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Colossians 3:23 “Whatever you do, work heartily, as for the Lord and not for men…”
Colossians 3:23“Whatever you do, work heartily, as for the Lord and not for men…”
Q: How many Chicago School economists does it take to change a light bulb?
International Trade
International Trade• Run into our friend: zero sum thinking
International Trade• Run into our friend: zero sum thinking• Both sides can gain in international trade, and in fact,
usually must or it wouldn’t take place
International Trade• Run into our friend: zero sum thinking• Both sides can gain in international trade, and in fact,
usually must or it wouldn’t take place• Dr. S contends: no need for government or experts to tell
us whether it’s “fair” or not
International Trade• No fixed number of jobs countries must fight over
International Trade• No fixed number of jobs countries must fight over• When NAFTA was approved, number of jobs increased in
Mexico, Canada and U.S.
Sowellian thought “Most international trade, like most domestic trade, is
done by millions of individuals, each of whom can determine whether the item purchased is worth what it cost and is preferable to what is available from others.”
Gibson Les Paul Standard made in U.S.: $2499.99
Epiphone Les Paul Standard made in China: $459
International Trade• Opponents of international trade are still using language
to confuse the situation. Examples?
International Trade• Opponents of international trade are still using language
to confuse the situation. Examples?• “favorable” trade balance, “record trade deficit”
International Trade• Opponents of international trade are still using language
to confuse the situation. Examples?• “favorable” trade balance, “record trade deficit”• Fact is, if the goods and services available are greater as
a result of trade, then America is wealthier
Sowellian thought take 2 “If the goods and services available to the American
people are greater as a result of international trade, then Americans are wealthier, not poorer regardless of whether there is a ‘deficit’ or a ‘surplus’ in the international balance of trade.”
U.S. had a trade surplus during Great Depression
Q: How many Keynesian economists does it takes to change a light bulb?
HOW CAN BOTH SIDES GAIN?
The three advantages
The three advantages
The three advantages• Absolute advantage:
The three advantages• Absolute advantage: when one country, for any number
of reasons, can produce some things cheaper or better than others
The three advantages• Absolute advantage: when one country, for any number
of reasons, can produce some things cheaper or better than others
• Examples?
The three advantages• Absolute advantage: when one country, for any number
of reasons, can produce some things cheaper or better than others
• Examples? Weather for bananas, engineers such as India, contra-seasonal veggies from South America
Q. How can you tell the difference between an economist and someone with a really bad concussion?
The three advantages• Comparative advantage:
The three advantages• Comparative advantage: When one country can produce
anything more efficiently than another, it still makes sense to trade thanks to comparative advantage
The three advantages• Comparative advantage: When one country can produce
anything more efficiently than another, it still makes sense to trade thanks to comparative advantage
• Yeah right, boy is this confusing
The three advantages• Comparative advantage: When one country can produce
anything more efficiently than another, it still makes sense to trade thanks to comparative advantage
• Yeah right, boy is this confusing• We gotta get this; foundational to international trade!
Comparative advantage• The secret is that even if a country can produce anything
cheaper than another, it will be unable to make everything comparatively cheaper
Comparative advantage• The secret is that even if a country can produce anything
cheaper than another, it will be unable to make everything comparatively cheaper
• What??????????????? Are you nutz???
Comparative advantage• The secret is that even if a country can produce anything
cheaper than another, it will be unable to make everything comparatively cheaper
• What??????????????? Are you nutz???• No, answer is our oldest econ friend, SRTHAU
Gaaaa!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Example…• Portugal is twice as efficient at producing cloth and three
times more efficient at wine making than England
Example…• Portugal is twice as efficient at producing cloth and three
times more efficient at wine making than England• Comparative advantage says Portugal should focus on
making and trading with England that which it is “most best” at producing… namely, wine
Example…• England should focus on producing that which is it is
“least worse” at producing, namely cloth
Example…• England should focus on producing that which is it is
“least worse” as producing, namely cloth• They both can trade and “win”
Example…• England should focus on producing that which is it is
“least worse” as producing, namely cloth• They both can trade and “win”• Also, remember the eye surgeon who is a better car
washer but it makes no sense for him to wash his own car, he can do a lot better working on eyes
Little more Comparative Advantage• It’s been centuries since Great Britain could feed itself
Little more Comparative Advantage• It’s been centuries since Great Britain could feed itself• Nation focused on producing those things where it had
comparative advantage... manufacturing, shipping, finance
Little more Comparative Advantage• It’s been centuries since Great Britain could feed itself• Nation focused on producing those things where it had
comparative advantage... manufacturing, shipping, finance
• Result: Nation is better fed and more prosperous than if it grew its own food
And final advantage…• Economies of scale:
And final advantage…• Economies of scale: when you sell products outside of
your own borders, you can often achieve a great economy of scale
And final advantage…• Economies of scale: when you sell products outside of
your own borders, you can often achieve a great economy of scale
• Examples?
