8.2 Comparative Advantage

Should you cook dinner tonight, or should your roommate? It’s a seemingly small decision, and the stakes are pretty low. But you’ll have to make this decision at dinner time for a lot of the days in your life. That makes the stakes seem a bit higher. And you don’t just have to figure out who’ll cook. Every day, you make dozens of other decisions, deciding who should clean the house, shop for groceries, or pay the bills. The underlying question in each case is the same: How best to allocate these tasks?

When you go to work as a manager, you’ll face similar questions. How do you divide tasks among team members? Who should be in charge of organizing meetings and ensuring the team meets deadlines? Who should be in charge of getting feedback from other divisions? Who should give the big presentation to a client? These management questions are the same ones you face as a household manager: How best to allocate these tasks?

Now think about the whole economy. There are literally billions of tasks performed in all sorts of organizations across the United States. Each task could be performed by any one of millions of workers who each have different skills, and in some instances, the task could also be completed by a machine. The economic management question facing the country is similar to the question you confront as the manager of your company or your household: How best to allocate these tasks?

Whether you’re responsible for running your household, your company, or the whole economy, you’ll need to figure out how best to allocate different tasks. Whatever task you’re thinking about, you’ll want to get it done at the lowest possible cost (if the work is of the same quality). As such, your goal should be to allocate each task to the lowest-cost producer. There’s one big idea that can help you do this: comparative advantage.

Introducing Comparative Advantage

Let’s start with a simple case, analyzing how two roommates, Helen and Jamie, should allocate tasks around their home. It’s a pretty stylized example, but stick with me, because it’ll yield an insight that applies equally well whether you’re the manager of your household, your company, or the economy.

Helen and Jamie want to figure out how best to assign their household tasks. For now, we’ll focus on just two tasks, cooking and vacuuming. Like good economists, they start with the data:

So how should they assign these tasks?

Absolute advantage tells you who’s best at a task, but not who should do the task.

Before I tell you how Helen wants to allocate tasks, let me warn you that her argument is not only self-serving, it’s wrong. Ok, so what’s her argument? Helen argues that Jamie should do all the household tasks because he is better at all household chores than her. After all, Jamie can make meals in less time than she can, and she’s no faster at vacuuming. If we measured costs in terms of time spent, she’s got a point—each chore costs Jamie less or equal time than it costs Helen. Helen’s argument is based on the idea that economists call absolute advantage, which is the ability of one person to do a task using fewer inputs than someone else.

But Helen’s conclusion is dead wrong because she’s not thinking about opportunity costs.

Comparative advantage is all about opportunity cost.

The opportunity cost principle reminds you that the true cost of something is what you must give up to get it. To figure out the true cost of Helen or Jamie vacuuming the house, you need to ask, “Or what?” Jamie can vacuum the house, or spend that time making meals. That’s why the opportunity cost of Jamie vacuuming is the number of meals he could have otherwise cooked. Likewise, if Helen vacuums the house, the opportunity cost is the number of meals she could otherwise have made. You should focus on opportunity cost because you want to minimize what you have to give up to get the task done—which is what opportunity cost measures.

To get the most output with your given inputs, you should allocate each task to the person with the lowest opportunity cost. That’s such an important point that I’m going to say it again: You should allocate each task to the person who can do it at the lowest opportunity cost. This seemingly straightforward idea is so important that economists have a specific term for it: The person with the lower opportunity cost of completing a particular task has a comparative advantage at that task. It’s comparative because opportunity cost compares what you can produce if assigned one task with what you would produce if you spent that time on another task. And it’s an advantage, because a lower opportunity cost means that you give up less to get a task done and so it’s more efficient for you to do that task.

When each person in a group—a household, a business or the economy—focuses on the task for which they have a comparative advantage, the group will produce more. This larger economic pie is due to the gains from trade from reallocating or trading tasks. If Helen and Jamie want to produce more—or if they want more free time—they should assign the vacuuming to whoever has a comparative advantage in vacuuming, and whoever has a comparative advantage in cooking should cook. And so we now turn to asking: Who has a comparative advantage in each task?

Calculate the opportunity cost of each task.

The top panel of Figure 1 shows how long it takes Jamie or Helen to vacuum the house, or produce one meal. But to find out who has a comparative advantage in vacuuming, you’ll need to focus instead on opportunity costs. The opportunity cost of doing a task is the output you could produce in your next best alternative task. You can calculate it as follows:

Opportunity cost of a task=Hours this task takesHours required to produce alternative outputOpportunity cost of a task equals Hours this task takes divided by Hours required to produce alternative output
Two tables show how to evaluate opportunity costs.

