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Specialization in Production

Specialization in Production. doing what we do most best or least worst. Economic Independence. Is it worth it?. EASILY. AT GREAT COST/ OR LOWER QUALITY. COULD NOT. EDUCATION. CHICKENS. BANANAS. STEREOS. LEVIS. CARS. COMPUTERS. HOUSES. TV’S. COFFEE.

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Specialization in Production

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  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 TV’S 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

  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

  11. 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. Buy Californian

  13. Buy Los Angeles!

  14. Remember Self sufficiency is expensive!

  15. International Economic Cooperation Good or bad for America? Wrong question!

  16. 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

  17. 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

  18. The Question How do we gain the advantages of trade while dealing with the disadvantages?

  19. The U.S. will export capital intensive and knowledge intensive products and will import labor intensive products

  20. 50% of new jobs in next 20 years will require a college education or advanced training. How Will You Make Yourself Scarce in the Global Economy of the 21st Century?

  21. 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 240 260 120 5.Average rejects 40 40 60 6.Usable units 7.Cost per usable unit $ $ $

  22. 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 $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 $.40 $.44 $.67

  23. 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.

  24. Main Points • International trade 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.

  25. Which is the strong dollar? • A. 50 = $1; 1 = $.02 • B. 100 = $1; 1 = $.01

  26. 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 $ ____

  27. 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

  28. 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 ____

  29. 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

  30. 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

  31. 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

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