How do people and nations gain from specialization and trade?

How do people and nations gain from specialization and trade? Ms. Ramos Alta Loma High School

Units of labor needed for production: • America has an absolute advantage in both Ms. Ramos

Economist David Ricardo says both can benefit • Look at opportunity costs!!! Ms. Ramos

US better at producing wheat vs. Brazil • Brazil better at producing coffee vs. US • Both better off trading-comparative advantage Ms. Ramos

Cost more to make computers in US • Brazil cost 2/3 for computer • US prod of computers costs 150 cars • Brazil producing comp costs 100 cars Ms. Ramos

United States benefits from specializing in cars, which it produces more cheaply than Brazil, and trading with Brazil for some of the computers it produces more cheaply. Ms. Ramos

Principles of Political Economy and Taxation- Ricardo • Portugal makes good cheap wine • England does not • England makes good cheap cloth • Portugal does not • Focus on what do well, trade, allows both to enjoy! Ms. Ramos

Comparative Advantage: benefit when produce most efficiently & trade for rest- more, better, cheaper • Autarky: self-sufficiency- NOT REALISTIC! Ms. Ramos

Ms. Ramos

Can Crusoe and Friday profit by specialization and trade? • Yes! • Crusoe is the better coconut gatherer, and Friday the better fisherman Ms. Ramos

Can there be mutual benefit from trade in this case? Or should Friday do all the work and Crusoe none? Or should Friday refuse to trade since he is better in both? Ms. Ramos

Crusoe finds coconuts cheaper and Friday finds fish cheaper Ms. Ramos

Suppose that the trading ratio were one fish for 1.8 coconuts (and thus one coconut cost 5/9 fish). With this ratio, Crusoe would find fish cheap--rather than spend two coconuts to catch one, he could spend 1.8 coconuts and buy one. Hence, Crusoe would be willing to sell coconuts. Friday would find coconuts cheap--rather than give up one fish by gathering his own coconuts, he could sell 5/9th of a fish and get one. Hence, Friday would be willing to sell fish. Trade will take place because both individuals find that it improves their well-being. Ms. Ramos

Trade occurs because of comparative advantage. • Friday is better @everything • "more better" in catching fish and "less better" in finding coconuts • Crusoe is "less worse" in finding coconuts • Both benefit from trade: Friday has a higher standard of living Ms. Ramos

Factors that give rise to comparative advantage: • Climate • Natural resources • Education • Wage levels • Technology Ms. Ramos

How do people and nations gain from specialization and trade? • Comparative advantage enables producers to gain from specialization & trade • By producing w/lowest opportunity cost and trading, both end up being more efficient and productive Ms. Ramos

Misconceptions About Comparative Advantage • Free trade is beneficial only if a country is more productive than foreign countries. • But even an unproductive country benefits from free trade by avoiding the high costs for goods that it would otherwise have to produce domestically. • High costs derive from inefficient use of resources. • The benefits of free trade do not depend on absolute advantage, rather they depend on comparative advantage: specializing in industries that use resources most efficiently. Source: Li Gan, Texas A&M University Ms. Ramos

Misconceptions About Comparative Advantage • Free trade with countries that pay low wages hurts high wage countries. • While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers. • Consumers benefit because they can purchase goods more cheaply. • Producers/workers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to earn higher prices and wages. Source: Li Gan, Texas A&M University Ms. Ramos

Misconceptions About Comparative Advantage • Free trade exploits less productive countries. • While labor standards in some countries are less than exemplary compared to Western standards, they are so with or without trade. • Are high wages and safe labor practices alternatives to trade? Deeper poverty and exploitation (ex., involuntary prostitution) may result without export production. • Consumers benefit from free trade by having access to cheaply (efficiently) produced goods. • Producers/workers benefit from having higher profits/wages—higher compared to the alternative. Source: Li Gan, Texas A&M University Ms. Ramos

How do people and nations gain from specialization and trade?