Another reminder of the importance of the supply chain for a good.

Here is a graphic from a French publication that nicely illustrates the importance of the regional and global supply chain for inputs that go into making an output, in this case the Honda Civic assembled in the UK/EU region.

These supply chains are very tight and help contribute to efficiencies that keep prices low(er).

It is also a nice lesson in Comparative Advantage.

Source HERE

Do we buy stuff from Countries OR do we buy stuff from people? Here is a different look at US trade numbers.

Trade numbers are published on a national level---comparing country to country. No problem with that, but here is another way to frame the numbers.

We trade with the actual, real live citizens of the respective country. They buy our stuff and we buy theirs.

So, how do the national trade numbers look when we quantify them on a per person basis?

Below is a graphic I created to show the US trade balance with the Top 10 (plus the EU Area) trade partners as a balance nationally (yellow) and on a per person (capita) basis.

I took the value of US exports to the respective country and divided it by the population of that country. This gives the dollar value of US goods on per person basis the person bought. I then took the value of imports from a country and divided it by the US population. This gives the dollar value of the foreign goods US citizens bought. The difference between the two numbers gives a per person SURPLUS of DEFICIT in trade between the countries.

Notice nationally the US has trade DEFICITS with all trading partners, except the UK.  But if we look at it on a per person basis, we have trade deficits with only 3 countries (the EU as a whole, China, and India).

In other words, for the most part, in trade the US citizens buy less from foreigners than they buy from us---we run person to person trade SURPLUSES.  Only with the relatively poor countries of China and India do we buy more from them then they buy from us.

Absolute and Comparative Advantage for Dummies...like me.

Here is my very detailed look at how to calculate Absolute and Comparative Advantage for AP Economics.  Overkill? Maybe, but it is a step by step look at how to do it that I think would be helpful to teachers and students alike.  Kinda wish I had the "Trade for Dummies" breakdown when I was first learning it.

Hope it helps someone have a breakthrough.

Absolute and comparative advantage from Gene Hayward

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?

Determining Comparative Advantage the "Easy Way'.

One of the hardest concepts for students (and teachers!) in the beginning of an economics course is Comparative Advantage. Specifically, determining the Opportunity Costs and then figuring out which country has the Comparative Advantage in the production of a good.

I think the confusion lies in the requirement that we look at the Opportunity Costs of producing one good in terms of the other, i.e. "the Opportunity Cost of producing 1 bushel of Corn is .5 bushels of Wheat".

I believe I have a "fail-proof" method that shows students who are having a hard time with the concept how to get the right answer EVERY TIME.

The slides below represent the second step in the process of determining Comparative Advantage.  If you are not sure how these were established go HERE for that explanation.

I will do a follow-up to this presentation, using this example, to show how acceptable "Terms of Trade" are determined in order for trade to be advantageous to both parties.

Comparative Advantage using "OOO"---Output Other Over". A concise explanation...

I put together the following slides to give you a step by step understanding of how this concept works. It can be confusing, as you have already found out.  "IOU"---Input Other Under" is in the works and I will post that as well.

Comparative Advantage using "OOO"---Output Other Over". A concise explanation...

I put together the following slides to give you a step by step understanding of how this concept works. It can be confusing, as you have already found out.  "IOU"---Input Other Under" is in the works and I will post that as well.

I have planted many a golf ball in a corn field but have not planted much corn on a golf course. See here WHY Iowa farmers are doing just that. How do you say "FORE!" in corn lingo??

A nice article in the NYTIMES today about farmers in Iowa  using every bit of land they can to grow crops, even land that previously had been deemed not worthy of cultivation.  This is an excellent example of increasing opportunity costs as it related to the Production Possibilities Frontier:

"Across much of the Midwest the sharp increase in farm earnings has driven the price of farmland to previously unimaginable — and, some say, unsustainable — levels. But in the process, to much less fanfare, the financial rewards have also encouraged farmers to put ever more land into production, including parcels that until recently were too small or too poor in quality to warrant a second glance."     

Most of the land they currently grow crops on could be labeled "low hanging fruit" which means that relatively little, other than the basics to cultivate, plant, maintain, has to be done to harvest the crop.  It is the most suitable land for growing crops.  However, this fertile land is not unlimited and "at the margins" of the acreage land is going to become less suitable, hence more expensive to convert to growing crops. 

The "opportunity cost" (explicit and implicit costs) of converting this land to grow food is too high relative to (1) the price they might receive for any food grown on it, or (2) an alternative use this land might have may be more suitable for the production of some other good:

A splash of green on a solid beige horizon, the golf course at the edge of this tiny town promised residents nine modest holes of refuge from corn country. Decades earlier the spot had been farmed, too, but the rocky soil was so poor, the saying went, that you couldn’t raise hell there with a fifth of whiskey.         

“The rottenest piece of land there is,” said Mick Elbert, a local car dealer who served on the golf association board. “All it is good for is a golf course. That’s why we built it there.” As Crop Prices Soar, Iowa Farms Add Acreage

Now that there appears to be sustained higher prices for various agricultural commodities, farmers and the communities they live in,  are willing and able to spend additional money and resources (equipment, time, etc) to cultivate this less suitable land because the opportunity cost of NOT doing so (foregone profit for farming relative to the profit, or lack there of, for the golf course) is now greater. 

""But this year, over a chorus of objections, the greens and fairways were plowed under. The course had been losing money, and crop prices had been breaking records, so the new owner did the type of quick calculation that is quietly reshaping the region and determined that it was more valuable as farmland. The first harvest took place this fall..."

For extra credit, draw a Production Possibilities Frontier showing the production of only two goods, Food and Golf Courses.  Show on the graph the result of the landowners decision about what to do with his land ("resource").  Explain why you drew your PPF curve the way you did (straight line or bowed). 


Read the whole article below the fold:

Steve Jobs and jobs---See how he creates jobs around the world to produce the i-Pad. How would YOU do it differently?

Resources are not unlimited.

Just look at the two top countries, the US and China. If you wanted to have the technological wizardy of the  i-Pad in the marketplace for a "reasonable" price, and you had to divide up the labor to produce it, which combination of jobs would you want available for US workers? You certainly don't trade an engineering job for a production job. That would not make sense. How about a retail job for a production job? Well, can't do that either, because the retail market is in the US.  If we moved ALL(or some) those production jobs to the US, would the i-Pad be a better product? A more expensive product? LESS expensive? OR is everything basically in balance to bring you the magic that is the i-Pad...Perhaps Comparative Advantage works?



Source: The Conversable Economist

HT: The Conversable Economist