Specialization in Production doing what we do most best or least worst

Economic Independence. Is it worth it? EDUCATION CHICKENS BANANAS STEREOS LEVIS COFFEE TVS HOUSES COMPUTERS CARS EASILY AT GREAT COST/ OR LOWER QUALITY COULD NOT

If voluntary exchange benefits both traders domestically, is the same thing true internationally?

Who should produce what? The Law of Comparative Advantage –Through specialization and exchange, both parties can gain from lower costs and greater output –The softball team

Two Comparative Advantages Hours to Make Cabinet Hours to Mow and Rake Yard Cabinet Maker32 Teenager203 Cabinet Maker advantage over teenager 3/20 =.152/3 =.67 Teenager disadvantage20/3 = 8.673/2 = 1.5

Who Gains What? Cabinet MakerTeenager Time to make cabinet20 hours Hourly pay$10 Cost to make cabinet Cost to buy cabinet Saving by buying cabinet Time to do yard work2 hours Hourly pay$50 Cost to do yard work Cost to hire yard work Saving by hiring yard work

Who Gains What? Cabinet MakerTeenager Time to make cabinet20 hours Hourly pay$10 Cost to make cabinet$200 Cost to buy cabinet$150 Saving by buying cabinet$50 Time to do yard work2 hours Hourly pay$50 Cost to do yard work Cost to hire yard work Saving by hiring yard work

Who Gains What? Cabinet MakerTeenager Time to make cabinet20 hours Hourly pay$10 Cost to make cabinet$200 Cost to buy cabinet$150 Saving by buying cabinet$50 Time to do yard work2 hours Hourly pay$50 Cost to do yard work$100 Cost to hire yard work$30 Saving by hiring yard work$70

Both Parties Gain from Specialization in Production and Exchange cabinet maker specializes in cabinets teenager specializes in Yard cabinet maker gains $70 teenager gains $50

The Law of Comparative Advantage In exchange between two parties, even if one party is better at both activities, both parties can benefit from specialization in production and exchange. Both domestically and internationally

The Law of Comparative Advantage The kid that mows my lawn does a lousy job. I could do much better in less time. (econ lessons vs. lawn care) The guy that cleans our house does a great job. I could do better. (econ lessons vs. house care) My wife is a much better parent than I am. She should stay home with the kids?????

Buy Californian

Buy Los Angeles!

Remember Self sufficiency is expensive!

International Economic Cooperation Good or bad for America? Wrong question!

Free Trade (Consumers) wider range of alternatives lower price higher quality all benefits of domestic competition fewer goods available for domestic use Founders of Nation recognized this Europe now recognizes this

Free Trade (Workers) Helps some workers (producers), hurts others NAFTA and other trade agreements will –help highly skilled, information intensive workers and industries –hurt low skilled workers, labor intensive industries

The Question How do we gain the advantages of trade while dealing with the disadvantages?

The U.S. will export capital intensive and knowledge intensive products and will import labor intensive products

50% of new jobs in next 20 years will require a college education or advanced training. How Will You Make Yourself Scarce in the Global Economy of the 21 st Century?

The Cheap Labor Fallacy Where to Locate Your Factory? 1.Hourly Wage 2.Workday 3.Daily wage 4.Daily production 5.Average rejects 7.Cost per usable unit 6.Usable units Country ACountry BCountry C $10$12$5 8 HRS $$ $$$ $

The Cheap Labor Fallacy Where to Locate Your Factory? 1.Hourly Wage 2.Workday 3.Daily wage 4.Daily production 5.Average rejects 7.Cost per usable unit 6.Usable units Country ACountry BCountry C $10$12$5 8 HRS $ $.40 $40$96$ $.67

Main Points People can get more from scarce resources if they specialize in those activities in which they have a comparative advantage In an exchange between two parties, even if one party is better at both activities, both parties can gain from specialization and exchange. This is the law of comparative advantage Comparative advantage applies to both domestic and international production and exchange.

Main Points International trade creates more jobs than it destroys, but it has serious distributive effects. Low wage is not the same as low labor cost. It is the wage in relation to productivity that is relevant.

Which is the strong dollar? A. 50 = $1; 1 = $.02 B. 100 = $1; 1 = $.01

WHY DO WE CARE? IMPORTS JAPANESE PRODUCT COSTS 100 PRICE IN U.S. A. 50 = $1; Price of product in $___ B. 100 = $1; Price of product in $ ____

WHY DO WE CARE? IMPORTS JAPANESE PRODUCT COSTS 100 PRICE IN U.S. A. 50 = $1; Price of product in $ 2 B. 100 = $1; Price of product in $ 1

WHY DO WE CARE? EXPORTS U.S. PRODUCT COSTS $50 PRICE IN JAPAN A. 50 = $1; Price of product in ____ B.100 = $1; Price of product in ____

WHY DO WE CARE? EXPORTS U.S. PRODUCT COSTS $50 PRICE IN JAPAN A. 50 = $1; Price of product in 2500 B.100 = $1; Price of product in 5000

The Big Ideas Self-sufficiency is expensive For the U. S., free trade –improves world efficiency –is unambiguously good for consumers –helps high-skill workers and industries, hurts low-skill workers and industries –has environmental effects

The Big Ideas It is not the wage but the relation of the wage to labor productivity that affects plant location You will compete in a global economy. A strong dollar: –makes U.S. imports less expensive –makes U. S. exports more expensive to foreigners –helps U.S. importers –harms U. S. exporters