Specialization in Production

1
Specialization in Production

• doing what we do
• most best or least worst

2
Economic Independence.Is it worth it?
EASILY
AT GREAT COST/ OR LOWER QUALITY
COULD NOT
EDUCATION
CHICKENS
BANANAS
STEREOS
LEVIS
CARS
COMPUTERS
HOUSES
TVS
COFFEE
3
If voluntary exchange benefits both traders
domestically, is the same thing true
internationally?
4
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

5
Two Comparative Advantages
6
Who Gains What?
7
Who Gains What?
8
Who Gains What?
9
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
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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

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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?????

12
(No Transcript)
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Buy Californian
14
Buy Los Angeles!
15
Remember

• Self sufficiency is expensive!

16
International Economic Cooperation

• Good or bad for America?
• Wrong question!

17
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

18
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

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The Question

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

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The U.S. will export capital intensive and
knowledge intensive products and will import
labor intensive products
21
How Will You Make Yourself Scarce in the Global
Economy of the 21st Century?
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The Cheap Labor Fallacy Where to Locate Your
Factory?
Country A
Country B
Country C
10
12
5
1.Hourly Wage
2.Workday
8 HRS.
8 HRS.
8 HRS.
3.Daily wage



4.Daily production
240
120
260
5.Average rejects
40
40
60
6.Usable units
7.Cost per usable unit



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The Cheap Labor Fallacy Where to Locate Your
Factory?
Country A
Country B
Country C
10
12
5
1.Hourly Wage
2.Workday
8 HRS.
8 HRS.
8 HRS.
3.Daily wage
40
96
80
4.Daily production
240
120
260
5.Average rejects
40
40
60
6.Usable units
220
200
60
7.Cost per usable unit
.44
.40
.67
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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.

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Main Points

• International trade probably 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.

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Which is the strong dollar?

• A. 50 1 1 .02
• B. 100 1 1 .01

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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 ____

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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

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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 ____

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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

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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

32
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