The continued protests during meetings of the World Trade Organization and the protests during the convocations of the World Bank and the International Monetary Fund 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:. Sending domestic jobs to another country is called outsourcing , a topic you can explore in more depth. Many U. Now even engineering and research and development jobs are being outsourced. While intervention by President Trump did lead to jobs remaining in Indianapolis, Carrier informed the state of Indiana that it will cut workers from its Indianapolis factory.
So is outsourcing good or bad? However, some economists say it leads to cheaper goods and services for U. 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. A closer look reveals that globalization has been the engine that creates jobs and wealth. Benefits of global trade include the following:.
Describe the policy of free trade and its relationship to comparative advantage. Why do people fear globalization? What are the benefits of globalization? Summary of Learning Outcomes Why do nations trade? 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. Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality.
They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18 th Century in The Wealth of Nations, , these being the division of labour and specialisation.
In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently. When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets.
For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.
Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity.
Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem? In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios. Review the numbers for Canada and Venezuela from Figure which describes how many barrels of oil and tons of lumber the workers can produce.
Use these numbers to answer the rest of this question. Bernstein, William J. Atlantic Monthly Press. New York. Skip to content International Trade. Learning Objectives By the end of this section, you will be able to: Show the relationship between production costs and comparative advantage Identify situations of mutually beneficial trade Identify trade benefits by considering opportunity costs.
Resources Needed to Produce Shoes and Refrigerators Country Number of Workers needed to produce 1, units — Shoes Number of Workers needed to produce 1, units — Refrigerators United States 4 workers 1 worker Mexico 5 workers 4 workers Absolute advantage simply compares the productivity of a worker between countries.
Mutually Beneficial Trade with Comparative Advantage When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. Production Possibilities before Trade with Complete Specialization Country Shoe Production — using 40 workers Refrigerator Production — using 40 workers United States 10, shoes or 40, refrigerators Mexico 8, shoes or 10, refrigerators As always, the slope of the production possibility frontier for each country is the opportunity cost of one refrigerator in terms of foregone shoe production—when labor is transferred from producing the latter to producing the former see Figure.
Production Possibility Frontiers. All other points on the production possibility line are possible combinations of the two goods that can be produced given current resources. Point A on both graphs is where the countries start producing and consuming before trade.
Point B is where they end up after trade. How Opportunity Cost Sets the Boundaries of Trade This example shows that both parties can benefit from specializing in their comparative advantages and trading.
Calculating Absolute and Comparative Advantage. Comparative Advantage Goes Camping To build an intuitive understanding of how comparative advantage can benefit all parties, set aside examples that involve national economies for a moment and consider the situation of a group of friends who decide to go camping together. Key Concepts and Summary Even when a country has high levels of productivity in all goods, it can still benefit from trade.
Self-Check Question In Germany it takes three workers to make one television and four workers to make one video camera.
Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell? Calculate the opportunity cost of producing one additional television set in Germany and in Poland. Your calculation may involve fractions, which is fine. Which country has a comparative advantage in the production of televisions? Calculate the opportunity cost of producing one video camera in Germany and in Poland.
Which country has a comparative advantage in the production of video cameras? In this example, is absolute advantage the same as comparative advantage, or not? In what product should Germany specialize? In what product should Poland specialize? In Germany, it takes fewer workers to make either a television or a video camera.
Germany has an absolute advantage in the production of both goods. Producing an additional television in Germany requires three workers. Thus, the opportunity cost of producing televisions is lower in Poland, so Poland has the comparative advantage in the production of televisions. If either country was to expand television production by a significant amount—that is, lots more than one unit—then we will be talking about whole cameras and not fractional ones.
Review Questions Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? How does comparative advantage lead to gains from trade? Problems In Japan, one worker can make 5 tons of rubber or 80 radios. Who has the absolute advantage in the production of rubber or radios?
Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. Which country has a comparative advantage in the production of radios? Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber? In this example, does each country have an absolute advantage and a comparative advantage in the same good? In what product should Japan specialize?
In what product should Malaysia specialize? Draw a production possibilities frontier for each country. Assume there are workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2, tons of lumber.
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