Overview
Purpose:
To illustrate the concepts of specialization and comparative advantage. The viewer is made aware that trade benefits society as a whole but that it can hurt certain groups. Conversely, tariffs, quotas and other trade restrictions can protect certain groups and industries but generally restrict the amount of goods available and raise prices.
Objectives:
1. If two countries have different opportunity costs in the production of a good, then the country with the lower opportunity cost has the comparative advantage.
2. It is more efficient from a world economic point of view for nations to specialize in the production of those goods for which they have a comparative advantage and to trade for other goods.
3. Free trade generally benefits society as a whole because it results in the least costly way of producing goods. However, in each country, there are industries that may not be able to compete effectively in world markets and, therefore, may decline. Thus free trade can hurt certain industries and certain groups in the economy.
4. Countries may decide to restrict imports in order to protect industries and jobs, and for national security reasons. Trade restrictions include tariffs and quotas. Protectionism benefits certain groups at the expense of the economy as a whole.
| Key Economic Concepts economies of scale, product life cycle, specialization and trade tariffs, quotas and other barriers to free trade, trade and efficiency, protectionism and national defense opportunity protectionism and job security. |
| Contemporary Issues Over the past twenty-five years, China has transformed itself from one of the most closed economies (under Maoism) to one of the world’s top-ten traders. This remarkable change has both fascinated and frightened other countries. One commonly expressed fear is that China’s success is based on the low wages of its large working population. However, low wages are one of the most fleeting sources of comparative advantage. If low wages are, in fact, the basis for comparative advantage, why has Africa not become an exporting powerhouse? The simple answer is: productivity. No only are Chinese workers paid low wages, but relative to other low-wage workers (e.g. in Africa and Latin America) they are more productive. What can other countries do to become more competitive vis-à-vis China? |
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