Time to go back to the basics to benefit more from trade

When Robinson Crusoe was shipwrecked on a deserted island, he couldn’t enjoy any benefits from division of labor until he met Friday. Although the Robinson Crusoe economy is often used as a simple ‘one consumer, one producer’ type economic model, a more realistic setup cannot be construed without introducing multiple agents. Anybody who has taken basic economics classes might have had an eye-opening experience upon encountering Ricardian comparative advantage theory and gains from trade. In fact, recognized or not, the fundamental merit of David Ricardo’s theory is being widely applied in our real life. Think of a potluck dinner gathering where each guest contributes one dish. Even if I were an excellent cook capable of preparing several dishes, I would do best to dedicate my time, effort, and budget to the one dish that I can make relatively better than others, letting other friends take care of the rest. And everybody gains from this arrangement. A similar story goes on in highly sophisticated financial product such as swap transactions or, to a lesser extent, the recent trend of the ‘sharing economy’ like Uber and Airbnb. Beneath all these economic phenomena and activities lies the benefit of division of labor and...

Written by Jong Woo Kang