Types of Mental Models- Comparative Advantage

After grasping the basics of mental models and how they can help you to cognize how things work around you, let’s dive in to look into the types of models you should grasp. Undeniably, there is a wide array of models that have been formulated throughout history. However, you should realize that you don’t have to master all these models for you to improve your thinking skills. Getting a deeper insight into the best models puts you in a good position to master the world around you.

Different mental models that will be discussed are from disciples such as chemistry, business, psychology, biology, philosophy, etc. Each disciple has ideal mental models that have been highly ranked over the years.  

Comparative Advantage

In the field of economics, comparative advantage is a theory that was introduced by David Ricardo in 1817. According to Ricardo, it was possible for two countries trading with each other to mutually benefit if they were producing their goods/services at a lower opportunity cost. To get the idea of how the theory of comparative advantage work, one should clearly understand what opportunity cost means. Basically, opportunity cost refers to the benefits that an individual misses when they choose one alternative over the other.

Economically, a nation would have comparative advantage over another if at all they can produce their goods/services at a lower opportunity cost as compared to other countries. Let’s take an ordinary example of two nations with the following labor costs of production.

Table 1: Labor Cost of Production

Country                Cost per Unit in Man Hours

                Product X

A             10

B             14

Using the above table, the cost of producing product X and Y is lower in country A. This means that there is an absolute advantage enjoyed by country A in producing both commodities. Nevertheless, applying the principle of comparative advantage here, country A would have a comparative advantage if it produced and exported product X. On the other hand, country B would also have a similar advantage by producing and exporting product Y. The point here is that both countries will benefit from trading together. The assumption made here is that the cost ratios should not be equal.

Employing real-life example, let’s assume that Christiano Ronaldo wants to mow his lawn. Indeed, Ronaldo is a famous soccer player. He is famous for his speed and skills on the ball. Since we know how fast Ronaldo is, does this imply that he should mow his lawn?

Ricardo’s concept of comparative advantage can help us in deciding whether Ronaldo would be best fitted to mow his lawn. Due to Ronaldo’s speed, let’s assume that it would take him an hour to complete the job. In the same one hour that he spends here, he could alternatively be featured in an advert that earns him $100,000. Conversely, his next-door neighbor, Mark, can get the job done in four hours. In this period, Mark can offer his plumbing services and earn $120.

From the example provided, Ronaldo’s opportunity cost is $100,000. By contrast, Mark’s opportunity cost is $120. Ronaldo has an absolute advantage over Mark because he can mow his lawn within a short period. Regardless, Mark enjoys comparative advantage in this case due to his lower opportunity cost of $120 as compared to $100,000 for Ronaldo. If these people work together, they will benefit. Therefore, instead of Ronaldo mowing his lawn, the best move would be to hire Mark. For instance, he could offer Mark $200 to do the job. This leaves both of them benefiting from the trade.

Therefore, with the help of a comparative advantage mental model, one could be influenced to invest their time and money wisely. Without a doubt, it would be a bad idea for Christiano Ronaldo to mow his lawn as explained in the example above.



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