COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION

The rancher’s explanation of the gains from trade, though correct, poses a puzzle. If the rancher is better at.both raising cattle and growing potatoes, how can the farmer ever specialize in doing what he does best? The fanner doesn’t seem to do anything best. To solve this puzzle, we need to look at the principle ofcomparative advantage .

As a first step in developing this principle, consider the following question. In our example, who can produce potatoes at lower cost the farmer or the rancher? There are two possible answers, and in these two answers lie the solution to our puzzle and the key to understanding the gains from trade.