January 18, 2007
Handout: Comparative Advantage; Micro Trade Market Failures
Handout: Comparative Advantage; Micro Trade Market Failures
J. Bradford DeLong
U.C. Berkeley
January 16, 2006
Comparative Advantage
Take a look at some trade numbers:
Principal Goods Exports: November 2006:
- $4.31B: Semiconductors
- $4.25B: Civilian aircraft
- $3.08B: Computers and accessories
- $2.76B: Pharmaceutical preparations
- $2.73B: Industrial machines, other
Principal Goods Imports: November 2006:
- $21.09B: Automotive vehicles, parts, and engines
- $15.87B: Crude oil
- $5.65B: Pharmaceutical preparations
- $5.60B: Computers and accessories
- $5.35B: Apparel--cotton
A question:
We understand why we import crude oil--ExxonMobil's rigs can pump more oil at other places on the earth than they could here. We understand why we import autos--as a former owner of a Chevy Citation and a Ford Taurus, I understand that especially well. There are lots of goods that people in other countries can make more productively than we can here in America--can make with fewer workers and less capital. But why do we import goods like apparel, where U.S. producers are the most productive in the world?
An answer:
The principle of comparative advantage...
You can be more productive than somebody else at a task, but it can still be not worth your time
Micro examples: I'm a d---ed good xeroxer.
The morality of comparative advantage:*
Is this ethical?
You're taking advantage of somebody else's lousy bargaining position...
You're giving them opportunities they wouldn't otherwise have had...
The case of Cuba: market exchange is inherently unjust and destructive and the U.S. trade embargo against Cuba is the source of the island's impoverishment
Micro Trade Market Failures
Externalities:
- Environment
- Labor standards
- Communities of technological and craft practice
- People who don't know what they really need
All cases in which the maxim "if it's profitable, it's good" is false...
What is to be done?
- Domestic policies
- Trade policies
- Government failure
- Responsibility to people in other countries?
January 16, 2007
Handouts for Guest Lectures in Marcia Parker's Course: Trade and California
Marcia Parker's Journalism-School Class: Introduction to Trade
Handouts for January 18, 2007:
Handouts for January 16, 2007:
Trade and the Division of Labor
Athletic Footware Value Chain
Trade and Scale Variables
Adam Smith on the Division of Labor
Trade and the Division of Labor
Handout: Trade and the Division of Labor
J. Bradford DeLong
U.C. Berkeley
January 16, 2006
- Examples of the division of labor
- Within Berkeley
- Beyond Berkeley but within California
- Beyond California but within the United States
- Beyond the United States
- Importance of the division of labor
- Allowing for the application of skill-intensive production processes
- Allowing for the application of capital-intensive production processes
- Allowing for the application of technology-intensive production processes
- Providing incentives:
- For investment in skills
- For investment in capital--saving
- For investment in technology--research and development
- How important is the division of labor beyond the United States?
- Intra-industry trade: narrow specialization
- Intra-industry trade: competition
- As spur to efficiency
- As reducer of profit margins
- Trade based on factors of production
- Resources as a source of trade
- Wealth as a source of trade
- Poverty as a source of trade
- Comparative advantage
Athletic Footware Value Chain
Athletic Footware Value Chain
In China:
- $15.67 materials
- $2.59 direct factory labor
- $4.56 indirect factory labor and overhead
- $1.90 factory capital and entrepreneurial profit
Price leaving China: $24.71
In the Pacific:
- $3.88 shipping and transport
Price landed in Oakland: $28.59
Cost of goods here in the U.S.:
- $0.76 Warehousing & distribution
- $0.38 Royalties
- $0.27 quality assurance
- $0.23 research and development
- $0.38 other costs of goods sold
Final cost of goods sold: $30.62
- $12.90 Sales, etc.
- $1.75 Corporate overhead
- $2.56 Corporate taxes
- $4.21 Interest and profit
Value at wholesale: $52.03
Retail sales costs: $47.97
Retail price: $100.00
Source: Katherine McIntyre and Ezra Perlman (2000), "Nike: Channel Conflict' (Stanford): https://gsbapps.stanford.edu/cases/documents/EC9B.pdf
Trade and Scale Variables
Some scale variables:
- U.S. monthly GDP: $1 trillion
- Monthly goods and services exports: $130 billion = 13%
- Monthly goods and services imports: $185 billion = 18.5%
- Balancing item: net capital flow: $55 billion = 5.5%
- Storing up purchasing power for the future
- Private political risk insurance
- Public development aid
- Public political risk insurance
- U.S. GDP per worker: $84,000 per year
- Exports of $10,900 per year
- Imports of $15,500 per year
Adam Smith on the Division of Labor
Division of Labor:
From Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations:
Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people... employed in procuring him this accommodation, exceeds all computation. The woollen coat... is the produce of the joint labour of... [t]he shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others....
How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver.... The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them....
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature... to truck, barter, and exchange one thing for another.
Whether this propensity be one of those original principles in human nature... it belongs not to our present subject to enquire. It is common to all men, and to be found in no other race of animals.... Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog....
When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will.
He has not time, however, to do this upon every occasion. In civilized society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.... [M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love... it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages...
Extent of the Market:
From Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations:
As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by... the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce... for such parts of the produce of other men's labour as he has occasion for.
There are some sorts of industry... which can be carried on no where but in a great town.... In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade. The scattered families that live at eight or ten miles distance from the nearest of them, must learn to perform themselves a great number of little pieces of work, for which, in more populous countries, they would call in the assistanc.... A country carpenter... is not only a carpenter, but a joiner, a cabinet maker, and even a carver in wood, as well as a wheelwright, a ploughwright, a cart and waggon maker.... It is impossible there should be such a trade as even that of a nailer in the remote and inland parts of the Highlands of Scotland....
As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself...
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