Tuesday, 14 November 2017

"Free trade case in a nutshell"

Physiocrat on top form.

11 comments:

Rich Tee said...

The theory of comparative advantage was first developed in 1817 when the world was a lot simpler. That was a world before your telephone call could be answered in India, and before people moved en masse from one country to another to find work, such as the Polish moving to Britain.

Like so many economic theories, it may be technically correct, but it is two hundred years old, and ignores the social breakdown effects of the modern era caused by viewing a country solely in economic terms and ignoring social impacts like deindustrialisation, the loss of manufacturing jobs in areas where employment is heavily dependent on manufacturing.

paulc156 said...

As long as the nation state remains the prime motor for achieving political and economic development pure free trade remains a utopian ideal for some unspecified time in the future. We only favoured it in Britain after we had achieved economic dominance. The US made its most staggering economic gains whilst pursuing protectionist policies. It too only favouring free(er) trade when it achieved economic dominance.

Dinero said...

Technical point , comparative advantage is a specific term , it refers to the prices of goods relative to one another within the domestic market, compared to the prices of goods relative to one another on the international market.
I summarise it thus - The comparative advantage of producing a product = (international price ratio)/(domestic price ratio).
So from that If the international price of oranges is cheaper than apples then for a country that has an economy that produces apples and where apples are cheaper than oranges, it can obtain more oranges buy selling apples and buying oranges, regardless of its ability to produce apples.

Mark Wadsworth said...

RT, the world has not changed that much. Two hundred years ago, there was a lot of migration, to USA and Australia, for example.

PC, I heartily disagree. Or else north Korea would be richest country in the world.

D, excellent point.

Lola said...

D. I don't think that is quite correct. CA is the comparison of the costs of production between areas. Thusly although you could make wine in Scotchland you're better making it in Italy (say). And for Scotch the other way about. And also even if Scotchland could produce wine with lower costs of production than Italy it may still pay it to import wine from Italy and use its even more superior advantage to use those freed up wine producing resources to make more scotch (say).

Mark Wadsworth said...

L, let's not split hairs. Dinero was explaining it differently that's all.

To cut a long story, everybody/every business/every country should do what it is best at, even if it is not very good at it.

So if Scotland can make wine for £10 a bottle and whisky for £10 a bottle and Italy can make wine for £5 a bottle and whisky for £8 a bottle, even though Italy can undercut Scotland on both, it's relative advantage is bigger with wine, so Italy makes wine and Scotland makes whisky.

World market price then clears at wine £5 and whisky £10. A bottle of each for a consumer is £15. If it were the other way round, a bottle of each would cost £18.

Robin Smith said...

Rich Tee, am not sure if you're aware that your summary is a perfect exposition of how the 'modern' world reinforces the point even more intensely.

Lola said...

Mw. I thought that that was what was saying.

Robin Smith said...

MW, its better than you state. Even a country thats better at making everything than everyone else, would be better off to leave the others to make(and profit well from) the things which are less profitable, and focus on the rest.

All this and much more is written perfectly well in Protection or Free Trade by the ideologist Henry George.

Dinero said...

>Lola

That is not comparative advantage. That is absolute advantage.

Absolute advantage is where an economic agent can produce something at less cost than another.

Comparative advantage is the ratio of the cost of production between products compared to its trading partner.

CA = (international price ratio)/(domestic price ratio

paulc156 said...

MW. Not sure exactly what you disagree with or how N Korea gets a mention. I do not argue above for or against free trade but simply refer to historical reality.

Britain absolutely was not remotely free trade until they achieved economic dominance well into its industrialisation period circa 1840's.Prior to that it was the most protectionist of nations. Even then it returned to protectionism in the 1870's! Alexander Hamilton came to typify the US approach to free trade in the 18th C. Protect nascent industries(tariffs, quotas, until they are strong enough to outcompete foreign producers. That policy stood until the second half of the 20thC. As for Korea, South Korea is typical ditto Japan and modern day China. Massive state led investments allied with protection was the story for all these countries whilst they were industrialising.Still the case in China. S. Korea only liberalised in the 80's well after its indudtries were well established.