It can be easy to take for granted that things are common knowledge just because they are common knowledge in your industry.

@Car shared a cartoon in the @saloon that suggests a misunderstanding of what comparative advantage is, so here I am to save the day. The cartoon itself is potentially fine, since it’s a question, but the premise of the question is flawed.

Why do more productive economies trade with less productive economies?

This was one of the big questions of classical economics. Adam Smith’s explanation of gains from trade was that some nations are better at making certain things than others and they trade with nations that are better at making other things. That’s called absolute advantage.

The problem with absolute advantage is that it’s incomplete. What happens if one country is better at producing everything than another country? The implication seems to be that they would not trade with each other.

This is wrong, though. There are still gains from trade even when one country is more productive across the board.

Example

Imagine a simplified economy where two bitcoiners produce two goods (podcasts and vibecoded apps) and those are also the only goods the bitcoiners consume.

• Car can make 30 podcasts or vibecode 12 apps per year (or any linear combination in between)
• GrayRuby can make 6 podcasts or vibecode 6 apps per year (or any linear combination in between)

Car is better at producing both goods. He has an absolute advantage in podcasting and he has an absolute advantage at vibecoding.

1) No trade. Each puts half their effort into each good

• 18 podcasts produced (15 from Car and 3 from GrayRuby)
• 9 apps produced (6 from Car and 3 from GrayRuby)

Without trade, Car consumes his 15 podcasts and 6 apps and GrayRuby consumes his 3 podcasts and 3 apps.

2) No trade. GrayRuby only makes apps. Car does 2/3’s podcasting and 1/3 apps

• 20 podcasts produced (all from Car)
• 10 apps produced (6 from GrayRuby and 4 from Car)
• Car consumes his 20 podcasts and 4 apps
• GrayRuby consumes his 6 apps and 0 podcasts

The world has more podcasts and apps because the producers specialized, but Car has 2 fewer apps and GrayRuby has 3 fewer podcasts than they each had before. We can’t say that they’re each better off…yet.

If Car could trade between 1-5 podcasts for 3 or more apps, he’d be better off.

Similarly, if GrayRuby can trade between 1-3 apps for 4 or more podcasts, he’d be better off.

3) Previous case with trade

• Car trades 4 podcasts for 3 apps
• Car now has 16 podcasts and 7 apps
• GrayRuby now has 4 podcasts and 3 apps

Compared to the first case, Car has more of both goods, while GrayRuby has more podcasts and the same number of apps. They are both better off.

Specialization and trade increase both the total amount of goods available and each individual consumption bundle.

GrayRuby has a comparative advantage in vibecoding apps, even though Car is actually better at that task, because they are both better off when he focuses his efforts on it and they exchange with each other.

https://stacker.news/items/1408590