Comparative Advantage and Gains from Specialization—Flash

Economic efficiency that results from specialization is a fundamental idea in economics. But the associated concept of comparative advantage is difficult to explain with a table listing the per-unit time output of two goods by two producers. When the numbers are plotted on a graph in the form of individual PPCs (production possibility curves), however, the location of comparative advantage can be pinpointed by comparing the relative length of the horizontal and vertical intercepts. If the PPC slopes of the two producers are different, there are opportunities for profitable trade. There are physical limits to what a static graph can show when several trading ratios between goods and among trading partners are involved. Using a Macromedia Flash animation, we can easily explain: (1) How the combined PPC of the two producers is generated, (2) How each point of the combined PPC corresponds to the output bundles on the individual PPCs, (3) How much total output will fall short of the feasible output bundles on the combined PPC if both producers produce both goods for their own consumption, and (4) How big is the gain from foreign trade if both producers specialize according to their comparative advantage and exchange goods along the World PPC. To make the animation short and accessible, we have divided it into five modules that are best viewed in sequence but also can be viewed out of sequence as selected materials from previous modules are repeated. To make each module user-friendly, we have built in a pause after each small chunk of animation. The user can replay that chunk or go on to the next chunk. These animations are best used in class with a regular lecture on comparative advantage. Students can replay them after class for review.