Do What You Do Best, and Trade for the Rest

Gay Lynn HillEconomics(ML), Mini Lessons

Common Sense Economics: What Everyone Needs to Know about Wealth and Prosperity

Many Americans believe that U.S. workers cannot compete with foreigners who sometimes make as little as $2 or $3 per day. This view is wrong and stems from a misunderstanding of both the source of high wages and the law of comparative advantage. Workers in the United States are well-educated, possess a high skill level, and work with large amounts of capital equipment. These factors contribute to their high productivity, which is the source of their high wages. In low-wage countries like Mexico and China, wages are low precisely because productivity is low.

Each country will always have some things that it does relatively better than others. Both high and low-wage countries will benefit when they can focus on using more of their resources pursuing productive activities that they do comparatively well. If a high-wage country can import a product from foreign producers at a lower cost than it can be produced domestically, importing it makes sense. Fewer of our resources will be tied up producing items that could be supplied domestically only at a high cost, and more will be directed toward production of things that we do well—goods and services that domestic producers can supply at a low cost.[20] Trade will make it possible for workers in both high and low-wage countries to produce a larger output than would otherwise be possible. In turn, the higher level of productivity will lead to higher wages for both.

What if foreign producers were able to provide consumers with a good so cheap that domestic producers were unable to compete? The sensible thing to do would be to accept the economical goods and use domestic resources to produce other things. Remember, it is availability of goods and services, not jobs, that determines our living standards. The French economist Frédéric Bastiat dramatically highlighted this point in his 1845 satire, “A Petition on Behalf of the Candlestick Makers.” The petition was supposedly written to the French Chamber of Deputies by French producers of candles, lanterns, and other products providing indoor lighting. The petition complained that domestic suppliers of lighting were “suffering from the ruinous competition of a foreign rival who apparently works under conditions so superior to our own for production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of the French industry whose ramifications are innumerable is all at once reduced to complete stagnation.”

Of course this rival is the sun, and the petitioners are requesting that the Deputies pass a law requiring the closing of windows, blinds, and other openings so that sunlight cannot enter buildings. The petition goes on to list the occupations in the lighting industry in which there would be a large increase in employment if the use of the sun for indoor lighting was outlawed. Bastiat’s point in this satire is clear: As silly as the proposed legislation in the petition is, it is no sillier than legislation that reduces the availability of low-cost goods and services in order to “save” domestic producers and promote employment.



Questions:
  1. Trade is simply that. Two people exchange goods or services or money for other goods or services or money, and both feel better off as a result. Do you think it should matter where the person you are buying from lives? If so, why?
  2. Do you think it is the job of the government to protect you from competition?
  3. Can you think of examples of trade issues in the news today, which are analogous to the “Petition of the Candlemakers?”

This reading is an excerpt from Certell’s Common Sense Economics eBook.  Certell offers curriculum materials and eBooks free of charge for students and teachers.  Click Here to download the Common Sense Economics Materials.


Citation:

[20] The same logic applies to “outsourcing,” undertaking certain activities abroad in order to reduce cost. If an activity can be handled at a lower cost abroad, doing so will release domestic resources that can be employed in higher productive activities. As a result, output will be larger and income levels higher.

Image Citation:

11, April 2018, CSCL Globe arrival at Felixstowe [Digital photograph].  Retrieve from <bbc.com>.