As the fall semester begins, thousands of students will begin their first economics courses and be exposed to the world of economic thinking. I was a drum instructor at a music lesson company. One of the things I enjoy doing as a teacher is, after the first lesson, I allow my students to practice by playing a complete, simple drum pattern, such as AC/DC’s main rhythm. back in black Or the Beatles Yellow submarine.
Ever since I decided to live as an economist, I like to think about what could be a good analogy to my first lesson in economics. What kind of economic thinking practice can students use after the first lesson?
One of my favorite first lessons is a concept exercise like: comparative advantage. This concept explains a lot about the world with very simple logic, but it may be very unintuitive for beginners. This explains why people exchange things with each other in the first place.
Years ago, I spoke with another drum teacher. In graduate school, I said I was interested in economics. “Oh,” he said approvingly. “I took an undergraduate economics class once. I don’t remember much, but I learned how to pay taxes.” I was feeling regretful, but I nodded along with him.
No matter how practical it is, you shouldn’t learn how to pay taxes in an economics class. The main points are to understand: Why are so many people paying others to do their taxes for them? The reason is comparative advantage.
The professor illustrates this well by hypothesizing the trade in coconuts and bananas on deserted islands, and the trade in wine cloth between England and Portugal. This is an example I wanted to provide to a friend of mine, a drum teacher. I think it provides a great concrete lesson for those new to economics.
Imagine an economy with only two individuals and two goods: music and accounting services (we believe that the citizens of this economy can survive on just these two goods). Further assume that individuals have some ability to produce different bundles of any of these goods each day.
Two individuals, Brutto and Bella, have different production capacities. If Brutto devotes all his efforts to accounting services, he can produce 5 units. If you focus on music, you can create 10 songs. Bella, on the other hand, is much more productive. If you concentrate on accounting, the unit can produce 10 songs, and if you spend time only on music, you can produce a whopping 30 songs.
Below are their production capacities and some of the bundles that can be produced in Autarky.
Brutto and Bella’s ability to create a song or accounting service in one day.
| Brut | bella | ||
| song | accounting services | song | accounting services |
| 0 | 5 | 30 | 0 |
| 2 | 4 | 27 | 1 |
| 4 | 3 | twenty four | 2 |
| 6 | 2 | twenty one | 3 |
| 8 | 1 | 18 | 4 |
| 10 | 0 | 15 | 5 |
| – | – | 12 | 6 |
| – | – | 9 | 7 |
| – | – | 6 | 8 |
| – | – | 3 | 9 |
| – | – | 0 | 10 |
For some exogenous reason, Bella has a great opportunity to consume both goods. She has an absolute advantage over Blut. At first glance, Blut could use Bella’s help, but Bella doesn’t need Blut.
Note, however, that at a production rate of 30 S per 10 A, it costs Vera 3 songs for every unit of accounting services he produces. Brutto costs only 2. When Bella produces a song, she gives up only 1/3 of the accounting service units, but Butto gives up 1/2 of the units. Brutto is willing to exchange any amount of accounting services greater than 2 songs, and Bella is willing to exchange 1 song for any amount of accounting services greater than 1/3.
If Bella and Blut are both rational and willing to engage in trade, they will both be better off because Bella has a comparative advantage in producing songs and Blut has a comparative advantage in producing accounting services. Opportunities exist. Their profitable exchange ratio range is between 2 and 3 S per 1 A. I can imagine they settle for a price of 2.5 S per A.
Below is a list of how the distribution of goods in this economy would be with and without trade between two individuals.
Music production and accounting (without trade and with trade) at a price of 2.5 S / 1 A
| Brut | bella | ||||||
| no trade | There is trade | no trade | There is trade | ||||
| song | accounting services | song | accounting
service |
song | accounting
service |
song | accounting
service |
| 0 | 5 | 0 | 5 | 30 | 0 | 30 | 0 |
| 2 | 4 | 2.5 | 4 | 27 | 1 | 27.5 | 1 |
| 4 | 3 | 5 | 3 | twenty four | 2 | twenty five | 2 |
| 6 | 2 | 7.5 | 2 | twenty one | 3 | 22.5 | 3 |
| 8 | 1 | 10 | 1 | 18 | 4 | 20 | 4 |
| 10 | 0 | 12.5 | 0 | 15 | 5 | 17.5 | 5 |
| – | – | – | – | 12 | 6 | 15 | 6 |
| – | – | – | – | 9 | 7 | 12.5 | 7 |
| – | – | – | – | 6 | 8 | 10 | 8 |
| – | – | – | – | 3 | 9 | 7.5 | 9 |
| – | – | – | – | 0 | 10 | 5 | 10 |
Once the trade takes place, both Bella and Brut reach higher consumption levels. Bella is good at everything, but she can become even richer by trading with Brut. In fact, even if the Bellas become more skilled, they can still profit from trade.
Now imagine that Vera is making a capital investment. She practices over time and gets better at composing songs. Now, if I focus my energy on music, I can produce 40 songs a day. Due to this increase in the amount of songs produced, there is a relative shortage of accounting services, and Bella is willing to part with one song if the amount is more than 1/4 of the amount of accounting services. Sho.
If the price is renegotiated, it may be determined at the new price. If we reach the new price of 3.5 S per 1A, here’s what the trading possibilities will be.
Music production and accounting (without trade and with trade) at a price of 3.5 S / 1 A
| Brut | bella | ||||||
| no trade | There is trade | no trade | There is trade | ||||
| song | accounting services | song | accounting
service |
song | accounting
service |
song | accounting
service |
| 0 | 5 | 0 | 5 | 40 | 0 | 40 | 0 |
| 2 | 4 | 3.5 | 4 | 36 | 1 | 36.5 | 1 |
| 4 | 3 | 7 | 3 | 32 | 2 | 33 | 2 |
| 6 | 2 | 10.5 | 2 | 28 | 3 | 29.5 | 3 |
| 8 | 1 | 14 | 1 | twenty four | 4 | 26 | 4 |
| 10 | 0 | 17.5 | 0 | 20 | 5 | 22.5 | 5 |
| – | – | – | – | 16 | 6 | 19 | 6 |
| – | – | – | – | 12 | 7 | 15.5 | 7 |
| – | – | – | – | 8 | 8 | 12 | 8 |
| – | – | – | – | 4 | 9 | 8.5 | 9 |
| – | – | – | – | 0 | 10 | 5 | 10 |
If Bella gets better at making songs, not only will she be richer, but Blut will also be even richer than before. This is where the “aha” moment begins for some students.
This example includes many assumptions, including the bargaining power of the two individuals. Numbers were chosen because they work for this example. Other numbers may not indicate a potential deal. For example, Bella and Brut only trade works here. different.
But this exercise is a powerful reason why accountants and musicians specialize in their fields, and why diverse individuals in our society are willing to trade one thing for another. will give you. Because it makes us rich.
Furthermore, individuals can change their comparative advantage by investing in physical and human capital. This is exactly why many students go to university in the first place: to prepare them for new career paths and increase future income and satisfaction. This is a good first lesson in economics, not how to pay taxes.
Giorgio Castiglia is a program manager for competitive projects at the Mercatus Center and a doctoral student in economics at George Mason University.
