Sec. 5. #Doctrine of comparative advantages.# It may be that two countries both possess the necessary technical conditions for making both articles that are to be traded for each other.  It may even be that the people in one country would be able to make not only one of the two objects of trade, but both of them, more easily and with less sacrifice and effort than the people in the other.  If, for example, American labor can produce two bushels of wheat in a day and English labor but one bushel a day; and American labor can produce just as much iron in a day as English labor—­or more—­the question always arises:  Is it not foolish and wasteful not to produce both the wheat and the iron?

Now, exactly the same case is presented in almost every simple neighborhood trade.  The proprietor may be able to keep his books better than does the bookkeeper whom he employs.  The merchant may be able to sweep out the store better than the cheap boy does it.  The carpenter may be able to raise better vegetables than can the gardener from whom he purchases.  Yet the merchant does not turn to sweeping and the carpenter to raising vegetables, because if they did they would have to quit or limit by so much their present better-paying work, and would lose far more than they would gain.

So whenever the people in one country have a greater advantage in one article than in another, relative to another country, the foreigners, like the low-paid man, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies.[7]

But this is always hard doctrine for the popular mind, and particularly for the commercial mind endeavoring to carry on a business that can not be made “to pay” in the face of foreign competition.  It is easy to believe that a country ought not to import goods unless it is at an absolute disadvantage in their production.  It is often declared that as our country can produce any kind of goods “as well” as foreign countries (meaning with as few days’ labor), there is a loss on every unit imported.  The fundamental principle of trade as applied to such cases shows that not the advantage which one country enjoys over the other as to a single product determines whether it will gain by producing at home, but the comparative advantages enjoyed in the production of the two articles in question.

As a simple example, suppose that a day’s labor in country A will secure two bushels of wheat (2x) and two hundred pounds of iron (2y), whereas in B a day’s labor will secure 1x or 2y.  Then A’s comparative advantage in producing x becomes a reason for A’s not trying to produce y.  Trade can take place (aside from transportation outlay) at any ratio between 2x = 2x (A’s minimum) and 2x = 4y (B’s maximum).  Evidently at any rate between these two ratios each party would gain something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y by a day’s labor, and B would get 1-1/3x instead of 1x for a day’s labor (2x for 1-1/2 day’s labor instead of for two days’).  If, however, A could produce exactly twice as much of everything as B could, then there could be no motive on either side for trade.  But this never happens.