1. Specialization in
Production
doing what we do
“most best” or “least worst”
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2. 03/14/13 Unit 6 Specialization in Production 2
Economic Independence. Is it worth it?
EASILY @ GREATER COULD NOT
OR LOWER
COST
EDUCATION
CHICKENS
BANANAS
STEREOS
LEVIS
CARS
COMPUTERS
HOUSES
TELEVISIONS
COFFEE
3. If voluntary exchange
benefits both traders
domestically, is the
same thing true
internationally?
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4. Who should produce what?
The Law of Comparative Advantage
• The softball (athletic) team example
• Through specialization and
exchange, both parties can gain
from lower costs and greater output
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5. Two Comparative Advantages
Hours to Make Hours to Mow and
Cabinet Rake Yard
Cabinet Maker 3 2
Teenager 20 3
Cabinet Maker 3/20 = .15 2/3 = .67
advantage over
teenager
Teenager disadvantage 20/3 = 8.67 3/2 = 1.5
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6. Who Gains What?
Cabinet Maker Teenager
Time to make cabinet 20 hours
Hourly pay $10
Cost to make cabinet
Cost to buy cabinet
Saving by buying cabinet
Time to do yard work 2 hours
Hourly pay $50
Cost to do yard work
Cost to hire yard work
Saving by hiring yard work
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7. Who Gains What?
Cabinet Maker Teenager
Time to make cabinet 20 hours
Hourly pay $10
Cost to make cabinet $200
Cost to buy cabinet $150
Saving by buying cabinet $50
Time to do yard work 2 hours
Hourly pay $50
Cost to do yard work
Cost to hire yard work
Saving by hiring yard work
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8. Who Gains What?
Cabinet Maker Teenager
Time to make cabinet 20 hours
Hourly pay $10
Cost to make cabinet $200
Cost to buy cabinet $150
Saving by buying cabinet $50
Time to do yard work 2 hours
Hourly pay $50
Cost to do yard work $100
Cost to hire yard work $30
Saving by hiring yard work $70
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9. Both Parties Gain from Specialization in
Production and Exchange
the cabinet maker The teenager
specializes in cabinets specializes in yard work
cabinet maker Teenager
gains $70 gains $50
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10. 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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11. The Law of
Comparative Advantage
The kid mowing my lawn does a lousy job. I believe I
could do much better job in less time. (studying
economic lessons versus providing lawn care)
The guy cleaning our house does a great job. I
believe I could do a better job in less time. (studying
economics lessons versus providing house care)
My wife is a much better parent than I am. Should she
should stay home with the kids? (Conditions
precedent?)
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12. What should we (as Rational Economic Actors) focus on achieving?
03/14/13 Unit 6 Specialization in Production 12
13. Should we focus on achieving?
Buy Californian
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14. Should we focus on achieving?
Buy Los Angeles!
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15. Remember
Self sufficiency is expensive!
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17. Free Trade
(for the 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
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18. Free Trade (for the Workers)
Helps some workers (producers),
hurts others
therefore NAFTA and other trade
agreements will
• help highly skilled and/or information
intensive workers and industries
• hurt low skilled workers and/or labor
intensive industries
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19. The Question
How do we gain trade’s
advantages while dealing with
trade’s disadvantages?
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20. The U.S. will export
capital intensive and
knowledge intensive
products while importing
labor intensive products
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21. Q. How Will You Make
Yourself Scarce in the
Global Economy of the
21 Century?
st
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22. The Cheap Labor Fallacy
Where to Locate Your Factory?
Country A Country B Country C
1.Hourly Wage $10 $12 $5
2.Workday 8 HOURS 8 HOURS 8 HOURS
3.Daily wage $ $ $
4.Daily production 240 260 120
5.Average rejects 40 40 60
6.Usable units
7.Cost per usable unit
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$
Unit 6 Specialization in Production
$ $ 22
23. The Cheap Labor Fallacy
Where to Locate Your Factory?
Country A Country B Country C
1.Hourly Wage $10 $12 $5
2.Workday 8 HOURS 8 HOURS 8 HOURS
3.Daily wage $80 $96 $40
4.Daily production 240 260 120
5.Average rejects 40 40 60
6.Usable units 200 220 60
7.Cost per usable unit
03/14/13
$0.40 $0.44
Unit 6 Specialization in Production
$0.67 23
24. 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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25. Main Points
International trade probably creates
more jobs than it destroys but at
the same time international trade
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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26. Which is the strong dollar?
A. $1.00 = 100Y per $1.00
B. $1.00 = 200Y per $1.00
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27. WHY DO WE CARE? re: IMPORTS
JAPANESE PRODUCT COSTS 100Y
CALCULATING THE PRICE IN U.S.
A. 50 Y = $1.00; Price of Product in $#.##?
B. B. 100 Y = $1.00; Price of Product in $#.##?
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28. WHY DO WE CARE? IMPORTS
JAPANESE PRODUCT COSTS 100Y
PRICE IN U.S. IS:
A. @ 50Y = $1.00; Price of Product in $ 2.00
B. @ 100Y = $1.00; Price of Product in $ 1.00
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29. WHY DO WE CARE? Re: EXPORTS
if a U.S. PRODUCT COSTS $50
the PRICE IN JAPAN would be
A. @ 50Y = $1.00; Price of Product in Y =
B. @100Y = $1.00; Price of Product in Y =
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30. WHY DO WE CARE? EXPORTS
if the U.S. PRODUCT COSTS $50
the PRICE IN JAPAN would be
A. @ 50Y = $1; Price of product is Y2500
B. @ 100Y = $1; Price of product is Y5000
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31. The Big Ideas
Self-sufficiency is expensive
For the U. S. engaging in free trade
• improves the world’s economic efficiency
• is unambiguously good for consumers
• helps high-skill workers and high-skill
industries while hurting low-skill workers and
low-skill industries
• has environmental effects
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32. The Big Ideas
It is not the wage but the relation of the wage to
labor productivity affecting the plant’s 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
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33. note (a): CURRENCY FLUCTUATIONS
A currency has value, or worth, in relation
to other currencies, and those values
change constantly.
For example: part one, if demand for a
particular currency is high because
investors want to invest in the country’s
stock market or buy exports, the price of
its currency will increase.
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34. note (b): CURRENCY FLUCTUATIONS
For example: part two, just the opposite
will happen if the country suffers an
economic slowdown or investors lose
confidence in its markets.
While some currencies fluctuate freely
against each other, others are pegged or
linked to a currency or a basket of
currencies.
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35. CURENCY FLUCTUATIONS: example(a)
@START: the “same” widget costs $1 in
the USA and Y100 in Japan.
$1.00 = Y100
THEN: the dollar strengthens (the same
dollar now allows you to buy more yen)
to the point where
$1.00 = Y125
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36. CURENCY FLUCTUATIONS: example(b)
Now the widget still costs Y100 in Japan
but an American needs to spend $0.80 to
buy the Japanese widget.
SO: Imports of comparable goods are
less expensive ~ so demand for
“imported” goods would be expected to
increase and importers would be helped.
(Q. To what extent and then what?)
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