Bella and Brutto are Different: A Lesson in Comparative Advantage

As we dig into the Fall semester, thousands of students will begin their first economics course and be exposed to the world of economic thinking. I used to be a drumming instructor with a music lessons company. One thing I enjoyed doing as a teacher was leaving the student with the capability of performing and practicing a full, simple drum pattern after the very first lesson, such as the main rhythm to AC/DC’s Back in Black or The Beatles’ Yellow Submarine.

Since I decided on the life of an economist, I like to think about what an analogous good first lesson in economics would be. What exercise in economic thinking could students put to use after their very first lesson?

One of my favorite first lessons is an exercise with the concept of comparative advantage. This concept explains a lot about the world with some extremely simple logic, but that can be quite unintuitive for the beginning student. It explains why people would exchange things with one another in the first place.

Years ago, I had a conversation with another drumming instructor. I mentioned that I was turning my attention to economics in graduate school. “Oh” he said approvingly, “I took an undergraduate class in economics once. I don’t remember very much, but I learned how to do my taxes.” I nodded along with him, though internally mortified.

However practical, one should not learn how to do one’s taxes in an economics class. A primary takeaway should be an understanding of why it is that so many individuals pay others to do their taxes for them. The reason is comparative advantage. 

Professors often show this with the hypothetical trade of coconuts and bananas on a deserted island or the trade of cloth for wine between Britain and Portugal. Here is the example I would have liked to provide for my friend, the drum teacher. I believe it provides a great concrete lesson for beginning economics students. 

Imagine an economy with only two individuals and two goods: music and accounting services (we make believe that citizens in this economy can subsist on these two goods alone). We further posit that within each day, an individual has some capacity to produce either of these goods in different bundles.

Our two individuals, Brutto and Bella, differ in productive ability. If Brutto focuses all of his energy on accounting services, he can produce 5 units. If he focuses on music, he can produce 10 songs. Bella, on the other hand, is much more productive. If she focuses on accounting, she can make 10 units, and if she spends her time only on music, she can produce a whopping 30 songs.

Here are their productive capacities, showing some of the bundles they can produce in autarky:

Abilities of Brutto and Bella in Producing Either Songs or Accounting Services in A Single Day

For some exogenous reason, Bella is endowed with a greater opportunity for consumption of both goods. She has an absolute advantage over Brutto. Seemingly, Brutto could use help from Bella, but Bella has no need for Brutto. 

One should notice though, that at a production ratio of 30 S per 10 A, it costs Bella 3 songs every time she produces a unit of accounting services. It costs Brutto only 2. When Bella produces one song, she gives up only 1/3 of a unit of accounting services, whereas Butto gives up 1/2 of a unit. Brutto would be willing to trade an accounting service for any amount of songs greater than 2, and Bella would be willing to trade a song for any amount of accounting services greater than 1/3. 

If both Bella and Brutto are rational and willing to engage in trade, opportunities exist for them both to become richer because Bella has a comparative advantage in producing songs and Brutto has a comparative advantage in producing accounting services. The range of exchange ratios that would make them better off is anywhere between 2 and 3 S per 1 A. We could imagine that they settle on a price of 2.5 S per A. 

Here is a list of how the distribution of the goods in this economy would look with and without trade between the two individuals. 

Production of Music and Accounting Without Trade and With Trade at a Price of 2.5 S / 1 A

When trade takes place, both Bella and Brutto reach higher levels of consumption. Even though Bella is better at everything, she can still get richer by trading with Brutto. In fact, even if Bella becomes more skilled, they can still benefit from trade. 

Imagine now that Bella engages in capital investment. She spends time practicing and becomes even better at producing songs. Now she can produce 40 songs in a single day if she focuses her energies on music. This greater production of songs makes accounting services relatively scarcer, and Bella would now be willing to let go of a song for anything greater than 1/4 of a unit of accounting services.

If the price is renegotiated, they might land on a new price. Here is what happens to the trade possibilities if they reach a new price of 3.5 S per 1 A. 

Production of Music and Accounting Without Trade and With Trade at a Price of 3.5 S / 1 A

If Bella becomes better at producing songs, she not only becomes richer, but Brutto also becomes even richer than before! This is where the “ah-ha” moment sets in for some students. 

This example involves many assumptions, including about the bargaining power of the two individuals. The numbers were chosen because they would work in this example. Other numbers might not suggest a possibility for trade. For instance, trade only works here because Bella and Brutto are different. 

However, this exercise gives a powerful reason for why accountants and musicians specialize in their different trades, and why we diverse individuals in society are so willing to trade one thing for another: because it makes us richer. 

Furthermore, individuals can change their comparative advantages by investing in physical or human capital. That’s the very reason many students are in college to begin with: to develop talent towards a new career path and enhance their future earnings and satisfaction. This is an appropriate first lesson in economics, not how to go about doing your taxes.

Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University.