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Chapter 9: Problem 6

Suppose you are explaining the benefits of free trade and someone states, "I don't understand all the principles of comparative advantage and gains from trade. I just know that if I buy something produced in America, I create a job for an American, and if I buy something produced in Brazil, I create a job for a Brazilian." Do you agree with this statement? When the United States imports products for which it does not have a comparative advantage, does this mean there are fewer jobs in the United States? In the example in Section 9.3 with China and the United States producing and trading smartphones and wheat, when the United States imports smartphones from China, does the number of jobs in the United States decline? Briefly explain.

Short Answer

Expert verified
Comparative advantage enables countries to specialize in the production of certain goods, optimising their resources and fostering economic growth which can translate into job creation. While buying goods produced domestically might secure some jobs, it overlooks the intricacies of international trade and the redistribution of labor that occurs as countries specialize in their fields of comparative advantage. Importing goods, even without a comparative advantage, does not necessarily mean fewer jobs. Transition of labor might occur, but it does not translate into an overall job reduction.

Step by step solution

01

Understanding the Principles of Comparative Advantage

The principle of comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another party. It's why countries choose to produce certain goods and trade for others; thus, ensuring efficiency in resource allocation.
02

Analysing the Trade Misperception

The statement 'buying from America creates American jobs, buying from Brazil creates Brazilian jobs' oversimplifies trade. Yes, when you purchase an item, you're contributing to demand for that product, which could secure or create jobs. But it doesn't factor in the reality of production and global trade. Companies often import and export goods as part of their production process. What's crucial is where a country has a comparative advantage.
03

Interpreting Comparative Advantage in Terms of Jobs

Having a comparative advantage doesn't necessarily mean a country has the absolute advantage (i.e., that they’re the best at producing a certain good). It means producing that good has a lower opportunity cost for them than for other countries. When a country specializes in producing goods where it has a comparative advantage and trades for other goods, it potentially optimizes national output and income levels. This economic growth can spur job creation.
04

Examining the Impact on Jobs When Importing Goods of No Comparative Advantage

Importing goods for which the U.S does not have a comparative advantage does not mean fewer jobs. While there may be job losses in the industries related to the imports, jobs would be created in sectors where the U.S. has a comparative advantage. In the example given, the U.S. focusing on wheat (where it has a comparative advantage) can free up resources and labor for that industry possibly resulting in job creation.
05

Drawing Connections with the China-U.S. Example

When the U.S. imports smartphones from China, it doesn't lead to a decline in American jobs. Although manufacturing smartphones in China creates jobs there, the U.S. realigns its resources to sectors where it carries an advantage, resulting in labor shifts but not necessarily an overall job reduction.

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Most popular questions from this chapter

Former President Barack Obama once described a trade agreement reached with the government of Colombia as a "win-win' for both our countries." Is everyone in both countries likely to win from the agreement? Briefly explain.

What is dumping? Who benefits and who loses from dumping? What problems arise when anti-dumping laws are implemented?

Does everyone gain from international trade? If not, explain which groups lose.

Steven Landsburg, an economist at the University of Rochester, wrote the following in an article in the Wall Street Journal: Free trade is not only about the right of American consumers to buy at the cheapest possible price; it's also about the right of foreign producers to earn a living. Steelworkers in West Virginia struggle hard to make ends meet. So do steelworkers in South Korea. To protect one at the expense of the other, solely because of where they happened to be born, is a moral outrage. How does the U.S. government protect steelworkers in West Virginia at the expense of steelworkers in South Korea? Is Landsburg making a positive statement or a normative statement? A few days later, Tom Redburn published an article disagreeing with Landsburg. Redburn argued that caring about the welfare of people in the United States more than about the welfare of people in other countries isn't "some evil character flaw." According to Redburn, "A society that ignores the consequences of economic disruption on those among its citizens who come out at the short end of the stick is not only heartless, it also undermines its own cohesion and adaptability." Which of the two arguments do you find most convincing?

(Related to the Apply the Concept on page 307) An economic analysis of a proposal to impose a quota on steel imports into the United States indicated that the quota would save 3,700 jobs in the steel industry but cost about 35,000 jobs in other U.S. industries. Why would a quota on steel imports cause employment to decline in other industries? Which other industries is a steel quota likely to affect?
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