the last case,
how would anyone ever end up with the job of
cleaning the bathroom?)
To decide who does what, we need more
economics. Specifically, the principle of
comparative advantage. Economists usually
talk about this in the context of trade.
Imagine Finland is better than Sweden at
making both reindeer hats and snowshoes.
But they are much, much better at the hats
and only a little better at the snowshoes.
The overall world production is maximized
when Finland makes hats and Sweden
makes snowshoes.
We say that Finland has an absolute
advantage in both things but a comparative
advantage only in hats. This principle
is part of the reason economists value free
trade, but that’s for another column (and
probably another author). But it’s also a
guideline for how to trade tasks in your
house. You want to assign each person the
tasks on which he or she has a comparative
advantage. It doesn’t matter that you have
an absolute advantage in everything. If you
are much, much better at the laundry and
only a little better at cleaning the toilet, you
should do the laundry and have your spouse
get out the scrub brush. Just explain that it’s
efficient!
In our case, it was easy. Other than using
the grill—which I freely admit is the
husband domain—I’m much, much better
at ­cooking. And I was only moderately
better at the dishes. So he got the job of
cleaning up after meals, even though his
dishwasher loading habits had already
come under scrutiny. The good news is
another economic ­principle I hadn’t even
counted on was soon in play: learning by
doing. As people do a task, they improve at
it. ­Eighteen months into this new arrangement
the dishwasher is almost a work of
art: neat rows of dishes and everything
carefully screened for “top-rack only” status.
I, meanwhile, am ­forbidden from getting
near the dishwasher. ­Apparently, there
is a risk that I’ll “ruin it.”
Ms. Oster is a professor of economics at
the University of ­Chicago.
IllustrationbyRobertNeubecker
Source: Slate, November 21, 2012. The article is found in the link: http://www.slate.com/articles/double_x/doublex/2012/11/dividing_the_chores_who_should_cook_and_who_
should_clean.2.html
3-3b Should the United States Trade with
Other Countries?
Just as individuals can benefit from specialization and trade with one another, as
Frank and Rose did, so can populations of people in different countries. Many
of the goods that Americans enjoy are produced abroad, and many of the goods
produced in the United States are sold abroad. Goods produced abroad and sold
domestically are called imports. Goods produced domestically and sold abroad
are called exports.
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58	 PART I	 INTRODUCTION
3-4 Conclusion
You should now understand more fully the benefits of living in an interdependent
economy. When Americans buy tube socks from China, when residents
of Maine drink orange juice from Florida, and when a homeowner hires
the kid next door to mow the lawn, the same economic forces are at work.
The principle of comparative advantage shows that trade can make everyone
better off.
Having seen why interdependence is desirable, you might naturally ask
how it is possible. How do free societies coordinate the diverse activities of all
the people involved in their economies? What ensures that goods and services
will get from those who should be producing them to those who should be consuming
them? In a world with only two people, such as Rose the rancher and
Frank the farmer, the answer is simple: These two people can bargain and allocate
resources between themselves. In the real world with billions of people,
the answer is less obvious. We take up this issue in Chapter 4, where we see
that free societies allocate resources through the market forces of supply and
demand.
To see how countries can benefit from trade, suppose there are two countries,
the United States and Japan, and two goods, food and cars. Imagine that the two
countries produce cars equally well: An American worker and a Japanese worker
can each produce one car per month. By contrast, because the United States has
more and better land, it is better at producing food: A U.S. worker can produce
2 tons of food per month, whereas a Japanese worker can produce only 1 ton of
food per month.
The principle of comparative advantage states that each good should be
produced by the country that has the smaller opportunity cost of producing
that good. Because the opportunity cost of a car is 2 tons of food in the United
States but only 1 ton of food in Japan, Japan has a comparative advantage in
producing cars. Japan should produce more cars than it wants for its own use
and export some of them to the United States. Similarly, because the opportunity
cost of a ton of food is 1 car in Japan but only 1/2 car in the United States,
the United States has a comparative advantage in producing food. The United
States should produce more food than it wants to consume and export some to
Japan. Through specialization and trade, both countries can have more food
and more cars.
In reality, of course, the issues involved in trade among nations are more complex
than this example suggests. Most important among these issues is that each
country has many citizens with different interests. International trade can make
some individuals worse off, even as it makes the country as a whole better off.
When the United States exports food and imports cars, the impact on an ­American
farmer is not the same as the impact on an American autoworker. Yet, contrary to
the opinions sometimes voiced by politicians and pundits, international trade is
not like war, in which some countries win and others lose. Trade allows all countries
to achieve greater prosperity.
Quick Quiz  Suppose that a skilled brain surgeon also happens to be the world’s fastest
typist. Should she do her own typing or hire a secretary? Explain.
