International Trade & Wealth (Pt. 2)
Lets assume that the production possibility of country A is 100 units of item c or 50 units of item d. Country B has a production possibility of 100 units of item d and 50 units of item c. If neither country does trades they could each produce some of each item and come up with a net production of about 70 units depending on what it needs of each item.
By trading with each other each county could have a net gain in production of about 30 units or almost 43%. This is a gross over simplification and does not take into account the possibilities of increased production from economies of scale. This suggests that each country is at least 43% richer because of the trade. The reality is greater because the increased efficiency in production makes the items cheaper for the citizens of each county. This allows them to buy more and further increase production somewhere and increase profits at every stage of the manufacturing and distribution system.
Duties and tariffs do not actually stop trade. What they do is “skim” the profits and reduce the effects of savings and efficiency in the market. Protective tariffs are often counterproductive. The USA tried to protect the steel industry which had about 200,000 jobs with a protective tariff. The result was to drive the steel using industries which employed 10’s of millions offshore. Eventually this hurt the steel industry as well.
David Segrest is a REALTOR in Charlotte NC. His website is http:www.segrestrealty.com .
Showing posts with label Comparative Advantage. Show all posts
Showing posts with label Comparative Advantage. Show all posts
Tuesday, November 27, 2007
Sunday, November 25, 2007
International Trade and Wealth (Part 1)
International Trade and Wealth (part 1)
Adam Smith may be a little bit passé but there are a couple of economic theories that still apply to international trade. These are the theories of “Absolute Advantage” and “Comparative Advantage”. Basically according to these theories when trade takes place between countries wealth is created beyond the actual value of the trades.
“Absolute advantage” assumed that a nation would export items that it produce more efficiently than other nations and import items that other nations produced more efficiently. The theory of “Comparative advantage” says that even if one country produces items less efficiently than another country, it could still get an advantage by producing the item(s) that it produced most efficiently and importing the item(s) that it produces less efficiently.
In order to demonstrate the creation of wealth one needs to understand the “production possibilities” of the countries being compared. “Production possibilities designates the capabilities of a country to produce goods when all of its factors of production are fully and efficiently employed” The next section of this blog will demonstrate how wealth is created. This article and the following articles on this subject draw very heavily on an economics textbook by Franklin R. Root called “International Trade and Investment” The sentence above in quotation marks is a direct quote from that book.
David Segrest is a REALTOR in Charlotte NC. His website is http:www.segrestrealty.com .
Adam Smith may be a little bit passé but there are a couple of economic theories that still apply to international trade. These are the theories of “Absolute Advantage” and “Comparative Advantage”. Basically according to these theories when trade takes place between countries wealth is created beyond the actual value of the trades.
“Absolute advantage” assumed that a nation would export items that it produce more efficiently than other nations and import items that other nations produced more efficiently. The theory of “Comparative advantage” says that even if one country produces items less efficiently than another country, it could still get an advantage by producing the item(s) that it produced most efficiently and importing the item(s) that it produces less efficiently.
In order to demonstrate the creation of wealth one needs to understand the “production possibilities” of the countries being compared. “Production possibilities designates the capabilities of a country to produce goods when all of its factors of production are fully and efficiently employed” The next section of this blog will demonstrate how wealth is created. This article and the following articles on this subject draw very heavily on an economics textbook by Franklin R. Root called “International Trade and Investment” The sentence above in quotation marks is a direct quote from that book.
David Segrest is a REALTOR in Charlotte NC. His website is http:www.segrestrealty.com .
Subscribe to:
Posts (Atom)