Figure 1 | Evaluating Opportunity Costs

You can see this formula in action, as follows:

  • Jamie takes four hours to vacuum the house, but if he spent that time cooking instead, he would have four more hours to devote to cooking, during which he would produce one meal per hour. And so for Jamie, vacuuming the house comes at an opportunity cost of 4 hours/1 hour per meal=4 mealsfour hours prefix solidus of one hour per meal equals four meals.
  • Helen takes four hours to vacuum the house, but if she spent that time cooking instead, she would have four more hours to devote to cooking, during which she would produce a meal every two hours. Thus, for Helen, vacuuming the house comes at an opportunity cost of 4 hours/2 hours per meal=2 mealsfour hours prefix solidus of two hours per meal equals two meals.

The lower panel of Figure 1 shifts the focus from the rate of production to opportunity costs. The left column shows the opportunity cost for each person of vacuuming the house in terms of meals they could make instead. Comparing Helen’s and Jamie’s opportunity costs reveals that Helen has a comparative advantage at vacuuming, because vacuuming the house costs her fewer forgone meals than if Jamie were to do the job. (The opportunity cost of vacuuming the house is only two meals for Helen, versus four meals for Jamie.)

Okay, so now let’s figure out who has a comparative advantage in cooking, by seeing who can make a meal at the lowest opportunity cost:

  • Jamie takes only an hour to make a meal, but if he spent that time cleaning instead, he would have one more hour to vacuum at a rate of one house every four hours. Thus for Jamie, one meal comes at an opportunity cost of vacuuming 1 hour/4 hours per house=1/4one hour prefix solidus of four hours per house equals super one postfix solidus of the house.
  • Helen takes two hours to make a meal, but if she spent that time cleaning instead, she would have two more hours to vacuum at a rate of one house every four hours. Thus, for Helen, one meal comes at an opportunity cost of vacuuming 2 hours/4 hours per house=1/2two hours prefix solidus of four hours per house equals super one postfix solidus of the house.

Comparing these (in the right column) reveals that Jamie has a comparative advantage at producing meals because each meal costs him less forgone vacuuming than it costs Helen (the opportunity cost of producing another meal is that he won’t vacuum only one-quarter of the house for Jamie, compared with half the house for Helen).

Everyone has a comparative advantage.

Notice that, in an absolute sense, Helen is better at neither cooking nor vacuuming than Jamie is. That is, Helen lacks an absolute advantage at any task. But even though Helen isn’t better at any household task, she can still help her household produce more. After all, her household is better off assigning her to some task than to nothing at all. That’s why the opportunity cost principle is so central here—it ensures that you think about all of the possible uses of Helen’s time. And it shows that Helen will make the biggest contribution if she’s assigned to the task that she’s least bad at relative to Jamie.

It’s often most intuitive to think of comparative advantage in exactly these terms: You have a comparative advantage in the task that you’re least bad at. Everyone has a comparative advantage in something, even if they don’t have an absolute advantage in anything, because everyone must be least bad at something as long as people have different opportunity costs.

A three-step recipe identifies who has a comparative advantage in each task.

You’re going to want to identify who has a comparative advantage in other situations, so let’s take a step back and walk through the three steps we’ve followed:

  • Step one: Determine how long each task would take each person (as in the top panel of Figure 1). This measures the cost of producing each good, in hours.
  • Step two: Convert this into a measure of opportunity cost, by calculating how much of the alternative good you could have produced in that time.
  • Step three: Evaluate who has a comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost.

You can use this three-step recipe to identify comparative advantage in any domain.

Do the Economics

Lakisha and Zara are partners in a small suburban law office. They have to decide how to assign the work that they’re getting. Lakisha can write a will in three hours, or an employment contract in six hours. Zara is slower, and it takes her nine hours to write a will, and nine hours to write an employment contract.

