McConnell Economics, Chapter 6

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Jin+Guice
Posts: 707
Joined: Sat Jun 30, 2018 8:15 am

McConnell Economics, Chapter 6

Post by Jin+Guice »

Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 6.

Jin+Guice
Posts: 707
Joined: Sat Jun 30, 2018 8:15 am

Re: McConnell Economics, Chapter 6

Post by Jin+Guice »

Chapter 6 is about foreign trade, with a focus on how it affects the United States. The U.S. has a trade deficit (imports more than it exports) in Goods and a trade surplus (exports more than it imports) in services (lol, what could go wrong????). The text highlights the increase in foreign trade since the end of WWII. It's authors believe this is because of improvements in transportation technology, communication and a decline in tariffs between nations.

This chapter introduces the idea of "comparative advantage." Here's the basics: If two agents (country, firm, individual) produce two goods and/ or services, both will benefit if they specialize in whichever one they are relatively better at producing. Counterintuitively, this will hold even if one agent is better at producing both goods/ services as long as there is a relative difference. 

Example: If China is better at manufacturing both N95 masks and sex dolls than the United States, but the United States is "less bad" at manufacturing sex dolls than it is at manufacturing N95 masks, and especially if China is "mo' better" at manufacturing N95 masks than sex dolls, both parties will benefit if China manufacturers masks and the U.S. manufactures fuck robots that eerily resemble David Ricardo, assuming free trade and competitive markets.

There's a more boring, but also more detailed explanation of why this holds in section 6.2 in the book. Economists are always rock hard for comparative advantage, so it's worth reading the example and working through it, if you're interested in economic theory.

Here's an article about the COVID-19 PPE crisis discussing the advantage of comparative advantage in terms of fragility: https://www.theamericanconservative.com ... -covid-19/

Section 6.3 discusses governments and international trade. Governments erect barriers to trade to protect their own nations from outside competition. These barriers include, tariffs, quotas, extra licensing requirements and export subsidies. Economists dislike these measures because they feel that they reduce the gains from comparative advantage and make everyone worse off.
The text also discusses several trade agreements including the WTO, the EU and NAFTA, all of which reduce trade restrictions between member nations.

white belt
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Joined: Sat May 21, 2011 12:15 am

Re: McConnell Economics, Chapter 6

Post by white belt »

@J+G

Interesting article. This is the part that was missing in the textbook discussion about comparative advantage, which the article highlights:
Ricardo’s case contains two critical hidden assumptions: first, that the prices of the goods in question will remain more or less stable in the global marketplace, and second that the availability of imported goods from specialized producers will remain uninterrupted, such that sacrificing local capabilities for cheaper foreign alternatives.
I would say one of my critiques of McConnell's textbook explanation of different models thus far is that he doesn't always lay out the inherent assumptions in each model. Maybe these are left out since it's an introductory textbook and the goal is to simply explain the models without undermining them with assumptions that may not always hold true.

In terms of governments and international trade, I think it's been interesting watching Trump's isolationist policies over the last few years. For someone who on paper is a free market capitalism proponent, he does seem to believe in trade wars. Perhaps this is just to pander to domestic voters who believe that their manufacturing jobs disappeared from outsourcing rather than automation.

ertyu
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Re: McConnell Economics, Chapter 6

Post by ertyu »

Ricardo did not assume that availability would remain interrupted. He did recognize specialization made countries more interdependent, but he welcomed it because he thought interdependence would incentivize countries towards cooperation and away from war and international conflict.

Jin+Guice
Posts: 707
Joined: Sat Jun 30, 2018 8:15 am

Re: McConnell Economics, Chapter 6

Post by Jin+Guice »

white belt: Actually I feel like McConnell does a good job of laying out the assumptions and known failing of each model. He doesn't spend a lot of time talking about what the assumptions imply (which is standard in intro to econ, because it'd be confusing at that level). I do think that the discipline as a whole does a bad job of handling the implications of these assumptions, because it's largely theoretical.

@ertyu: To me, the genius of the economic system is it allows me to work a little bit for someone in Chile while I use the money to pay someone to work for me a little bit in Indonesia. It's a way to increase communication and ultimately trust beyond people you know personally. It works as long as everyone trusts the viability of the economic system (but not necessarily each other). Treating this (admittedly great) technological advance as a religion, is in my opinion, one of our societies greatest failings. One of the effects of treating it as a religion is placing too much faith in foreign connections (who, by design, are only on your team in so much as you pay them) and not enough on local ones. I'm not refuting your comment, just adding my $.02 to what you said.

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