I believe this is a very important topic, so thank you for addressing it! But making a focus on comparative (as opposed to absolute) advantage at the beginning seems to me like distraction from the main problem, which occurs regardless of whether the advantage is absolute or not.
It is a separate (and very important) fact that mutually beneficial trade can occur in situations where one party doesn’t have an absolute advantage at anything. (At least, if we ignore the transaction costs.) Without economical education, people are often unaware of this, but if you take an interest in economics, this will be one of the first things they will teach you.
But another fact is that if we have a situation (or possibility) of mutually beneficial trade—regardless of how specifically that happened—and the traded resources are (sufficiently) continuous, then there is actually a whole interval of possible mutually beneficial trades (ZOPA), and it matters a lot at which specific point the trade happens. It matters so much that it actually makes sense to put the entire trade at risk in order to achieve a more profitable point (which is still profitable for your trade partner!). For some reason, this fact is taught much less frequently (at least it seems so to me).
If you understand the concept of relative advantage, but don’t understand the concept of ZOPA (and other people know this), what happens is that you get many trade offers that all give you epsilon extra benefit, and at the end of the day you are confused: “If I am participating in so many mutually beneficial trades, why am I not so rich?” Yeah, the technical answer is that your profit margin is low; but the important question is: why?
Even worse, low profit margin may seem like a natural consequence of trading at an efficient market (which again is a concept you do learn in Econ 101). So we get a “valley of bad economical literacy” where you believe that your behavior is optimal, and you even have seemingly solid scientific arguments to prove it, but in fact you are leaving a lot of money on the table. That’s because you are an “educated stupid” and whenever you meet a market imperfection, you allow someone else to pick up the banknote from the street. (For the purposes of this article, the market imperfection is that there are two different islands, instead of thousand similar ones.)
I wonder what other similarly important concepts I am unaware of...
EDIT:
The way I used to describe this topic is: Imagine that if you work alone, you can make $100 a day. There is another person who can also make $100 a day working alone. But if you work together, you can make $300 a day. How would you split the money?
Now, the second scenario: If you work alone, you can make $100 a day. Another person approaches you and offers to work together, because that would be more productive; at the end of the day the person will give you $120. Would you accept the offer? You don’t know how much money the other person can make alone, and how much money they will keep if you work together; they refuse to tell you. Do you actually need this information in order to make a rational decision? Obviously, $120 is more than $100, therefore...
I think the reason the second fact gets less attention has to do with the focus rapidly shifting to markets and prices as the mechanism by which the exchange rate is set, rather than 1-on-1 negotiation.
Not to say that the second fact is irrelevant. OPs examples of relevance of fact 1 include things like household chore splits between partners, as well as career choice—applications where fact 2 is clearly very relevant.
But in econ 101, there is a lot of ground to cover. comparative advantage is a natural jumping off point for supply & demand Qs which are pretty much required content, whereas negotiation, game theory, bilateral decisions are usually treated as somewhat supplementary.
I believe this is a very important topic, so thank you for addressing it! But making a focus on comparative (as opposed to absolute) advantage at the beginning seems to me like distraction from the main problem, which occurs regardless of whether the advantage is absolute or not.
It is a separate (and very important) fact that mutually beneficial trade can occur in situations where one party doesn’t have an absolute advantage at anything. (At least, if we ignore the transaction costs.) Without economical education, people are often unaware of this, but if you take an interest in economics, this will be one of the first things they will teach you.
But another fact is that if we have a situation (or possibility) of mutually beneficial trade—regardless of how specifically that happened—and the traded resources are (sufficiently) continuous, then there is actually a whole interval of possible mutually beneficial trades (ZOPA), and it matters a lot at which specific point the trade happens. It matters so much that it actually makes sense to put the entire trade at risk in order to achieve a more profitable point (which is still profitable for your trade partner!). For some reason, this fact is taught much less frequently (at least it seems so to me).
If you understand the concept of relative advantage, but don’t understand the concept of ZOPA (and other people know this), what happens is that you get many trade offers that all give you epsilon extra benefit, and at the end of the day you are confused: “If I am participating in so many mutually beneficial trades, why am I not so rich?” Yeah, the technical answer is that your profit margin is low; but the important question is: why?
Even worse, low profit margin may seem like a natural consequence of trading at an efficient market (which again is a concept you do learn in Econ 101). So we get a “valley of bad economical literacy” where you believe that your behavior is optimal, and you even have seemingly solid scientific arguments to prove it, but in fact you are leaving a lot of money on the table. That’s because you are an “educated stupid” and whenever you meet a market imperfection, you allow someone else to pick up the banknote from the street. (For the purposes of this article, the market imperfection is that there are two different islands, instead of thousand similar ones.)
I wonder what other similarly important concepts I am unaware of...
EDIT:
The way I used to describe this topic is: Imagine that if you work alone, you can make $100 a day. There is another person who can also make $100 a day working alone. But if you work together, you can make $300 a day. How would you split the money?
Now, the second scenario: If you work alone, you can make $100 a day. Another person approaches you and offers to work together, because that would be more productive; at the end of the day the person will give you $120. Would you accept the offer? You don’t know how much money the other person can make alone, and how much money they will keep if you work together; they refuse to tell you. Do you actually need this information in order to make a rational decision? Obviously, $120 is more than $100, therefore...
I think the reason the second fact gets less attention has to do with the focus rapidly shifting to markets and prices as the mechanism by which the exchange rate is set, rather than 1-on-1 negotiation.
Not to say that the second fact is irrelevant. OPs examples of relevance of fact 1 include things like household chore splits between partners, as well as career choice—applications where fact 2 is clearly very relevant.
But in econ 101, there is a lot of ground to cover. comparative advantage is a natural jumping off point for supply & demand Qs which are pretty much required content, whereas negotiation, game theory, bilateral decisions are usually treated as somewhat supplementary.