  • Step one: Measure the cost of producing each good in hours.
    A table with two rows and two columns shows the productivity of Lakisha and Zara.
  • Step two: Calculate the opportunity cost of producing each good.
    1. Evaluate the opportunity cost for Lakisha and Zara to produce a will. (Hint: You’re making comparisons across tasks, so you compute it by comparing numbers across a row.)
    2. Evaluate the opportunity cost for Lakisha and Zara to produce an employment contract.
    A table with two rows and two columns evaluates the opportunity cost for Lakisha and Zara.
  • Step three: Evaluate who has a comparative advantage by assessing who has the lowest opportunity cost for each task.
    1. Who has a comparative advantage in writing wills? (Hint: You’re trying to figure out who’s down for the task, so look down that column to find who has the lowest opportunity cost.)
    2. Who has a comparative advantage in writing employment contracts?
Rearranging who does what creates more stuff.

There’s a big payoff from thinking in terms of comparative advantage: Simply by rearranging who does what, you can produce more stuff with the same inputs. All you need to do is reallocate the tasks so that we each do more of those tasks where we each hold a comparative advantage, and less of the other tasks.

This logic says that Jamie should reallocate time from vacuuming to cooking, and Helen should reallocate time from cooking to vacuuming. Figure 2 illustrates what’ll happen if they follow this advice.

A tables shows Gains from Trade Due to Comparative Advantage.

Figure 2 | Gains from Trade Due to Comparative Advantage

In this example, Jamie reallocates four hours each week from vacuuming to cooking, which will mean the house gets vacuumed one fewer time, but he’ll make four more meals per week. And if Helen reallocates four hours each week from making meals to vacuuming, she’ll produce two fewer meals per week, but make sure the house gets vacuumed one more time. Add it up, and as the bottom row shows, their household now produces two extra meals each week and the house still gets vacuumed. Specializing according to comparative advantage has made both Helen and Jamie better off—there are two more nights each week when they’ll eat at home, rather than having to pay for takeout.

Where do these extra meals come from? It’s not from working harder—Helen and Jamie are simply reallocating the tasks each does around the house, and so neither of them is working longer hours on household chores. And in this example, it’s not that they’re each getting better at the tasks they’ve been assigned (although that could also happen). Rather, this extra stuff is the dividend from rearranging their household tasks according to comparative advantage. That’s the power of comparative advantage: By ensuring each task is done at the lowest opportunity cost you produce more in the same amount of time.

This extra output is called the gains from trade, because Helen can only get her meals made at the lowest opportunity cost by trading tasks with Jamie, and Jamie can only get the vacuuming done at the lowest opportunity cost by trading tasks with Helen.

Trading allows people to reallocate tasks so that more output is produced with a lower opportunity cost. And this leads to specialization in which people focus on specific tasks, spending more of their time on what they’re relatively good at, and less of their time doing other stuff.

Comparative Advantage in Action

Don’t get lost in the details. Instead, focus on the big idea here, which is that you can produce more if you use comparative advantage to assign tasks. You should assign each task to the person who can do it at the lowest opportunity cost. This is an idea that you can apply well beyond the simple example we’ve explored so far.

Use comparative advantage to assign workers to tasks.
A photo shows a vet wearing gloves and clipping the nails of a puppy.

While both your vet and their assistant know how to trim your puppy’s nails, only one of them has a comparative advantage.

Shrewd managers use comparative advantage to figure out how to assign their workers to different jobs:

  • Your dentist probably doesn’t clean your teeth or take your X-rays. Instead, most dentists allocate these tasks to their hygienist, which frees them up to do more complicated (and expensive!) procedures on another patient.
  • Your pet’s veterinarian likely leaves nail trimming to an assistant, so she can focus her time on medical exams and treatment.
  • Senior lawyers rarely draft legal motions. Instead, they assign those tasks to junior lawyers or paralegals, which frees up the senior lawyer to do the more profitable work of having fancy lunches in order to get more clients.
  • Your hairdresser probably doesn’t wash your hair. Instead, hairdressers typically allocate that task to an assistant, so that they can do more high-paying tints, highlights, or coloring jobs.
  • Chef Alice Waters is the best cook in her kitchen at the famed Chez Panisse in Berkeley, California—but that doesn’t mean she does the cooking. A restaurateur and executive chef, Waters’ time is best spent overseeing her business: working with local vendors, planning menus, creating new dishes, and training staff on how to prepare them.

In each case, the idea is that you should delegate tasks whenever you can delegate them to someone with a lower opportunity cost. And the upside is that it’ll free you up to spend more time on those tasks where you hold a comparative advantage.

EVERYDAY Economics

Should the best drummer play the drums?

A photo shows ’The Beatles’ performing on a stage.

