Econ 101.b Comparative Advantage
I’m reading a Galbraith book, The Predator State, so forgive me if I inundate you with economic facts. But, since we are in the banking crisis I can’t think of a better time to understand and learn some of the things that many of you numbnuts don’t know or conveniently forget when it comes to our economy.
In his 1817 book, On the Principles of Political Economy and Taxation, David Ricardo used the example of Portugal and England’s trading of wine and cloth to illustrate the benefits of specialization and trade. His writing served as the basis for the principle of comparative advantage, under which total output will be increased if people and nations engage in those activities for which their advantages over others are the largest or their disadvantages are the smallest.
Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade.
Effects on the economy
Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, in many real world examples where comparative advantage is attainable may in fact require a trade deficit. For example, the amount of goods produced can be maximized, yet it may involve a net transfer of wealth from one country to the other, often because economic agents have widely different rates of saving.
As the markets change over time, the ratio of goods produced by one country versus another variously changes while maintaining the benefits of comparative advantage. This can cause national currencies to accumulate into bank deposits in foreign countries where a separate currency is used.
Macroeconomic monetary policy is often adapted to address the depletion of a nation’s currency from domestic hands by the issuance of more money, leading to a wide range of historical successes and failures.
That’s easy for you to say!
numbnuts is easy for any to say
Sounds familiar. China and the U.S. right now are in a symbiotic/parasitic relationship regarding the U.S. dollar and U.S. debt. I wonder how we’ll fix it.
Well, in theory it should work itself out…
The excess of our currency going overseas should devalue the dollar and result in decreased buying power… But the Chinese realized this, and wanting to keep their expansion going have done what Japan has done for years (though much more aggressively than Japan ever did) and took the excess foreign currency and purchased treasuries and other dollar denominated bonds. This has the effect of clearing excess dollars from the market and reducing supply, therefore keeping the dollar strong… The Chinese had for a long time been pegging the Yuan to the dollar by buying as much as necessary to engineer a stable exchange rate.
This does two things:
Gives China an artificial comparative advantage which serves to distort our internal production. The stronger currency puts us at a disadvanttage exporting to other countries.
It also ties China’s wealth to this whole scheme, if the dollar ever falls to it’s true value then so too does all the accumulated reserves they are holding…
We are grossly out of equilibrium right now. It all comes back to equilibrium in the long run… A collapse of the value of the dollar and high inflation will almost certainly have to happen… But with that would result in exports increasing and a redistribution of wealth as labor gains more power (and to come full circle) and the US gaining advantages in manufacturing…
hook, line and sinker
NB,
But the Chinese realized this, and wanting to keep their expansion going have done what Japan has done for years (though much more aggressively than Japan ever did) and took the excess foreign currency and purchased treasuries and other dollar denominated bonds.
which is why china can’t do shit about benchmarking the global markets to another currency. It would kill them economically….
Yes it would. No doubt the Chinese would greatly prefer for their money right now not to be so tied up with the US, they have no real other options right now. So the Chinese are sortof like us, watching our money go to bankers who misbehaved and who are certainly going to misbehave again.
well, the problem is they do have a choice… If they do believe that the dollar will devalue then at some point they need to cut bait… The less reason we give them to think it will work out for them the more urgent it is for them to start diversifying their reserves… It will happen… Like I said, everything will tend to go back towards equilibrium (as it is now)…