Resource Productivity and Use

1
Resource Productivity and Use
2
Producing Goods Takes Resources

• The amount of resources a country has determines
  how much it can produce
• Both quantity and quality of resources matter
• What are resources
• Land anything found in nature
• Labor human effort
• Capital tools, equipment, buildings and other
  goods that business use to further production

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Resources are not Equally Productive

• Some resources are more productive than others
• It takes more resources to produce a good if the
  resource is less productive
• Abbydales labor is not as productive as ours in
  any area it takes them longer to produce
  everything
• Springfields film makers are more productive
  than ours it takes them less time to produce
  films
• Abbydale has more labor than we do (about 2.5 as
  much)
• We make the same amount of goods
• Our resources are more productive

4
Some Resources are More Productive than Others

• Why are some workers more productive than others?
• Innate differences
• Investment differences
• Capital use
• Some land is richer than others

5
Absolute Advantage

• Absolute Advantage means a country produces goods
  using fewer resources than another
• Absolute Advantage indicates the resources are
  more productive
• Our island has an absolute advantage in producing
  ALL goods as compared to Abbydale
• Our island has an absolute advantage in producing
  SOME goods as compared to Springfield
• Table 1 shows the island with an absolute
  advantage in producing each good

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Using Resources

• Tradeoffs occur when all resources are used in
  production
• To produce more of one good, you must produce
  less of another, if all resources are being used
• Example
• Springfield has 211.5 hours of labor and can
  produce the goods listed on Table 1
• Springfield cant increase production of one good
  or produce a new good all workers are being used
• Springfield can trade off goods on Table 1 to
  increase production in one area or to produce a
  different good

7
Unemployed Resources

• Some resources that could be used in production
  are not being used
• Production tradeoffs do not have to occur with
  unemployed resources
• Unemployed resources can be used to increase
  production
• Tradeoffs in production only exist for a country
  if resources are fully employed

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Comparative Advantage
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A Key Economic Question

• Every society has to answer the question What
  will be produced?
• Countries with market economies produce low cost
  goods and trade for goods they dont produce

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Specialization and Trade

• Specialization means a country will not produce a
  full array of goods
• Must trade with other countries to get other
  goods
• Trade with countries that produce goods at a
  lower relative cost
• For efficiency (most goods produced)
• Produce goods that have the lowest relative cost
• Relative means what give up (opportunity cost)

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Specialization and Trade An Intuitive Example

• You want students taught and your car fixed
• You can do both, but you are a better teacher
  than auto mechanic
• More teaching and car fixing can occur if you
  specialize in teaching and trade services with a
  mechanic you gain
• Markets work by themselves
• No one dictates the trade
• Trade is a voluntary exchange of services (in
  this case)

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What if Im Better at Everything?

• If you are a better teacher and auto mechanic
  should you produce everything?
• Absolute advantage in teaching and fixing cars
• Hint resources are scarce and you want to get as
  many goods out of them as possible

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Comparative Advantage

• True cost of producing a good is opportunity cost
  (what you have to give up)
• Production tradeoffs When you use resources to
  produce one good, they cannot be used to produce
  another good
• When resources are traded off in production we
  say they are production substitutes
• Comparative Advantage who has to give up the
  least to produce a good

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Comparative Advantage An Example

• Dentists office 2 services cleaning teeth and
  keyboarding
• Dentist costs 50/hour to clean 4 sets of teeth
  or enter 80 wpm
• Assistant costs 15/hour, cant clean teeth but
  enters 40 wpm
• Division of labor and specialization
• Dentist gives up 50 to enter 4,800 words (80
  wpm X 601 hr)
• Assistant costs 30 for 4,800 words
  (4,800/40120 min2 hrs)
• Cost of getting 4sets of teeth cleaned and 4,800
  words entered
• 100 for dentist to do both2 hours of the
  dentist time
• 80 for dentist and assistant1 hour of dentist
  2 hours of assistant
• Comparative advantage (lower opportunity cost)
• Dentist cleaning teeth
• Assistant keyboarding

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Countries Act Like People

• Total production increases when countries
  specialize production in goods for which they
  have a comparative advantage and trade with other
  countries for goods not produced
• Countries are less likely to produce goods with a
  high opportunity cost with specialization and
  trade

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Comparative Advantage and Countries

• Two countries Northland and Southland
• Two products wheat and radios
• Countries have different productivities
  (Northland better at both absolute advantage at
  both)

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Opportunity Cost of Production

• What the country gives up to produce the good
• Reflected in the ratios of production(number in
  denominator is the opportunity cost)
• One unit of wheat costs .4 radios in Northland
• One unit of radios costs 2.5 wheat in Northland
• One unit of wheat costs .6 radios in Southland
• One unit of radios costs 1.67 wheat in Southland

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Comparative Advantage

• Opportunity costs between countries
• Radios costs Northland 2.5 W, Southland 1.67W
• Wheat costs Northland .4R, Southland .6R
• Southland should produce radios and Northland
  should produce wheat
• Northland may be better at producing both goods,
  but is better off with specialization and trade

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The Real World

• More than 2 goods
• How do we measure comparative advantage?
• Does specialization and trade still work?
• Can use the low cost good to gauge opportunity
  cost (Table 1)
• Springfields low cost good is printers
• It takes 2.5 hours to make 100 copies
• It takes more than 2.5 hours to make anything
  else
• Abbydales low cost good is shipping
• It takes 6 hours to ship 20 tons
• It takes more than 6 hours to make anything else
• If Springfield or Abbydale produce goods other
  than the low cost good, they must give up
  producing the good it is best at making

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What We Produce

• We know what to produce once we know the
  opportunity cost of producing goods (Table 2)
• Dividing the number of hours to produce a good by
  the low cost good estimates the opportunity cost
  of producing a good
• Produce goods with low opportunity cost and trade
  for goods with higher opportunity costs
• We produce college education
• Opportunity cost of doing so is lower than either
  Springfield or Abbydale

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Specialization and Trade
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Specialization and Trade

• Each island holds a comparative advantage in
  producing some goods
• Table 2 shows the country with the comparative
  advantage (lowest opportunity cost) of producing
  each good
• Output can increase when countries specialize
  production in goods with the lowest opportunity
  cost and trade for the goods not produced

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Specialization and Trade Why?

