Absolute Advantage<\/h3>\r\n
A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product. The United States, for example, has an absolute advantage in reusable spacecraft and other high-tech items.<\/p>\r\n
Suppose that the United States has an absolute advantage in air traffic control systems for busy airports and that Brazil has an absolute advantage in coffee. The United States does not have the proper climate for growing coffee, and Brazil lacks the technology to develop air traffic control systems. Both countries would gain by exchanging air traffic control systems for coffee.<\/p>\r\n\r\n<\/div>\r\n
Comparative Advantage<\/h3>\r\n
Even if the United States had an absolute advantage in both coffee and air traffic control systems, it should still specialize and engage in trade. Why? The reason is the principle of comparative advantage, which says that each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods that foreign countries can produce most readily and cheaply. This specialization ensures greater product availability and lower prices.<\/p>\r\n
For example, India and Vietnam have a comparative advantage in producing clothing because of lower labor costs. Japan has long held a comparative advantage in consumer electronics because of technological expertise. The United States has an advantage in computer software, airplanes, some agricultural products, heavy machinery, and jet engines.<\/p>\r\nThus, comparative advantage acts as a stimulus to trade. When nations allow their citizens to trade whatever goods and services they choose without government regulation, free trade exists. Free trade is the policy of permitting the people and businesses of a country to buy and sell where they please without restrictions. The opposite of free trade is protectionism, in which a nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas. In the next section, we\u2019ll look at the various barriers, some natural and some created by governments, that restrict free trade.\r\n\r\n<\/div>\r\n
The Fear of Trade and Globalization<\/h3>\r\n
The continued protests during meetings of the World Trade Organization<\/span> and the protests during the convocations of the World Bank<\/span> and the International Monetary Fund<\/span> (the three organizations are discussed later in the chapter) show that many people fear world trade and globalization. What do they fear? The negatives of global trade are as follows:<\/p>\r\n\r\n Sending domestic jobs to another country is called outsourcing, a topic you can explore in more depth. Many U.S. companies, such as Dell<\/span>, IBM<\/span>, and AT&T<\/span>, have set up call service centers in India, the Philippines, and other countries. Now even engineering and research and development jobs are being outsourced. Outsourcing and \u201cAmerican jobs\u201d were a big part of the 2016 presidential election with Carrier<\/span>\u2019s plan to close a plant in Indianapolis and open a new plant in Mexico. While intervention by President Trump<\/span> did lead to 800 jobs remaining in Indianapolis, Carrier<\/span> informed the state of Indiana that it will cut 632 workers from its Indianapolis factory. The manufacturing jobs will move\u00a0to Monterrey, Mexico, where the minimum wage is $3.90 per day. [footnote]Danielle Paquette, \u201cTrump Said He Would Save Jobs at Carrier. The Layoffs Start July 20,\u201d The Washington Post,<\/em> https:\/\/www.washingtonpost.com, May 24, 2017.[\/footnote]<\/p>\r\n\r\n So is outsourcing good or bad? If you happen to lose your job, it\u2019s obviously bad for you. However, some economists say it leads to cheaper goods and services for U.S. consumers because costs are lower. Also, it should stimulate exports to fast-growing countries. No one knows how many jobs will be lost to outsourcing in coming years. According to estimates, almost 2.4 million U.S. jobs were outsourced in 2015.[footnote]\u201cJobs Overseas Statistics,\u201d http:\/\/www.statisticbrain.com, accessed June 26, 2017.[\/footnote]<\/p>\r\n\r\n<\/div>\r\n A closer look reveals that globalization has been the engine that creates jobs and wealth. Benefits of global trade include the following:<\/p>\r\n\r\n Nations trade because they gain by doing so. The principle of comparative advantage states that each country should specialize in the goods it can produce most readily and cheaply and trade them for those that other countries can produce most readily and cheaply. The result is more goods at lower prices than if each country produced by itself everything it needed. Free trade allows trade among nations without government restrictions.<\/p>\r\n\r\n<\/div>\r\n 2. Why do nations trade?<\/p>\n One might argue that the best way to protect workers and the domestic economy is to stop trade with other nations. Then the whole circular flow of inputs and outputs would stay within our borders. But if we decided to do that, how would we get resources like cobalt and coffee beans? The United States simply can\u2019t produce some things, and it can\u2019t manufacture some products, such as steel and most clothing, at the low costs we\u2019re used to. The fact is that nations\u2014like people\u2014are good at producing different things: you may be better at balancing a ledger than repairing a car. In that case you benefit by \u201cexporting\u201d your bookkeeping services and \u201cimporting\u201d the car repairs you need from a good mechanic. Economists refer to specialization like this as advantage.<\/em><\/p>\n A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product. The United States, for example, has an absolute advantage in reusable spacecraft and other high-tech items.