[cmarschner]

For economists, efficiency is simply that goods should be created where the surroundings are best suited for it - first described by David Ricardo in the 19th century. E.g. Cotton should be planted where there is the most fertile soil etc. This works best in a globalized economy where production can move around freely and where there are no trade restrictions. As a result, productivity is higher, meaning that goods are cheaper (if there is competition), meaning that - provided the result is used for consumption - that everybody is better off. This doesn't take into account that a) labor doesn't move freely, meaning the change process creates winners and losers, and uncertainty (locals are in constant danger that their job is reallocated to some other place), b) it gives an incentive to move production to places with lowest priced-in externalities (labor market frictions like unions, environmental damage).

[rahimnathwani]

"Cotton should be planted where there is the most fertile soil etc."

Nitpick: this statement is about absolute advantage, whereas Ricardo emphasised comparative advantage: https://en.wikipedia.org/wiki/Comparative_advantage#Ricardo....

Imagine that you're better than me at everything (both programming and needlework). You can program three times as fast, and sew twice as fast as I can. Does that mean you should do all your own programming and sewing? No.

However small my contribution, I can save you some time by doing some sewing for you. In that saved time, you can do more programming than I could have achieved in the time I spent sewing. So in sum we're better off. So, there are potential gains from trade.

[reddytowns]

Yes, but at a certain threshold that is no longer true due to logistics. For instance, I could try to sell back all the plastic bags I got at the grocery store, and even if I folded them flat, made sure they were clean and ready to reuse, no matter the price, the grocery store owner would with all likelihood refuse to buy them from me.

Because, regardless of how much money would be saved from buying my bags over the ones fresh from the factory, it wouldn't be able to cover the logistical cost to the company's workflow.

[rahimnathwani]

My simplified example was designed to demonstrate the difference between absolute advantage and comparative advantage, and show that there are gains from trade, even when one party has absolute advantage for all output goods.

There is no doubt that transactions costs and other friction make some potential exchanges uneconomical. So, what you say is true. But it doesn't help or hinder my explanation, and is irrelevant to the point I was trying to make.

[thaumasiotes]

> For economists, efficiency is simply that goods should be created where the surroundings are best suited for it - first described by David Ricardo in the 19th century. E.g. Cotton should be planted where there is the most fertile soil etc.

This seems slightly off to me. Cotton can be grown more efficiently (in the usual sense of less cost per unit return) in some climates than others. But the economy as a whole may be more efficient if cotton is grown exclusively in subpar-for-cotton areas; perhaps the ideal-for-cotton areas are needed for another crop.

As I understand it, "efficiency" in economics will refer to one of two ideas:

1. Small deadweight losses. The smaller they are, the more efficient the economy is.

2. Pareto efficiency. (That is, the economy is efficient, in this sense, if there is no reallocation of resources that makes somebody better off without making anyone worse off.)

[rahimnathwani]

"This seems slightly off to me."

You are correct. GP gave an example of absolute advantage. But Ricardo is more famous for demonstrating that comparative advantage can be enough to make trade worthwhile.

Your field may be 1/3 as efficient at making cotton than mine. But perhaps it's 1/5 as efficient as mine in growing olives. So, assuming we both want cotton and olives, it would be worth you growing more cotton, and swapping for some of my olives. I get a little more cotton than I would have alone. And you get a few more olives than you would have.