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 59
absolute advantage, p. 52
opportunity cost, p. 52
comparative advantage, p. 53
imports, p. 57
exports, p. 57
Key Concepts
  1.	 Under what conditions is the production possibilities
frontier linear rather than bowed out?
  2.	 Explain how absolute advantage and comparative
advantage differ.
  3.	 Give an example in which one person has an absolute
advantage in doing something but another person has
a comparative advantage.
  4.	 Is absolute advantage or comparative advantage more
important for trade? Explain your reasoning using the
example in your answer to Question 3.
  5.	 If two parties trade based on comparative advantage
and both gain, in what range must the price of the
trade lie?
  6.	 Why do economists oppose policies that restrict trade
among nations?
Questions for Review
•	 Each person consumes goods and services produced
by many other people both in the United States and
around the world. Interdependence and trade are desirable
because they allow everyone to enjoy a greater
quantity and variety of goods and services.
•	 There are two ways to compare the ability of two
­people to produce a good. The person who can produce
the good with the smaller quantity of inputs
is said to have an absolute advantage in producing the
good. The person who has the smaller opportunity
cost of producing the good is said to have a comparative
advantage. The gains from trade are based on comparative
advantage, not absolute advantage.
•	 Trade makes everyone better off because it allows
­people to specialize in those activities in which they
have a comparative advantage.
•	 The principle of comparative advantage applies to
countries as well as to people. Economists use the principle
of comparative advantage to advocate free trade
among countries.
Summary
  1.	 In an hour, David can wash 2 cars or mow 1 lawn,
and Ron can wash 3 cars or mow 1 lawn. Who has
the absolute advantage in car washing, and who
has the absolute advantage in lawn mowing?
a.	 David in washing, Ron in mowing.
b.	 Ron in washing, David in mowing.
c.	 David in washing, neither in mowing.
d.	 Ron in washing, neither in mowing.
  2.	 Once again, in an hour, David can wash 2 cars or mow
1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who
has the comparative advantage in car washing, and
who has the comparative advantage in lawn mowing?
a.	 David in washing, Ron in mowing.
b.	 Ron in washing, David in mowing.
c.	 David in washing, neither in mowing.
d.	 Ron in washing, neither in mowing.
  3.	 When two individuals produce efficiently and then
make a mutually beneficial trade based on comparative
advantage,
a.	 they both obtain consumption outside their
­production possibilities frontier.
b.	 they both obtain consumption inside their
­production possibilities frontier.
c.	 one individual consumes inside her production
possibilities frontier, while the other consumes
­outside hers.
d.	 each individual consumes a point on her own
­production possibilities frontier.
  4.	 Which goods will a nation typically import?
a.	 those goods in which the nation has an absolute
advantage
Quick Check Multiple Choice
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b.	 those goods in which the nation has a comparative
advantage
c.	 those goods in which other nations have an
­absolute advantage
d.	 those goods in which other nations have a
­comparative advantage
  5.	 Suppose that in the United States, producing an aircraft
takes 10,000 hours of labor and producing a shirt
takes 2 hours of labor. In China, producing an aircraft
takes 40,000 hours of labor and producing a shirt takes
4 hours of labor. What will these nations trade?
a.	 China will export aircraft, and the United States
will export shirts.
b.	 China will export shirts, and the United States will
export aircraft.
c.	 Both nations will export shirts.
d.	 There are no gains from trade in this situation.
  6.	 Mark can cook dinner in 30 minutes and wash the
laundry in 20 minutes. His roommate takes half as
long to do each task. How should the roommates
­allocate the work?
a.	 Mark should do more of the cooking based on his
comparative advantage.
b.	 Mark should do more of the washing based on his
comparative advantage.
c.	 Mark should do more of the washing based on his
absolute advantage.
d.	 There are no gains from trade in this situation.
  1.	 Maria can read 20 pages of economics in an hour. She
can also read 50 pages of sociology in an hour. She
spends 5 hours per day studying.
a.	 Draw Maria’s production possibilities frontier for
reading economics and sociology.
b.	 What is Maria’s opportunity cost of reading 100
pages of sociology?
  2.	 American and Japanese workers can each produce
4 cars a year. An American worker can produce 10
tons of grain a year, whereas a Japanese worker can
produce 5 tons of grain a year. To keep things simple,
assume that each country has 100 million workers.
a.	 For this situation, construct a table analogous to the
table in Figure 1.
b.	 Graph the production possibilities frontiers for the
American and Japanese economies.
c.	 For the United States, what is the opportunity cost
of a car? Of grain? For Japan, what is the opportunity
cost of a car? Of grain? Put this information in
a table analogous to Table 1.
d.	 Which country has an absolute advantage in producing
cars? In producing grain?
e.	 Which country has a comparative advantage in
producing cars? In producing grain?
f.	 Without trade, half of each country’s workers produce
cars and half produce grain. What quantities
of cars and grain does each country produce?
g.	 Starting from a position without trade, give an
example in which trade makes each country
better off.