<\/p>\n Suppose that the United States has an absolute advantage in air traffic control systems for busy airports and that Brazil has an absolute advantage in coffee. The United States does not have the proper climate for growing coffee, and Brazil lacks the technology to develop air traffic control systems. Both countries would gain by exchanging air traffic control systems for coffee.<\/p>\n<\/div>\n Even if the United States had an absolute advantage in both coffee and air traffic control systems, it should still specialize and engage in trade. Why? The reason is the principle of comparative advantage, which says that each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods that foreign countries can produce most readily and cheaply. This specialization ensures greater product availability and lower prices.<\/p>\n For example, India and Vietnam have a comparative advantage in producing clothing because of lower labor costs. Japan has long held a comparative advantage in consumer electronics because of technological expertise. The United States has an advantage in computer software, airplanes, some agricultural products, heavy machinery, and jet engines.<\/p>\n Thus, comparative advantage acts as a stimulus to trade. When nations allow their citizens to trade whatever goods and services they choose without government regulation, free trade exists. Free trade is the policy of permitting the people and businesses of a country to buy and sell where they please without restrictions. The opposite of free trade is protectionism, in which a nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas. In the next section, we\u2019ll look at the various barriers, some natural and some created by governments, that restrict free trade.<\/p>\n<\/div>\n The continued protests during meetings of the World Trade Organization<\/span> and the protests during the convocations of the World Bank<\/span> and the International Monetary Fund<\/span> (the three organizations are discussed later in the chapter) show that many people fear world trade and globalization. What do they fear? The negatives of global trade are as follows:<\/p>\n Sending domestic jobs to another country is called outsourcing, a topic you can explore in more depth. Many U.S. companies, such as Dell<\/span>, IBM<\/span>, and AT&T<\/span>, have set up call service centers in India, the Philippines, and other countries. Now even engineering and research and development jobs are being outsourced. Outsourcing and \u201cAmerican jobs\u201d were a big part of the 2016 presidential election with Carrier<\/span>\u2019s plan to close a plant in Indianapolis and open a new plant in Mexico. While intervention by President Trump<\/span> did lead to 800 jobs remaining in Indianapolis, Carrier<\/span> informed the state of Indiana that it will cut 632 workers from its Indianapolis factory. The manufacturing jobs will move\u00a0to Monterrey, Mexico, where the minimum wage is $3.90 per day. [1]<\/sup><\/a><\/p>\n Anti-globalization groups oppose America\u2019s free-trade stance, arguing that corporate interests are hurting the U.S. economy and usurping the power of the American people. The recent protests at the G20 meetings in Hamburg, Germany, expressed anti-free-trade sentiment, supporting the idea that multinational corporations wield too much power. Are fears expressed by anti-globalization activists and nationalists justified? (Credit: fiction of reality\/ Flickr\/ Attribution 2.0 Generic (CC BY 2.0))<\/p>\n<\/div>\n<\/div>\n So is outsourcing good or bad? If you happen to lose your job, it\u2019s obviously bad for you. However, some economists say it leads to cheaper goods and services for U.S. consumers because costs are lower. Also, it should stimulate exports to fast-growing countries. No one knows how many jobs will be lost to outsourcing in coming years. According to estimates, almost 2.4 million U.S. jobs were outsourced in 2015.[2]<\/sup><\/a><\/p>\n<\/div>\n A closer look reveals that globalization has been the engine that creates jobs and wealth. Benefits of global trade include the following:<\/p>\n Nations trade because they gain by doing so. The principle of comparative advantage states that each country should specialize in the goods it can produce most readily and cheaply and trade them for those that other countries can produce most readily and cheaply. The result is more goods at lower prices than if each country produced by itself everything it needed. Free trade allows trade among nations without government restrictions.<\/p>\n<\/div>\n\r\n \t
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Anti-globalization groups oppose America\u2019s free-trade stance, arguing that corporate interests are hurting the U.S. economy and usurping the power of the American people. The recent protests at the G20 meetings in Hamburg, Germany, expressed anti-free-trade sentiment, supporting the idea that multinational corporations wield too much power. Are fears expressed by anti-globalization activists and nationalists justified? (Credit: fiction of reality\/ Flickr\/ Attribution 2.0 Generic (CC BY 2.0))[\/caption]\r\n\r\n<\/div>\r\nBenefits of Globalization<\/h3>\r\n
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concept check<\/h3>\r\n
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Summary of Learning Outcomes<\/h3>\r\n
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Glossary<\/h3>\r\n
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Absolute Advantage<\/h3>\n
Comparative Advantage<\/h3>\n
The Fear of Trade and Globalization<\/h3>\n
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<\/p>\nBenefits of Globalization<\/h3>\n
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concept check<\/h3>\n
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Summary of Learning Outcomes<\/h3>\n
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Glossary<\/h3>\n
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Candela Citations<\/h3>\n\t\t\t\t\t