Transcript Gains From Trade

How does trade make people better off?

Imagine that you are the
manager of a fast-food
restaurant. You are
outgoing, interact well
with customers, and
work the cash register
proficiently. You are
also efficient in the
kitchen and can manage
several tasks at once,
such as making pizzas,
preparing salads, and
filling drinks.

You have one employee
who is slow in the
kitchen and often
struggles to cook while
filling drink orders.
Your employee works
the cash register well
but interacts little with
the customers.


What is your opportunity cost if you work the
cash register?
What is your opportunity cost if you work in
the kitchen?

Based on your opportunity costs, describe
where you will work and where you will place
your employee. Explain your rationale.


Specialization is defined as the development
of skills or knowledge in one aspect of a job
or field of interest. People who specialize
become expert in a particular activity.
When societies specialize, the create a
division of labor in which critical tasks are
undertaken by different individuals. The
result is a much more productive society than
one in which everyone is self-sufficient.



Imagine a society in which everyone is able to
perform every necessary task for survival well
enough to… survive.
What’s good about
this arrangement?
What’s not so good?

What is “trade”?
◦ It is a “voluntary exchange” that two or more parties
engage in, when they find they have a “coincidence
of wants” – a fancy way of saying that they all have
something that each other desires.

How do people trade?
◦ The simplest form of trade is barter. What is
bartering, and why is this not always the best way
to trade?
◦ Money is a better option, because it serves as a
medium of exchange – something can be used to
trade for goods/services universally. Money is
critical for market economies.

Why does specialization encourage trade?
◦ Trade creates economic interdependence, in which
people rely on others for most of the goods and
services they want.
◦ When you specialize, you limit yourself. This means
you now depend on others to do things that you
cannot do because of this limitation.
Turnips
Clams
10 per hour
10 per hour
40 per day
40 per day
30 per hour
15 per hour
120 per day
60 per day
Turnips
Clams
10 per hour
10 per hour
40 per day
40 per day
30 per hour
15 per hour
120 per day
60 per day
Why would He-Man bother trading with Skeletor?


absolute advantage: the time and labor
required for you to produce something is less
than it is for another producer (you are more
productive, overall)
comparative advantage: the ability to perform
a task at a lower opportunity cost than
someone else is able to perform that same
task


He-Man and Skeletor would still benefit from
trading, even though He-Man has an absolute
advantage, because each has a different
comparative advantage.
Let’s explore this concept…
Founder of Microsoft.
Made his fortune writing
software, including Microsoft
Windows and other widelyused programs.
So wealthy, it would cost him
more money to stop and pick
up a $50 bill than to simply
keep going about his regular
job.
Retired singer.
Made his fortune crooning
pre-adolescent girls out of
their iTunes money.
Now spends his time getting
into trouble with the law,
collecting royalties from his
songs.

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
Bill Gates has a strong work ethic and holds
an absolute advantage in productivity.
Should this mean, then, that Bill Gates should
mow his own lawn?
What would Bill Gates be giving up to take the
time to mow his own lawn? (What would be
his opportunity cost? )
Bill Gates would be better off
hiring Justin Bieber to mow his
lawn and going to work instead.
He would make much more
money.
Justin would be better off
mowing Bill’s lawn, since his
opportunity cost – getting
arrested for driving under the
influence of weed (or just plain
wasting time) – is smaller. Plus,
he’d earn like $10, and get
some sunshine and exercise.
Cost of One Turnip
Cost of One Clam
1 clam
1 turnip
½ clam
2 turnips
T
C
T
C
Without
Specialization & Trade
With
Specialization & Trade
Production
Consumption
Production
20
20
0
25
+5
20
20
40
23
+3
90
90
120
95
+5
15
15
0
17
+2
Gains
Consumption
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Comparative advantage applies to nations as
well as individuals. When nations specialize
in producing what they have a comparative
advantage for, and then trade, society usually
benefits.
Some factors are fairly obvious, i.e. climate
and natural resources.
◦ Florida excels at orange production because of the
warm, humid weather.
◦ Saudi Arabia excels in oil production because it has
vast oil reserves.

Other factors, like education, wage levels,
and technology, also play a role.
◦ The United States has a highly educated and highly
skilled workforce, giving it a comparative advantage
in developing advanced technologies like computer
systems.
◦ Less developed nations have a comparative
advantage in the production of simpler goods like
clothing that do not require skilled labor.

Trade moves goods to people who value
them. Doing so increases their value.
◦
◦
◦
◦

You have a new ball cap that does not fit you.
Your friend has a soccer ball they don’t use.
You want the ball, she wants the hat.
You trade and both end up with something you
want. In essence, you are both wealthier.
Remember – wealth is more than just money.
It is whatever people value!

Trade increases the quantity and variety of
goods available.

Trade lowers the cost of goods.
◦ First, by opening up markets to less costly goods
from other places.
◦ Second, by expanding markets for products. This
allows producers to take greater advantage of mass
production – buying supplies and producing things
on a large scale can often be done more cheaply
than on a small scale.

Not everyone gains from expanding global
trade.
◦ Cheap imports can take business away from
American producers and even force some out of
business.
◦ This can lead to American workers losing their jobs.
◦ This especially impacts places that depend more
heavily on manufacturing (historically, Mansfield!)

Economists point out that as the economy
changes, old jobs may be lost, but new ones
are created.

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In theory, completely free trade (in which
national governments do not interfere
whatsoever with trade between nations),
should make people better off.
We have already seen, though, how free trade
can hurt the economies of certain parts of the
country - at least in the short run.
Are there any other drawbacks?


In theory, the United States should go all-in
on industries they have a comparative
advantage for (high-tech, high-skill
production and service jobs) and leave
simpler tasks to less-developed countries
who hold a comparative advantage in those.
What exceptions might there be?

A strategic industry is an industry that a
government considers to be very important
for the country’s economy or safety.

Why might it not be in the best interest of our
national security to completely turn over
things like food or energy production to less
developed countries, even though they might
hold a comparative advantage in it?

“By the time of Augustus, North Africa and
Egypt were supplying most of the grain that
the empire consumed, with farms in Italy
selling only a marginal amount. In other
words, instead of a fertile citizen population
tilling the fields and sustaining the state
locally, the Romans outsourced their
agricultural production to feed their cities
across the Mediterranean.”

“The consequences for the later empire could
not be any more grave…[T]he Vandals would
continue moving to North Africa, and
eventually took over Carthage, ending the
supply of grain being shipped to Rome. This
meant functionally that the city could scarcely
feed itself…”
- Ryan Grant, The Distributist Review