  3.	 Pat and Kris are roommates. They spend most of
their time studying (of course), but they leave some
time for their favorite activities: making pizza and
brewing root beer. Pat takes 4 hours to brew a gallon
of root beer and 2 hours to make a pizza. Kris takes
6 hours to brew a gallon of root beer and 4 hours to
make a pizza.
a.	 What is each roommate’s opportunity cost of making
a pizza? Who has the absolute advantage in
making pizza? Who has the comparative advantage
in making pizza?
b.	 If Pat and Kris trade foods with each other, who
will trade away pizza in exchange for root beer?
c.	 The price of pizza can be expressed in terms of gallons
of root beer. What is the highest price at which
pizza can be traded that would make both roommates
better off? What is the lowest price? Explain.
  4.	 Suppose that there are 10 million workers in Canada
and that each of these workers can produce either 2
cars or 30 bushels of wheat in a year.
a.	 What is the opportunity cost of producing a car in
Canada? What is the opportunity cost of producing
a bushel of wheat in Canada? Explain the relationship
between the opportunity costs of the two
goods.
b.	 Draw Canada’s production possibilities frontier.
If Canada chooses to consume 10  million cars,
how much wheat can it consume without trade?
Label this point on the production possibilities
frontier.
c.	 Now suppose that the United States offers to buy
10 million cars from Canada in exchange for 20
bushels of wheat per car. If Canada continues to
consume 10 million cars, how much wheat does
this deal allow Canada to consume? Label this point
on your diagram. Should Canada accept the deal?
Problems and Applications
60	 PART I	 INTRODUCTION
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	 CHAPTER 3  INTERDEPENDENCE AND THE GAINS FROM TRADE 61
  5.	 England and Scotland both produce scones and
sweaters. Suppose that an English worker can produce
50 scones per hour or 1 sweater per hour. Suppose that
a Scottish worker can produce 40 scones per hour or
2 sweaters per hour.
a.	 Which country has the absolute advantage in the
production of each good? Which country has the
comparative advantage?
b.	 If England and Scotland decide to trade, which
commodity will Scotland trade to England? Explain.
c.	 If a Scottish worker could produce only 1 sweater
per hour, would Scotland still gain from trade?
Would England still gain from trade? Explain.
  6.	 The following table describes the production possibilities
of two cities in the country of Baseballia:
  Pairs of Red Socks per
Worker per Hour
Pairs of White Socks
per Worker per Hour
Boston 3 3
Chicago 2 1
a.	 Without trade, what is the price of white socks
(in terms of red socks) in Boston? What is the price
in Chicago?
b.	 Which city has an absolute advantage in the
­production of each color sock? Which city has a
comparative advantage in the production of each
color sock?
c.	 If the cities trade with each other, which color sock
will each export?
d.	 What is the range of prices at which trade can occur?
  7.	 A German worker takes 400 hours to produce a car
and 2 hours to produce a case of wine. A French
worker takes 600 hours to produce a car and X hours
to produce a case of wine.
a.	 For what values of X will gains from trade be
­possible? Explain.
b.	 For what values of X will Germany export cars and
import wine? Explain.
  8.	 Suppose that in a year an American worker can
­produce 100 shirts or 20 computers and a Chinese
worker can produce 100 shirts or 10 computers.
a.	 For each country, graph the production possibilities
frontier. Suppose that without trade the workers in
each country spend half their time producing each
good. Identify this point in your graphs.
b.	 If these countries were open to trade, which country
would export shirts? Give a specific numerical
example and show it on your graphs. Which country
would benefit from trade? Explain.
c.	 Explain at what price of computers (in terms of
shirts) the two countries might trade.
d.	 Suppose that China catches up with American
productivity so that a Chinese worker can produce
100 shirts or 20 computers. What pattern of trade
would you predict now? How does this advance
in Chinese productivity affect the economic wellbeing
of the citizens of the two countries?
  9.	 Are the following statements true or false? Explain in
each case.
a.	 “Two countries can achieve gains from trade even
if one of the countries has an absolute advantage in
the production of all goods.”
b.	 “Certain very talented people have a comparative
advantage in everything they do.”
c.	 “If a certain trade is good for one person, it can’t be
good for the other one.”
d.	 “If a certain trade is good for one person, it is
­always good for the other one.”
e.	 “If trade is good for a country, it must be good for
everyone in the country.”
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