specialization in production doing what we do most best or least worst

Specialization in Production

doing what we do

most best or least worst

Economic Independence.Is it worth it?

EDUCATIONCHICKENSBANANASSTEREOSLEVIS

COFFEETV’SHOUSESCOMPUTERSCARS

EASILY AT GREAT COST/ OR LOWER QUALITY COULD NOT

If voluntary exchange benefits both traders domestically, is

the same thing true internationally?

Who should produce what?

The Law of Comparative Advantage

– Through specialization and exchange, both

parties can gain from lower costs and

greater output

– The softball team

Two Comparative Advantages

Hours to Make Cabinet

Hours to Mow and Rake Yard

Cabinet Maker 3 2

Teenager 20 3

Cabinet Maker advantage over teenager

3/20 = .15 2/3 = .67

Teenager disadvantage

20/3 = 8.67 3/2 = 1.5

Who Gains What?

Cabinet Maker Teenager

Time to make cabinet 20 hours

Hourly pay $10

Cost to make cabinet

Cost to buy cabinet

Saving by buying cabinet

Time to do yard work 2 hours

Hourly pay $50

Cost to do yard work

Cost to hire yard work

Saving by hiring yard work

Who Gains What?

Cabinet Maker Teenager

Time to make cabinet 20 hours

Hourly pay $10

Cost to make cabinet $200

Cost to buy cabinet $150

Saving by buying cabinet $50

Time to do yard work 2 hours

Hourly pay $50

Cost to do yard work

Cost to hire yard work

Saving by hiring yard work

Who Gains What?

Cabinet Maker Teenager

Time to make cabinet 20 hours

Hourly pay $10

Cost to make cabinet $200

Cost to buy cabinet $150

Saving by buying cabinet $50

Time to do yard work 2 hours

Hourly pay $50

Cost to do yard work $100

Cost to hire yard work $30

Saving by hiring yard work $70

Both Parties Gain from Specialization in Production

and Exchangecabinet maker specializes

in cabinetsteenager specializes in Yard

cabinet maker gains $70

teenager gains $50

The Law of Comparative Advantage

• In exchange between two parties, even if one party is better at both activities, both parties can benefit from specialization in production and exchange.

• Both domestically and internationally

The Law of Comparative Advantage

The kid that mows my lawn does a lousy job. I could do much better in less time. (econ lessons vs. lawn care)

The guy that cleans our house does a great job. I could do better. (econ lessons vs. house care)

My wife is a much better parent than I am. She should stay home with the kids?????

Buy Californian

Buy Los Angeles!

Remember

Self sufficiency is expensive!

International Economic Cooperation

Good or bad for America?

Wrong question!

Free Trade(Consumers)

wider range of alternativeslower pricehigher qualityall benefits of domestic competitionfewer goods available for domestic useFounders of Nation recognized thisEurope now recognizes this

Free Trade(Workers)

Helps some workers (producers), hurts others

NAFTA and other trade agreements will– help highly skilled, information intensive

workers and industries– hurt low skilled workers, labor intensive

industries

The Question

How do we gain the advantages of trade while dealing with the

disadvantages?

The U.S. will export capital intensive and knowledge

intensive products and will import labor intensive

products

50% of new jobs in next 20 years will require a college education or

advanced training.

How Will You Make Yourself Scarce in the Global Economy

of the 21st Century?

The Cheap Labor FallacyWhere to Locate Your Factory?

1.Hourly Wage

2.Workday

3.Daily wage

4.Daily production

5.Average rejects

7.Cost per usable unit

6.Usable units

Country A Country B Country C

$10 $12 $5

8 HRS. 8 HRS. 8 HRS.

240 120260

40 40 60

$$

$$$

$

The Cheap Labor FallacyWhere to Locate Your Factory?

1.Hourly Wage

2.Workday

3.Daily wage

4.Daily production

5.Average rejects

7.Cost per usable unit

6.Usable units

Country A Country B Country C

$10 $12 $5

8 HRS. 8 HRS. 8 HRS.

240 120260

40 40 60

$.44

220

$.40

$40$96$80

200 60

$.67

Main Points

People can get more from scarce resources if they specialize in those activities in which they have a comparative advantage

In an exchange between two parties, even if one party is better at both activities, both parties can gain from specialization and exchange. This is the law of comparative advantage

Comparative advantage applies to both domestic and international production and exchange.

Main Points

International trade creates more jobs than it destroys, but it has serious distributive effects.

Low wage is not the same as low labor cost. It is the wage in relation to productivity that is relevant.

Which is the strong dollar?

A. 50 = $1; 1 = $.02

B. 100 = $1; 1 = $.01

WHY DO WE CARE? IMPORTS

JAPANESE PRODUCT COSTS 100

PRICE IN U.S.

A. 50 = $1; Price of product in $___

B. 100 = $1; Price of product in $ ____

WHY DO WE CARE? IMPORTS

JAPANESE PRODUCT COSTS 100

PRICE IN U.S.

A. 50 = $1; Price of product in $ 2

B. 100 = $1; Price of product in $ 1

WHY DO WE CARE? EXPORTS

U.S. PRODUCT COSTS $50

PRICE IN JAPAN

A. 50 = $1; Price of product in ____

B.100 = $1; Price of product in ____

WHY DO WE CARE? EXPORTS

U.S. PRODUCT COSTS $50

PRICE IN JAPAN

A. 50 = $1; Price of product in 2500

B.100 = $1; Price of product in 5000

The Big Ideas

Self-sufficiency is expensiveFor the U. S., free trade

– improves world efficiency– is unambiguously good for consumers– helps high-skill workers and industries,

hurts low-skill workers and industries– has environmental effects

The Big Ideas

It is not the wage but the relation of the wage to labor productivity that affects plant location

You will compete in a global economy. A strong dollar:

– makes U.S. imports less expensive– makes U. S. exports more expensive to foreigners– helps U.S. importers– harms U. S. exporters