McConnell Economics, Chapter 6

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Jin+Guice
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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
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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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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
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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.

Cheepnis
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Re: McConnell Economics, Chapter 6

Post by Cheepnis »

Ok, time for Cheepnis to embarrass himself a little. I bought the book and am making my way through it. Doing at least the Key Questions at th end of each chapter and a few of the others. This has me thinking in circles.

6. True or False? “US exports create a demand for foreign currencies; foreign imports of US goods create a supply of foreign currencies.” Explain. Would a decline in US consumer income or a weakening of US preferences for foreign products cause at the dollar to depreciate or to appreciate? Other things equal, what would be the effects of that depreciation or appreciation on US export and imports?

----

At first I thought it was easy since the first half of that statement seemed obviously false to me. When the US exports stuff we want payment in dollars, so everyone buying it heads to the currency exchange looking to trade their local money for $$$, hence demand for dollars, not foreign currency. Or I suppose you could say there's a supply of foreign currency rather than demand for dollars. Those would amount to the same thing, right?

But I cannot figure out how to get the second half of the statement to mesh with the first half. If US exports create a supply of foreign currency/demand for dollars, then shouldn't the second half (considering there's a foreign import for every US export) do the opposite: a supply of dollars/demand of foreign currency. But that doesn't seem right because the statement as is seems correct already. "; foreign imports of US goods create a supply of foreign currencies". No duh, all the buyers are supplying their local currency for exchange for dollars. Yet intuitively I think it should read either "supply of foreign currency; demand for foreign currency" or "demand for dollars; supply of dollars".

So here are the options: I'm intuitively right but don't really understand why, or I'm not intuitively right and I'm unable to think myself out of a wet paper bag. I've reread the pertinent sections of the chapter enough times that they just make it more confusing at this point. Seems no matter which side (supply/demand) I look at either side (import/export) of that statement I can make it make sense, but try to add in the other side and I might as well be deciphering gibberish.

Cheepnis
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Re: McConnell Economics, Chapter 6

Post by Cheepnis »

Whoa, hold on. Folding my laundry I either made of had a break through or extended the circumference.

US export = demand for dollars/US Import = supply of dollars

Conversely: Foreign export = demand for foreign currency/foreign import = supply of foreign currency

So I was intuitively wrong since the statement isn't talking about things from the perspective of the one country, but of two countries: both the exporting and importing country. So change the first half to demand for dollars; leave the second half, and it is now true. Capeesh.....?

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