And final advantage…• Economies of scale: when you sell products outside of
your own borders, you can often achieve a great economy of scale
• Examples? Heineken beer, Japanese cars, Swiss watches, Chinese toys
International trade restrictions
International trade restrictions• Politics are important consideration with international
trade
International trade restrictions• Politics are important consideration with international
trade• The same fallacies disproven by Adam Smith continue to
be heard today (and tomorrow)
The definition of "waste“… a busload of economists plunging off a cliff with some of the seats unoccupied.
Trade fallacies• Fallacy 1: a high-wage country cannot trade “fairly” with a
low-wage one
Trade fallacies• Fallacy 1: a high-wage country cannot trade “fairly” with a
low-wage one• Why it’s false: need to look at more than wages, but at
overall costs including capital, shipping, productivity.
Trade fallacies• The reason the U.S. is so prosperous is that we’re very
efficient at producing things; likewise, there’s a reason Vietnam, for example, is so poor
Trade fallacies• Fallacy 2: we need import restrictions to save American
jobs from lower cost nations
Trade fallacies• Fallacy 2: we need import restrictions to save American
jobs from lower cost nations• Why it’s false: It usually costs America more in higher
costs and lost jobs overall when we try to “protect” certain jobs from imports
Trade fallacies• So politicians impose tariffs (taxes on imports such as
Brazilian orange juice and sugar) or limit the amount of imports to “protect” American jobs
Trade fallacies• So politicians impose tariffs (taxes on imports such as
Brazilian orange juice and sugar) or limit the amount of imports to “protect” American jobs
• All of this is known as “protectionism”
Smoot-Hawley Act of 1930• Raised tariffs on 20,000 items to record levels
Smoot-Hawley Act of 1930• Raised tariffs on 20,000 items to record levels• 1,028 economists opposed it
Smoot-Hawley Act of 1930• Raised tariffs on 20,000 items to record levels• 1,028 economists opposed it• Trade wars broke out
Smoot-Hawley Act of 1930• Raised tariffs on 20,000 items to record levels• 1,028 economists opposed it• Trade wars broke out• U.S. exports to Europe decreased from $2.3 billion to
$784 million from 1929-1934
Smoot-Hawley Actof 1930• Overall international trade declined 33%
Smoot-Hawley Actof 1930• Overall international trade declined 33%• U.S. unemployment went from 7.8% in 1930 to 25.1% in
1933
Trade fallacies• Fallacy 3: We need to protect our “infant industries”
Trade fallacies• Fallacy 3: We need to protect our “infant industries” • Why it’s false: infant industries rarely have enough clout to
get restrictions passed to help them; winds up as an excuse to protect inefficient industries at expense of consumers and taxpayers
Trade fallacies• Fallacy 4: we need to keep the industry in event it’s
needed for national defense
Trade fallacies• Fallacy 4: we need to keep the industry in event it’s
needed for national defense• Why it can be false: we do need gun, bullet makers, etc.
But many other industries claim to be essential to defense so need to carefully validate this
Trade fallacies• Fallacy 5: we need to stop the “dumping” of goods into
our markets… selling things at a loss to get market share and then raise prices later. Example from today is Chinese steel.
Trade fallacies• Fallacy 5: we need to stop the “dumping” of goods into
our markets… selling things at a loss to get market share and then raise prices later. Example from today is Chinese steel.
• Why it is usually false: almost impossible to determine actual costs of production; and guess who wins with cheaper goods?
Types of restrictions• Tariffs (import taxes)
Types of restrictions• Tariffs (import taxes)• Import quotas… can only bring in a limited number of the
item
Types of restrictions• Tariffs (import taxes)• Import quotas… can only bring in a limited number of the
item• Making products meet “health and safety” requirements,
certify that their workforces receive “living” wages, or that the manufacturer had carbon offsets, etc.
Assignment 4/30• Chapter 21: “International Transfers of Wealth”