• Spend fewer hours to get the same goods
• Table 3 shows
• Designate the hours it takes to produce the good
  IF the island with the lowest opportunity cost
  produces it
• Add all the hours it takes to make goods with
  specialization
• Hours to make the goods with specialization is
  less than those used when all goods produced
  (Table 1)

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Extra Hours

• Specialization and trade means same goods
  produced with fewer resources
• Potential uses for extra resources (hours)
• More goods economic growth with more goods and
  services produced
• Idle resources
• Labor works fewer hours
• Expendable resources saved for future use

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Trade

• Trade may look bad if dont know Economics
• Abbydale is worse than us at making everything so
  some people think it is inefficient to trade
• Not true trade benefits both Abbydale and us
• Voluntary exchange (trade) makes people, firms,
  and nations better off
• Trade wouldnt occur if both parties didnt get
  something out of it
• Everyone knows what will make them best off

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Money and Trade

• Benefits of trade masked because countries trade
  with money
• Money facilitates trade
• Easier to exchange labor for money and use the
  money to buy desired goods
• Without money, teachers would be paid with
  chickens
• Hard to trade chickens for beef
• Money solves the problem
• Allows teachers pay in a manner to get desired
  goods
• Money is a medium of exchange

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Tariffs, Quotas, and Voluntary Restraint
Agreements
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Trade in the Long Run

• Specialization of production and trade results in
  efficient resources use
• If production and trade grounded in comparative
  advantage, countries get as many goods as
  possible given resources
• Efficiency gains accrue in the long term as
  production (and labor) becomes specialized

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Trade in the Short Run

• Critical phrase in the long run
• In the long run, resources can be used in any way
• In the short run, resources may have fixed uses
• At any point in time, may be difficult to move
  resources into desired production
• McCoys workers (labor) trained as engineers
  cant suddenly become artists
• Hatfields capital used in agriculture (e.g.,
  tractors) cant readily become technology in
  education
• Land used in housing cant readily be used to
  grow corn

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Short Run Constraints

• Comparative advantages (Table 2)
• Abbydale farm equipment
• Springfield in recoding artists
• Us science technology
• Specialization and trade
• Quit making farm equipment and recordings
• Produce science technology
• Short term costs
• Workers making farm equipment and the recording
  artists cant immediately become scientists
• Farm equipment workers and recording artists
  become unemployed and remain idle
• Farm equipment and recordings studio firms become
  unhappy (they have no business)

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Groups Lobby Against Trade

• Firms and individuals (often through unions)
  lobby against free trade
• Firms want to prevent trade that will hurt their
  business (e.g., farm equipment and recording
  artists will lobby to not let trade happen)
• Workers who might lose their jobs will want to
  prevent trade

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Protecting Our Industries

• Protectionists want to build trade barriers to
  prevent imports in some industries
• Young industries might need protection from trade
  to develop (the infant industry argument)
• Some goods (like military goods) are vital to
  survival should not be left to trade

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Non-Efficiency Goals

• Some (non-efficiency) reasons may exist for a
  country not to trade with another
• Dont want a country to succeed economically
• Environmentally destructive practices
• Violation of basic human rights
• Different religious beliefs?
• (add in your values)

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How Do We Prevent Trade?

• Tariffs
• Quotas
• Voluntary Restraint Agreements

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Tariffs

• Very visible restriction on trade
• A tax on goods coming into a country (imports)
• Makes imports more expensive so reduces their
  quantity demanded
• Raises the price (to consumers) above that of
  domestically produced goods
• Consumers will not buy as many goods from other
  countries

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Quotas

• Sets an upper limit on the quantity of a good
  that can be imported in a given period of time
  (import quota)
• Restricts how much of a good that can come into a
  country during a certain time
• A bigger threat to trade than tariffs because
  forbids trade
• Tariffs only increase the price of trade

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Voluntary Restraint Agreements

• Ask countries to limit their exports (how much it
  sends to other countries)
• No legal back up only voluntary
• No enforcement relies only on a verbal agreement
  that countries will restrict trade
• Often fail because no enforcement

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Is It Worth It?

• Long term efficiencies from specialization and
  trade
• Countries get the most goods
• Fewer resources used
• Sometimes firms, workers, or societies think
  other considerations
• Restrict trade because it enables us to pursue
  other (non-economic) values
• Tariffs, quotas, voluntary restraint agreements
  can prevent/inhibit trade

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To Trade or Not to Trade?
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Trade Is Good

• Everything has a cost opportunity cost
• Produce one good, cannot use the resources to
  produce something else
• Specializing production in goods with comparative
  advantage and trading for goods others produce at
  a lower relative cost
• More goods produced OR
• Fewer resources used to produce existing goods

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Trade Has Costs

• Workers are unemployed and firms go out of
  business in the short term
• Our critical industries may not be developed
• Non-economic concerns
• Environment
• Human rights
• Infant industries
• Essential goods
• Tariffs, quotas, voluntary restraints
• Create trade barriers
• Can reduce short term costs or concerns about
  trade

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And the Answer Is.

• You decide
• Are the short term costs or concerns about trade
  worth the long term benefits of economic
  efficiency?