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