What matters in the trade is not just wages but how much the work can be produced in an hour.
In prosperous countries such as America, a fallacy that sounds very plausible is that American goods cannot compete with goods produced by low-wage workers in poorer countries,some of whom are paid a fraction of what American workers receive.
Economically, the key flaw in the high-wage argument is that it confuses wage rates, measured per hour of work, and labor costs, measured per unit of output.
Chinese workers American workers
wage $8 per hour $30 per hour
marginal output of labor 4 unit per hour 20 units per hour
ratio $2 per unit 1.5bucks per unit
America has an absolute advantage in labor costs over China, but China has a comparative advantage in producing stuff over America. America has to bear a higher opportunity cost than China does.
The world trend of manufacturing is that there're fewer workers working in this area.
Does trade surplus create jobs?
NO American agriculture has had a surplus since 1976 but the employment has been decreasing. The reason is that productivity enhances, which means that the land use is more and more efficient.
American government now puts a higher tariff on Chinese goods but can this policy spur the domestic manufacturing?
Answer: NO Reasons
(1) Chinese productions consist of only 2.7% of the American market.
(2) Most of the goods made in China are input of production of other goods, which means that a tariff on such goods is an increase the cost of input to produce the stuff that the American people are producing. (Raw material is more expensive)
What affects manufacturing jobs? Regulation
Economic sustainability: Neither trade surplus or deficit will create or cost jobs
Why doesn't trade deficit cost jobs?
People who think that trade deficit destroy jobs ignore dynamic nature of employment in two ways.
(1)When you think about trade, U have to remember the identity: The real reason a country needs exports is to pay for its imports.
(2)When you specialize you will become richer.
You consume excessive income and thus create more jobs.
Conclusion:
Because of specialization, trades allow us to consume more than we otherwise did,raising the number of jobs, and when we import stuff we always have to export, so we are not losing jobs; instead, we are shifting jobs to reach a situation of optimal efficiency.
Even if Korean give Americans cars for free, it won't let the American automobile business disappear because people have different preferences.
What's related to trade deficit?
Balance of payments: an accounting record of all monetary transactions between a country and the rest of the world, including payments for the country's exports and imports of goods and services, financial capitals and transfers.
Two types of balance of payments:
(1)Capital account: a reflection of net change in national ownership of assets
A surplus means that money flows into the country, suggesting that it's lending or selling the assets to other countries.
A deficit means that money is flowing out of the country, suggesting that it's claiming on foreign assets.
(2)Current account: A reflection of the sum of the balance of trade, net factor income(Like interest), and net transfer(Foreign aid, for example)
A surplus increases a country's net foreign assets by the corresponding amount and the deficit does the opposite thing.
Why trade doesn't cost America
Example:
Suppose an American buys a 10 dollar toy from a Chinese and the Chinese pays the American 5 bucks for a bowl.
What will the Chinese do with the excessive 5 bucks?
(1) buy other American stuff
(2) burn the money, but that will enrich the American because the money is a claim on American assets
(3) buy another country's stuff, but the country will make the choice like the Chinese does.
All the three ways ensure that the money will go back to America.
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