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

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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?

Comments

[CJColucci]

I had comparative advantage explained to me with the story that Woodrow Wilson was a better typist than his secretary. But does that always work? When I started out as a lawyer, no one typed his or her own briefs. It was more efficient to write them longhand, scrawl edits, cut-and-paste, and have a secretary type them. Many of us, even hopeless computer semiliterates like me, now find that we draft about as quickly with word processing equipment as we ever did by hand and it's no big deal to put things into final form ourselves.