Patrick J. Buchanan, a political commentator and former presidential candidate, argued in his book on the global economy that there is a flaw in David Ricardo's theory of comparative advantage: Classical free trade theory fails the test of common sense. According to Ricardo's law of comparative advantage \(\ldots\) if America makes better computers and textiles than China does, but our advantage in computers is greater than our advantage in textiles, we should (1) focus on computers, (2) let China make textiles, and (3) trade U.S. computers for Chinese textiles.... The doctrine begs a question. If Americans are more efficient than Chinese in making clothes \(\ldots\) why surrender the more efficient American industry? Why shift to a reliance on a Chinese textile industry that will take years to catch up to where American factories are today? Do you agree with Buchanan's argument? Briefly explain.

Step by step solution

01

Understanding The Debate

First, it's crucial to understand the argument. Ricardo's law of comparative advantage suggests that a country should focus on what it's more efficient at producing (in terms of opportunity cost), and trade for the rest. Buchanan’s argument implies the U.S. should not abandon the industry where it has an absolute advantage.

02

Comparative vs. Absolute Advantage

It's important to clarify the definition and difference between comparative and absolute advantage. Absolute advantage refers to being more productive or efficient than others, it means a worker needs fewer resources to produce goods. Comparative advantage refers to the ability to produce a particular good or service at a lower opportunity cost than other entities.

03

Analyzing Buchanan’s Criticism

Buchanan's argument is based on absolute advantage, if US is absolutely more efficient in making both computers and textiles it should not abandon the textiles industry. However, this argument misses the point of comparative advantage. Even if one country is more efficient in producing both goods in terms of man-hours, there is still room for trade because of the differing opportunity costs of producing the goods in each country.

04

Final Thoughts

It's not a matter of abandoning an industry or not, but of where resources can be used most efficiently. Even if the U.S. has an absolute advantage in textiles and computers, if it has a higher comparative advantage in computer production, resources should be allocated there, and textiles should be imported from China. The theory of comparative advantage states that trade can lead to an increase in overall economic output that benefits both countries.

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