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Is U.S. Manufacturing in Decline?
Pop wisdom says Yes
some evidence....
But these facts do not mean that
American manufacturing output
is declining absolutely or per-person....
Real Per-Capita Manufacturing
Output in America1970: $7,569 (2011 dollars)
2008: $11,687 (2011 dollars)
This happy trend is the result ofsteadily and dramatically improving
productivity......
But would America’s manufacturing
sector be even larger if low-wage
foreign countries weren’tbecoming so dominant in
manufacturing?
Adam Smith:An Inquiry Into the Nature and CAUSES of the
Wealth of Nations
Division of Labour***
-
Division of Labour
•By dividing labor, output in an 18th-century pin factory from from about 10 pins per worker per day to 4,800 pins per worker per day
WOW!
Why?
•1. specialized workers don’t waste time moving from task to task
Why?
•1. specialized workers don’t waste time moving from task to task
•2. specialized workers hone their skills
Why?
•1. specialized workers don’t waste time moving from task to task
•2. specialized workers hone their skills
•3. specialization more readily suggests practical means of mechanization
Specialization is the Key
•But specialization is the key for one other reason in addition to the three identified by Adam Smith
David Ricardo Vacations in Bath
•... and reads The Wealth of Nations
Principle of Comparative Advantage
•familiar (to economists) two-person, two-good ‘model’
Alone on an Island
------ DON TOM
FISH 50 200
BANANAS 50 100
Maximum Amounts Possible to Produce
Good Not to be Dependent Upon Others?
**** DON TOM
FISH 25 100
BANANAS 25 50
Amounts Produced AND Consumed
Let’s Trade
Tom offers to give me 37 fish if I give him 25 bananas
Let’s TradeSome more simplifying assumptions:
1. Don’s fish and bananas are identical to Tom’s
2. Don and Tom are trustworthy
3. Don and Tom each want, with trade, to continue to consume the same number of
bananas that each consumed without trade (that is, 25 bananas for Don and 50 bananas for
Tom)
Specialization...
*** DON TOM
FISH 0 150
BANANAS 50 25
Amounts Produced with Trade
Amounts consumed with trade....
**** DON TOM
FISH
BANANAS(50-25) =
25
**** DON TOM
FISH
BANANAS(50-25) =
25(25 + 25)
= 50
**** DON TOM
FISH(0+37) =
37
BANANAS(50-25) =
25(25+25) =
50
**** DON TOM
FISH(0+37) =
37(150-37) =
113
BANANAS(50-25) =
25(25+25) =
50
DonTomania is Wealthier by 25 fish!
With trade, each of us can consume more than each of
us can produce!
With trade, each of us can consume MORE than each of us can produce!
A Parlor Trick?Not at all.
Ask: What does It Cost me to produce a fish? A banana?
Then ask: What does it cost Tom to produce a fish? A banana?
If those costs are different, then there is the potential for mutual gains from trade
Tapping Into Each Other’s Talents: Our ProductionCosts Per
Unit
**** DON TOM
FISH 1 banana 1/2 banana
BANANA 1 fish 2 fish
Don is the lower-cost bananaerererer...
Tom is the lower-cost fisherman
Trade enables each of us to tap into the better talents
of the other
Don wants fish and bananas and can produce his own fish at a cost of 1 banana. Because Tom also wants bananas yet can produce his own only at a cost of 2 fish, Tom figures out
that, (1) because he (Tom) can produce a fish at a cost of 1/2 banana; (2) that Don wants fish;
and that (3) Don’s cost of catching his own fish is 1 banana per fish -
Tom realizes that he (Tom) can enable Don to profitably “produce” his (Don’) own fish by him (Don) first gathering bananas (at a cost of 1 fish
per banana) and then trading each of those bananas to Tom in exchange for more than one
fish (say, 1.5 fish per banana).
The result of Don getting from Tom 1.5 fish for each banana
that Don produces and exchanges is that each fish that Don “produces” in this way cost him only 2/3rds (or
0.67ths) of a banana.
Any ratio of exchange (“price”) of fish for bananas that has fish fetching at least slightly
more than 1/2 banana yet no more than 1 banana is mutually advantageous.
The reason is that Tom’s cost of producing each fish is 1/2 of a banana, and Don can produce his
own fish at a cost of 1 banana
Smith and Ricardo Together
**** DON TOM
FISH 50 300
BANANAS 50 100
Tom’s Concentration on fishing makes him a better fisherman
But Tom’s becoming a better fisherman makeshim a worse bananaerererer....
That is, each banana now costs Tom 3 fish to producerather than 2 fish
And Tom’s becoming a better fisherman also makesme a relatively better bananaerererer....
That is, whereas before I could produce bananasat 1/2 the cost that Tom incurred to produce
bananas,Now I can produce bananas at 1/3 the cost that Tom
incurs to produce bananas.