Friday, November 18, 2016

Nice excerpt from the WSJ that illustrates Comparative Advantage.

The following is from a WSJ article on the automaker Ford's decision to produce a model in the US versus perhaps moving production to Mexico.  The article is about the politics of the situation, but the following excerpt caught my eye
"...Like many of its rivals, Ford is increasing production of more profitable trucks and sport-utility vehicles in the U.S. while investing to boost output in Mexico for lower-margin small cars...." (WSJ)
Without mentioning it by name, this nicely sums up the microeconomic concept of "Comparative Advantage" all students learn at the beginning of a semester of basic economics.

Ford can use its factories to produce either small lower profit margin cars or they can use them to produce larger higher profit trucks and SUV's.  They could conceivably do both but, assuming limited resources, the factories (and the workers) produce higher value with the larger vehicles.  

The Opportunity Cost of producing trucks and SUV's  (large profit margin) is what they give up in small car production (small profit margin).

The Opportunity Cost of producing small cars (small profit margin) is what they give up in trucks and SUV's (large profit margin).

Which is a more economically efficient allocation of a nation's scarce resources?
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