“He’s not the best drummer in the Beatles.”

It’s been reported that when John Lennon was asked “Is Ringo Starr the best drummer in the world?” he responded that “he’s not the best drummer in the Beatles!” He may be right because their bassist, Paul McCartney, was also a superb drummer. And this makes me think that the Beatles were also savvy economists, using comparative advantage to assign tasks. After all, if the opportunity cost of having McCartney play drums was losing him as a bass guitarist, that’s too high a price to pay. Comparative advantage says that you don’t necessarily want the best drummer playing drums, because you also need to think about their opportunity cost.

Markets Facilitate Gains from Trade

So far we’ve found that Helen and Jamie are both better off—they produce more—if they hold a household meeting and divvy up their household tasks according to comparative advantage. But this simple story points to a broader lesson that extends well beyond assigning tasks to your roommates.

Markets offer the opportunity to specialize according to comparative advantage.

Even if Helen and Jamie are no longer roommates, the logic of comparative advantage still applies. This logic says that they’ll both be better off if each task is assigned to the person who can do it at the lowest opportunity cost. That might mean that Helen occasionally drops by Jamie’s house to vacuum, and Jamie repays the favor by sending Helen home with some of his pre-prepared meals. As we’ve seen, trading tasks like this makes them both better off.

This logic also works even if Helen and Jamie don’t know each other. And this is where markets come in: Markets help strangers exploit the gains from trade that come from specializing according to comparative advantage. After all, the logic of comparative advantage tells Helen to do more of the tasks where her opportunity cost is low, and to rely on others for tasks where she has a higher opportunity cost. That logic will lead her to start a company that’ll vacuum people’s living rooms for them. And when she’s hungry, she’ll use some of her profits to buy food from someone who can make delicious meals at a lower opportunity cost than she can. Who knows, she may even buy meals made by some guy called Jamie.

Likewise, the logic of comparative advantage tells Jamie to do more of those tasks where his opportunity cost is low, and rely on others for tasks where he has a high opportunity cost. That’s why he’ll partner with a delivery network to sell his favorite recipes to folks too busy to do elaborate food prep. And when his floors get dirty, he’ll see if there’s a business that can get his vacuuming done. He might even end up a customer of his old friend Helen.

The gains from trade are just as great in this market-based exchange as they are when Helen and Jamie are roommates. And the incentive to do this is just as great, because when Helen and Jamie each focus on those tasks where they hold a comparative advantage, together they get more done. That is, there are gains from trade.

Comparative advantage explains why there are gains from trade in markets.
A photo shows Helen Greiner, speaking at an event.

Helen Greiner, co-founder of iRobot Corp.

Indeed, our simple story is an abridged version of a real-world business success story, in which Helen is Helen Greiner. As an undergraduate student she was so inspired by R2-D2 in Star Wars that she focused her studies on robotics and artificial intelligence. It led her to start the company iRobot, which makes the Roomba, a $300 robot that’ll vacuum your house for you. Helen’s robots are so efficient that they can vacuum your home at a lower opportunity cost than you can. And even though you don’t know Helen, you can still trade with her. Pay her company $300, and in return the robot she helped invent will do your vacuuming, allowing you to spend the hours you save on those tasks where you have a comparative advantage.

A photo shows Jamie Oliver, cooking at his kitchen.

Jamie Oliver, celebrity chef.

Likewise, Jamie is a stand-in for Jamie Oliver, the British celebrity cook sometimes known as “The Naked Chef.” He, too, is specializing in tasks where he holds a comparative advantage. He recently partnered with HelloFresh, a service that delivers recipes and all necessary ingredients directly to your door, so you can enjoy preparing delicious meals without having to do the meal planning and food shopping. Even though you don’t know Jamie, for a reasonable weekly fee, he’ll send you his meal kits, saving you time that you can spend on activities where you hold a comparative advantage.

The beauty of all this is that markets allow you to trade tasks with both Helen and Jamie, so that you can spend less time on tasks like cleaning and cooking where your opportunity cost is high, and more time on tasks where you hold a comparative advantage. And because each task—vacuuming the living room, making dinner, and studying economics—is being done at its lowest possible opportunity cost, you’re each better off. The big idea here is that people following their comparative advantage creates gains from trade.

Comparative advantage explains why people specialize.

