We have two economic terms to talk about today.
First, comparative advantage.
Second, opportunity cost.
I want you to keep them both in mind.
Each one helps explain the other.
And don't worry,
we're going to explain them both
with a little help from our friends
Mark and Lucy.


Mark and Lucy like apples and oranges.
And they're both pretty good
at picking them.
When Mark goes apple picking, he can get, well, ten a day.
And when he goes orange picking, he can get, well, ten a day.
But he can't do both.
He has to make a choice.

If he spends the day picking apples,
well, that's ten oranges he can't pick.
I'm sorry, buddy, that's life.

Lucy can pick ten a day, too.
Just like Mark.
But when she chooses to pick oranges,
something marvelous happens.
In the time it takes Mark to pick either
ten apples or ten oranges,
Lucy can pick 30 oranges.
She just gets orange picking. Who knows why.

One day,
Mark and Lucy decided
to spend half their day picking apples
and the other half picking oranges.
Can you guess what happened?
Mark picked five apples in the morning
and five oranges in the afternoon.

While Lucy
had the same kind of morning as Mark,
but the afternoon was a different story.
And when they added up their total haul
for the day,
they got ten apples and 20 oranges.

And that's when they realized something.
If Mark had just picked apples
and Lucy had just picked oranges,
they'd have had the same amount of apples,
but ten more oranges.

Now, how can that be?
All they did was rearrange
who does what.

Well, the answer lies in the concept
we mentioned:
opportunity cost.
Mark can either pick ten apples
or ten oranges in one day.
So when he decides to pick one apple,
he's also choosing not to pick an orange.
In a way, he's trading with himself.
One apple for one orange, and vice versa.

But because Lucy can pick three times
as many oranges as apples in a day,
trading with herself is different for her
than it is for Mark.
When she chooses to pick an apple,
she loses out not on one orange.
Get the picture?

Mark has to give up one orange
for one apple.
But Lucy, because she's so awesome
at orange picking, has to give up three.
It costs her more to lose the opportunity
of picking oranges than it costs Mark.
Get it? Opportunity cost.

But wait.
All Lucy has to do to make things
better for herself
is to get one apple
for less than three oranges, right?
Meanwhile, Mark can do better for himself
if he can get one orange
for less than one apple.
And they can do that by trading with
each other instead of with themselves.

Here's how.
Here are the oranges Lucy picked
when she wasn't picking apples.
Here's the apples
Mark picked in the same amount of time.
Watch what happens when they trade.
Lucy trades two oranges to Mark
for one apple.
So that's one less orange
than she would have to trade with herself
if she got the same apples.

Now she has an apple
and an orange instead of one or the other.
So she's done well,
but Mark's getting a better deal too.
He now gets two oranges for one apple,
instead of trading with himself
one for one.

So by just changing who does what,
and without improving
either of their outputs,
they've ended up with more stuff.
So even if Lucy is better at everything,
she still benefits from trade
because the number of oranges
she gives up to get an apple from Mark
is less than the number of oranges
she needs to give up
to pick the apple herself.

So by being mindful of opportunity costs
and using specialization,
they can both benefit
from the principle of comparative advantage.
Life has gotten pretty good.

And in the same way it works for Mark
and Lucy, it also works for the world.
Comparative advantage means that
by specializing and trading with others,
instead of trying to do everything themselves,
countries can be better off
than they otherwise would be.
No matter how good they are
at doing what they do.