Resource Productivity and Use

1. Resource Productivity and Use

2. Producing Goods Takes Resources • The amount of resources a country has determines how much it can produce • Both quantity and quality of resources matter • What are resources • Land: anything found in nature • Labor: human effort • Capital: tools, equipment, buildings and other goods that business use to further production

3. Resources are not Equally Productive • Some resources are more productive than others • It takes more resources to produce a good if the resource is less productive • Abbydale’s labor is not as productive as ours in any area: it takes them longer to produce everything • Springfield’s film makers are more productive than ours: it takes them less time to produce films • Abbydale has more labor than we do (about 2.5 as much) • We make the same amount of goods • Our resources are more productive

4. Some Resources are More Productive than Others Why are some workers more productive than others? • Innate differences • Investment differences • Capital use • Some land is richer than others

5. Absolute Advantage • Absolute Advantage means a country produces goods using fewer resources than another • Absolute Advantage indicates the resources are more productive • Our island has an absolute advantage in producing ALL goods as compared to Abbydale • Our island has an absolute advantage in producing SOME goods as compared to Springfield • Table 1 shows the island with an absolute advantage in producing each good

6. Using Resources • Tradeoffs occur when all resources are used in production • To produce more of one good, you must produce less of another, if all resources are being used • Example • Springfield has 211.5 hours of labor and can produce the goods listed on Table 1 • Springfield can’t increase production of one good or produce a new good: all workers are being used • Springfield can trade off goods on Table 1 to increase production in one area or to produce a different good

7. Unemployed Resources • Some resources that could be used in production are not being used • Production tradeoffs do not have to occur with unemployed resources • Unemployed resources can be used to increase production • Tradeoffs in production only exist for a country if resources are fully employed

8. Comparative Advantage

9. A Key Economic Question • Every society has to answer the question “What will be produced?” • Countries with market economies produce low cost goods and trade for goods they don’t produce

10. Specialization and Trade • Specialization means a country will not produce a full array of goods • Must trade with other countries to get other goods • Trade with countries that produce goods at a lower relative cost • For efficiency (most goods produced) • Produce goods that have the lowest relative cost • Relative means what give up (opportunity cost)

11. Specialization and Trade: An Intuitive Example • You want students taught and your car fixed • You can do both, but you are a better teacher than auto mechanic • More teaching and car fixing can occur if you specialize in teaching and trade services with a mechanic you gain • Markets work by themselves • No one dictates the trade • Trade is a voluntary exchange of services (in this case)

12. What if I’m Better at Everything? • If you are a better teacher and auto mechanic should you produce everything? • Absolute advantage in teaching and fixing cars • Hint: resources are scarce and you want to get as many goods out of them as possible

13. Comparative Advantage • True cost of producing a good is opportunity cost (what you have to give up) • Production tradeoffs: When you use resources to produce one good, they cannot be used to produce another good • When resources are traded off in production we say they are production substitutes • Comparative Advantage: who has to give up the least to produce a good

14. Comparative Advantage: An Example • Dentist’s office 2 services: cleaning teeth and keyboarding • Dentist: costs $50/hour to clean 4 sets of teeth or enter 80 wpm • Assistant: costs $15/hour, can’t clean teeth but enters 40 wpm • Division of labor and specialization • Dentist: gives up $50 to enter 4,800 words (80 wpm X 60=1 hr) • Assistant: costs $30 for 4,800 words (4,800/40=120 min=2 hrs) • Cost of getting 4sets of teeth cleaned and 4,800 words entered • $100 for dentist to do both—2 hours of the dentist time • $80 for dentist and assistant—1 hour of dentist + 2 hours of assistant • Comparative advantage (lower opportunity cost) • Dentist: cleaning teeth • Assistant: keyboarding

15. Countries Act Like People • Total production increases when countries specialize production in goods for which they have a comparative advantage and trade with other countries for goods not produced • Countries are less likely to produce goods with a high opportunity cost with specialization and trade

16. Comparative Advantage and Countries • Two countries: Northland and Southland • Two products: wheat and radios • Countries have different productivities (Northland better at both: absolute advantage at both)

17. Opportunity Cost of Production • What the country gives up to produce the good • Reflected in the ratios of production(number in denominator is the opportunity cost) • One unit of wheat costs .4 radios in Northland • One unit of radios costs 2.5 wheat in Northland • One unit of wheat costs .6 radios in Southland • One unit of radios costs 1.67 wheat in Southland

18. Comparative Advantage • Opportunity costs between countries • Radios: costs Northland 2.5 W, Southland 1.67W • Wheat: costs Northland .4R, Southland .6R • Southland should produce radios and Northland should produce wheat • Northland may be better at producing both goods, but is better off with specialization and trade

19. The Real World • More than 2 goods • How do we measure comparative advantage? • Does specialization and trade still work? • Can use the low cost good to gauge opportunity cost (Table 1) • Springfield’s low cost good is printers • It takes 2.5 hours to make 100 copies • It takes more than 2.5 hours to make anything else • Abbydale’s low cost good is shipping • It takes 6 hours to ship 20 tons • It takes more than 6 hours to make anything else • If Springfield or Abbydale produce goods other than the low cost good, they must give up producing the good it is best at making

