Comparative advantage:
Example:
Rochester Cornell
Wine 10 3
Camera 5 4
Rochester has an absolute advantage in producing wine and camera over Cornell
What's efficiency? What's sacrifice?
Price means what's traded off to do something else
Efficiency is who incurs a smaller trade-off when they produce a certain good
Rochester 1 wine----0.5 camera Cornell 1 wine------4/3 camera
1 camera---2 wine 1 camera---- 0.75 wine
Rochester has a comparative advantage in producing wine over Cornell because it bears a less opportunity cost in producing wine than Cornell does.
Now suppose Rochester just produces wine and Cornell produces cameras, and Rochester gives 3 wine to Cornell for 3 cameras, the corollary is that both Rochester and Cornell will be better off.
So trade is based on comparative advantage; there's no producer who can have a comparative advantage in producing everything; trade will be beneficial to both traders as long as the offer fits in the opportunity cost of two traders. (For example: 0.5<1<4/3 so both Rochester and Cornell can benefit)
If domestic price of a good is lower than world price, domestic producer will export the product, when domestic price is higher than world price, domestic producer will import the product and produce something else that can have a comparative advantage.
You pay for imports with exports always
Implications of comparative advantage
(1) Self-sufficiency is road to poverty
1> can you produce all the stuff by yourself?
2> if world population shrinks to 10, will you get what you want most?
(2)What countries end up producing is a function of their relative productivity, not a function of their level of tech, wages, how nasty they treat the workers in the countries.
What matters in not the differences in prices across countries. What matters for trade is the relative price differences within the country.
(3)Policy that restricts trade between individuals make society poor
Application: tax and tariff
The reasons of the loss of manufacturing jobs
(1)Workers have been replaced by modern technology
(2)The types of things we produce today are more technology intensive
(3)Within companies, low skill jobs shrink and high skill jobs thrive
(4)New jobs are safer and more pleasing than the old jobs replaced
No comments:
Post a Comment