How is opportunity cost dumb? Even playing strategy games as a kid, I understood it. “Oh if I spend this money on a tank I can’t use it for a helipad or a defense tower, so I need to figure out which of those options is the best use for it.”
In the context of macroeconomics, it refers to the idea that even if a country could make everything they need internally, it is ultimately cheaper for everyone if regions just specialized in producing stuff that they do better/cheaper than anyone else, and trade for the rest.
In a very simplistic sense, if Country A and Country B are each able to produce all the food and all the clothing that they need internally, but Country A is way better at making food and than clothing, and vice versa for Country B, it would make sense for Country A to just focus on producing a ton of food and import their clothing needs. Then everyone gets more stuff overall.
However, this implies that there are no geopolitical frictions between Country A and Country B. It works if countries can maintain friendly trade relations, but can make supply lines real fragile.
Also as homhom9000 says, sometimes “specializing” gets really stupidly specific.
It also doesn’t account for the common situation where a country could do something more cheaply internally if they had a decade or two to spool shit up.
See China where it’s gone from a comparative advantage in coal and not much else, to cheap manufacturing, to high tech manufacturing, to universal comparative advantage.
It’s all about actually having the capital. China understood the assignment and put itself in a position to attract capital and gain that comparative advantage, now it’s all paying out supremely.
What if country A doesn’t produce that much at all and instead just prints dollars, then uses it’s military to force everyone to trade oil and everything else in dollars enjoying a steady flow of goods and services in exchange for cheap paper? And what if country A then suddenly reverses course (because other countries start to move away from the dollar anyway) and tries to cash in on this flow, while it’s still going, with high tariffs?
I remember learning about comparative advantage and opportunity cost, thinking it was the dumbest shit in the world. Now we get to see why 😈
How is opportunity cost dumb? Even playing strategy games as a kid, I understood it. “Oh if I spend this money on a tank I can’t use it for a helipad or a defense tower, so I need to figure out which of those options is the best use for it.”
In the context of macroeconomics, it refers to the idea that even if a country could make everything they need internally, it is ultimately cheaper for everyone if regions just specialized in producing stuff that they do better/cheaper than anyone else, and trade for the rest.
In a very simplistic sense, if Country A and Country B are each able to produce all the food and all the clothing that they need internally, but Country A is way better at making food and than clothing, and vice versa for Country B, it would make sense for Country A to just focus on producing a ton of food and import their clothing needs. Then everyone gets more stuff overall.
However, this implies that there are no geopolitical frictions between Country A and Country B. It works if countries can maintain friendly trade relations, but can make supply lines real fragile.
Also as homhom9000 says, sometimes “specializing” gets really stupidly specific.
It also doesn’t account for the common situation where a country could do something more cheaply internally if they had a decade or two to spool shit up.
See China where it’s gone from a comparative advantage in coal and not much else, to cheap manufacturing, to high tech manufacturing, to universal comparative advantage.
It’s all about actually having the capital. China understood the assignment and put itself in a position to attract capital and gain that comparative advantage, now it’s all paying out supremely.
What if country A doesn’t produce that much at all and instead just prints dollars, then uses it’s military to force everyone to trade oil and everything else in dollars enjoying a steady flow of goods and services in exchange for cheap paper? And what if country A then suddenly reverses course (because other countries start to move away from the dollar anyway) and tries to cash in on this flow, while it’s still going, with high tariffs?
So much of undergrad macroecon classes is built on the idea that everyone plays nice and fair with each other.
You know, a fantasy land.