And so this simple story about Helen and Jamie is not just about two happy roommates. Rather, it’s a metaphor for the entire economy. It’s a metaphor that explains why each of us specializes in the specific tasks for which we hold a comparative advantage—those with leadership skills work as managers, number-crunchers work as business analysts, and empathetic folks work in human resources. Each of us uses the money we make to buy stuff that’s made by folks who have a comparative advantage in those tasks—buying cars designed by skilled engineers, restaurant meals from expert chefs, and education from dedicated teachers.

In turn, all of this comparative advantage–driven specialization ensures that each product is made at the lowest opportunity cost, which ensures there are gains from all this trade.

Do more of what you’re relatively good at, and less of the other stuff.
A photo shows Dwayne “The Rock” Johnson and Tanoai Reed.

Only one of them is Dwayne Johnson. The other has a lower opportunity cost of stunt work.

Comparative advantage boils down to one key piece of advice: Do more of what you’re relatively good at, and less of the other stuff. This simple advice explains why:

  • It pays to get your shirts professionally pressed: The opportunity cost of wrestling with an iron is time you could spend working toward your next promotion.
  • Few executives make their own lunch: The opportunity cost of spending ten minutes making a sandwich is simply too high when you have an empire to run.
  • Busy families buy pre-cut vegetables: The opportunity cost of chopping vegetables is time busy parents could spend with their kids.
  • Politicians let lobbyists draft bills for them: The opportunity cost of drafting legislation is time that an ambitious politician can spend wooing voters.
  • Actors don’t do their own stunts: Even though no one is tougher than Dwayne “The Rock” Johnson, he doesn’t do his own stunts, because the opportunity cost of The Rock breaking a bone is much greater than it is for his cousin, Tanoai Reed, who works as his stunt double.
  • TaskRabbit is so successful: If you’re busy, you can’t afford the time to assemble your new Ikea furniture. But through TaskRabbit, you can find someone who has a comparative advantage in building furniture, and hire them to do it for you.

In each of these cases, the market plays an important role in helping people focus on the tasks for which they have a comparative advantage: It provides you with pressed shirts, a busy executive with lunch, a harried family with pre-cut vegetables, politicians with pre-written bills, actors with stunt doubles, and someone to build your Ikea furniture for you. The time and energy you save on tasks other people do is time you can allocate to tasks for which you do have a comparative advantage.

Interpreting the DATA

How shifting comparative advantage explains changes in family life

Comparative advantage can explain some of the most important social changes of the past century, including the changing nature of work, families, and relationships. Let me explain.

Most couples have two broad sets of tasks to manage: the task of earning money, and housework. Historically housework was a full-time job, and the opportunity cost of doing this work was the forgone earnings from not pursuing a career. Comparative advantage suggests that whether the couple assigns the housework to the man or the woman depends on who can do it at the lowest opportunity cost.

Back in your grandparents’ day, discrimination kept women’s wages down. As a result, each hour of housework came with a lower opportunity cost for your grandmother than for your grandfather, because it meant forgoing an hour of low-paid work. That’s why so many women of that era were homemakers, while their husbands pursued their careers.

As the twentieth century progressed, social and economic changes led more women to go to college. More education led to higher potential wages for women, increasing the opportunity cost of staying home. As the logic of comparative advantage suggests, this led more women to enter the workforce.

What happened to housework, then? A parallel development—the invention of new household appliances—led families to reorganize their domestic priorities. Here’s why: Your washing machine has a comparative advantage at laundry, your dishwasher has a comparative advantage at washing dishes, and the Roomba has a comparative advantage at vacuuming. Your microwave oven means that industrial kitchens can churn out easily reheated meals at a lower opportunity cost than any homemaker. As a result, your parents’ generation does a lot less housework than their parents did, because they employ a small army of domestic robots to wash, clean, and cook, instead. Your generation will do even less, as online services make it easier for you to outsource and automate chores like paying your bills.

In turn, these robots mean that the opportunity cost of pursuing a career has fallen—the housework will still get done!—and so in many more households today, both parents work. They’re following the dictates of comparative advantage, doing what they’re relatively good at—working in their job—and relying on others (including domestic robots!) to do the other stuff.

Comparative Advantage Drives International Trade

A photo of iRobot, invented in the United States.

Invented in the United States and helping people worldwide focus on their comparative advantage.

Comparative advantage explains how you benefit from specializing in some tasks and trading with others. This also means that comparative advantage explains why we trade with people who live in other countries, and hence it explains international trade.

