Let us see how this works in a simple example. gives an example of an economy with two workers and two jobs. Each entry in the table is the amount of output that a particular worker can produce in each job in one day. For example, worker B can produce 4 units of output in job 2 and 8 units of output in job 1.
Table 8.1 Output Level per Day in Different Jobs
|
Worker |
Job 1 |
Job 2 |
|
A |
9 |
6 |
|
B |
8 |
4 |
Before we begin, let us pause for a moment to think about this kind of example. This chapter is motivated by the desire to explain the employment and unemployment experiences of hundreds of millions of workers in the United States and Europe. It may seem ridiculous to think that a story like this—with two workers, two jobs, and some made-up numbers—can tell us anything about employment and unemployment across two continents. Economists often refer to such stories as “toy” models, in explicit recognition of their simplicity. This kind of model is not designed to tell us anything specific about US or European unemployment. The point of this kind of model is to keep our thinking clear. If we cannot understand the workings of a story like this, then we cannot hope to understand the infinitely more complicated real world. At the same time, if we do understand this story, then we begin to get a feel for the forces that operate in the real world.
If we were in charge of this economy, how would we allocate the workers across the jobs? In this case, the answer is easy to determine. If we assign worker A to job 1 and worker B to job 2, then the economy will produce 13 units of output per day. If we assign worker A to job 2 and worker B to job 1, then the economy will produce 14 units of output per day. This is the better option because—in the interest of efficiency—we would like the workers to be assigned to the jobs they do best.
Notice, by the way, that worker A is better than worker B at both jobs. However, worker A is a lot better at job 2 (50 percent more productive) and only a little better at job 1 (12.5 percent more productive). The best assignment of workers is an application of the idea called comparative advantage: each worker does the job at which he or she does bestwhen compared to the other person.
Comparative advantage and absolute advantage are used to compare the productivity of people (countries) in the production of a good or a service. We introduce this tool here assuming there are two people and two goods that they can each produce.
Toolkit:
A person has an absolute advantage in the production of a good if that person can produce more of that good in a unit of time than another person can. A person has a comparative advantage in the production of one good if the opportunity cost, measured by the lost output of the other good, is lower for that person than for another.
In our example, worker A has a comparative advantage in job 2, and worker B has a comparative advantage in job 1. We have defined comparative advantage in terms of opportunity cost, so let us go through this carefully and make sure it is clear. The opportunity cost of assigning a worker to one job is the amount of output the worker could have produced in the other job.
We can measure opportunity cost in terms of the output lost from assigning a worker to job 2 instead of job 1. The opportunity cost of assigning worker A to job 2 rather than job 1 is 3 units (9 − 6). The opportunity cost of assigning worker B to job 2 rather than job 1 is 4 units of output (8 − 4). The opportunity cost is higher for worker B, which is another way of saying that worker B has a comparative advantage in job 1. Worker B should be assigned to job 1, and worker A should take on job 2.
We could equally have measured opportunity cost the other way around: as the output lost from assigning a worker to job 1 rather than job 2. The opportunity cost of assigning worker A to job 1 rather than job 2 is −3 units (6 − 9). The opportunity cost of assigning worker A to job 1 rather than job 2 is less, it is −4 units of output (4 − 8). Worker A has the higher opportunity cost (−3 is greater than −4), so we again conclude that worker A should be assigned to job 2.
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