20. What We Produce • We know what to produce once we know the opportunity cost of producing goods (Table 2) • Dividing the number of hours to produce a good by the low cost good estimates the opportunity cost of producing a good • Produce goods with low opportunity cost and trade for goods with higher opportunity costs • We produce college education • Opportunity cost of doing so is lower than either Springfield or Abbydale

21. Specialization and Trade

22. Specialization and Trade • Each island holds a comparative advantage in producing some goods • Table 2 shows the country with the comparative advantage (lowest opportunity cost) of producing each good • Output can increase when countries specialize production in goods with the lowest opportunity cost and trade for the goods not produced

23. Specialization and Trade: Why? • Spend fewer hours to get the same goods • Table 3 shows • Designate the hours it takes to produce the good IF the island with the lowest opportunity cost produces it • Add all the hours it takes to make goods with specialization • Hours to make the goods with specialization is less than those used when all goods produced (Table 1)

24. Extra Hours • Specialization and trade means same goods produced with fewer resources • Potential uses for “extra” resources (hours) • More goods: economic growth with more goods and services produced • Idle resources: • Labor works fewer hours • Expendable resources saved for future use

25. Trade • Trade may look bad if don’t know Economics • Abbydale is worse than us at making everything so some people think it is inefficient to trade • Not true: trade benefits both Abbydale and us • Voluntary exchange (trade) makes people, firms, and nations better off • Trade wouldn’t occur if both parties didn’t get something out of it • Everyone knows what will make them best off

26. Money and Trade • Benefits of trade masked because countries trade with money • Money facilitates trade • Easier to exchange labor for money and use the money to buy desired goods • Without money, teachers would be paid with chickens • Hard to trade chickens for beef • Money solves the problem • Allows teachers pay in a manner to get desired goods • Money is a medium of exchange

27. Tariffs, Quotas, and Voluntary Restraint Agreements

28. Trade in the Long Run • Specialization of production and trade results in efficient resources use • If production and trade grounded in comparative advantage, countries get as many goods as possible given resources • Efficiency gains accrue in the long term as production (and labor) becomes specialized

29. Trade in the Short Run • Critical phrase: “in the long run” • In the long run, resources can be used in any way • In the short run, resources may have fixed uses • At any point in time, may be difficult to move resources into desired production • McCoy’s workers (labor) trained as engineers can’t suddenly become artists • Hatfield’s capital used in agriculture (e.g., tractors) can’t readily become technology in education • Land used in housing can’t readily be used to grow corn

30. Short Run Constraints • Comparative advantages (Table 2) • Abbydale: farm equipment • Springfield: in recoding artists • Us: science technology • Specialization and trade • Quit making farm equipment and recordings • Produce science technology • Short term costs • Workers making farm equipment and the recording artists can’t immediately become scientists • Farm equipment workers and recording artists become unemployed and remain idle • Farm equipment and recordings studio firms become unhappy (they have no business)

31. Groups Lobby Against Trade • Firms and individuals (often through unions) lobby against free trade • Firms want to prevent trade that will hurt their business (e.g., farm equipment and recording artists will lobby to not let trade happen) • Workers who might lose their jobs will want to prevent trade

32. Protecting Our Industries • “Protectionists” want to build trade barriers to prevent imports in some industries • Young industries might need protection from trade to develop (the infant industry argument) • Some goods (like military goods) are vital to survival should not be left to trade

33. Non-Efficiency Goals • Some (non-efficiency) reasons may exist for a country not to trade with another • Don’t want a country to succeed economically • Environmentally destructive practices • Violation of basic human rights • Different religious beliefs? • (add in your values)

34. How Do We Prevent Trade? • Tariffs • Quotas • Voluntary Restraint Agreements

35. Tariffs • Very visible restriction on trade • A tax on goods coming into a country (imports) • Makes imports more expensive so reduces their quantity demanded • Raises the price (to consumers) above that of domestically produced goods • Consumers will not buy as many goods from other countries

36. Quotas • Sets an upper limit on the quantity of a good that can be imported in a given period of time (import quota) • Restricts how much of a good that can come into a country during a certain time • A bigger threat to trade than tariffs because forbids trade • Tariffs only increase the price of trade

37. Voluntary Restraint Agreements • Ask countries to limit their exports (how much it sends to other countries) • No legal back up: only voluntary • No enforcement: relies only on a verbal agreement that countries will restrict trade • Often fail because no enforcement

38. Is It Worth It? • Long term efficiencies from specialization and trade • Countries get the most goods • Fewer resources used • Sometimes firms, workers, or societies think other considerations • Restrict trade because it enables us to pursue other (non-economic) values • Tariffs, quotas, voluntary restraint agreements can prevent/inhibit trade

39. To Trade or Not to Trade?

40. Trade Is Good • Everything has a cost: opportunity cost • Produce one good, cannot use the resources to produce something else • Specializing production in goods with comparative advantage and trading for goods others produce at a lower relative cost • More goods produced OR • Fewer resources used to produce existing goods

41. Trade Has Costs • Workers are unemployed and firms go out of business in the short term • Our critical industries may not be developed • Non-economic concerns • Environment • Human rights • Infant industries • Essential goods • Tariffs, quotas, voluntary restraints • Create trade barriers • Can reduce short term costs or concerns about trade

42. And the Answer Is…. • You decide • Are the short term costs or concerns about trade worth the long term benefits of economic efficiency?