To see why, let’s return to the story of Helen and Jamie. We began this chapter by analyzing a simple example of two roommates who’ll both be better off if they trade tasks. As we discovered, they’re both better off when Helen takes more responsibility for vacuuming the house, and Jamie does more of the cooking. The same logic applies to the real-world Helen Greiner and Jamie Oliver. In the real world it means that Helen will buy tasty meals designed by Jamie, by purchasing them from HelloFresh. And Jamie will buy a Roomba designed by Helen, to vacuum his house. These choices are driven by the now-familiar logic that says trading—either trading tasks in a household, or trading meals for robots in the market—enables Helen and Jamie to get their cooking and cleaning done at the lowest opportunity cost.

We trade with foreigners for the same reason we trade with locals.

Now let’s add one more wrinkle: Helen Greiner is American, while Jamie Oliver is British. When Jamie buys a Roomba, it’s an export from an American firm to a British buyer. And if Helen buys one of Jamie’s meal kits, it’s an export from a British-German partnership (Jamie is British; HelloFresh is German) to an American. This international trade between an American and a Brit makes them both better off, creating gains from trade.

By this telling, the gains from trade created by comparative advantage are the reason for international trade. Those gains from trade are an incentive for people all around the world to focus on what they’re best at, and rely on others for the other stuff. And the result will be that tasks will be allocated to the people who can do them at the lowest opportunity cost—even when that person happens to live overseas. We’ll study international trade in greater depth in Chapter 9. But even now it should be clear that when comparative advantage drives you to trade with someone—and even if that person is living overseas—you’ll both end up better off.

EVERYDAY Economics

The international trade controversy in my garden

A photo shows a person wearing gloves trimming a stem with a pair of hand pruners.

Do it yourself, or delegate? It depends on your comparative advantage.

I used to spend my weekends gardening. But then the New York Times asked me to start writing columns on economics. So I switched from spending my Saturdays gardening to writing columns, and I hired a gardener. Financially, I was better off, because I paid the gardener less than I was paid for writing my column. And the gardener was happy to have an additional client who paid more than her other part-time job. By my telling, this is comparative advantage creating gains from trade.

Now think how this might play out in terms of the politics of international trade. To do so, you’ll have to allow me to declare myself to be an independent country. Let’s call it the Republic of Nerdonia, population one.

Critics of international trade will argue that it has wrought extraordinary havoc upon Nerdonia. This once-proud republic used to have a thriving agricultural sector (my gardening), but this traditional way of life has collapsed. It was destroyed by an influx of cheap foreign labor (the gardener). All Nerdonia has to show for it is a huge bilateral trade deficit with the gardener (the deficit arises because I pay her every weekend, but she buys nothing from me).

Every word of this argument makes trade sound terrible, and every word is true (although exaggerated for effect). But I still think this trade was worthwhile, and my gardener agrees. The critics have overlooked two untold stories that are central to the logic of comparative advantage. First, Nerdonia now has an emerging media industry (those columns that I write), and that’s only possible because of trade with the gardener. And second, too often the trade debate only focuses on the production side of the economy, effectively asking who’s doing the gardening. But this misses the consumption side, which is where the gains are. I consume and enjoy the fruits of my gardener’s labor every time I sit in my yard and smell the flowers, and I enjoy some small splurges from the remainder of my media earnings.

Recap: Comparative advantage is about reallocating resources to their better uses.

You’ve now come a long way in uncovering what markets are all about. The economy largely consists of folks selling stuff they’ve made, and other folks buying it. We now see why they do this—they’re reallocating tasks according to comparative advantage. And all this trade generates gains from trade, which make both buyer and seller better off.

This should lead you to think differently about markets. Rather than thinking about them as a zero-sum competition in which your gain is my loss, the logic of comparative advantage shows how they can enable a win-win outcome for both buyer and seller. If that now seems obvious, then you’re well on your way to becoming an economist. You won’t meet an economist who doesn’t believe in the power of comparative advantage. But it just might be the hardest idea for non-economists to believe.

I began this chapter by saying that markets reallocate stuff to better uses. And we’ve seen how markets reallocate a valuable resource—such as your time—to a better use, which is performing those tasks for which you hold a comparative advantage. You might wonder how it is that markets figure out where each resource is most valuable. That’s where prices come in, and our next task is to explore the role that prices play in coordinating economic activity.