analyticsbox | May 25, 2022
It Can Improve Our Standard Of Living
“Made in America.” What a great slogan, and politicians of all ilk love it. Let’s keep the jobs here, they say. No more exporting jobs to China, India, or wherever, and depriving our workforce opportunities to work.
But is that the best policy to grow an economy and improve our standard of living?
The answer is NO. And the reason lies with the understanding of Comparative Advantage. It is a very simple concept. We want to use scarce resources as efficiently as possible. These resources used for production of goods and services are:
• LAND (Raw materials included)
• LABOR
• CAPITAL
• ENTREPRENEURSHIP
Who can use the resources available to them in the most efficient manner to produce the most goods and services at the lowest possible cost? And the answer to this question is not always ‘Made in America’. If it were, the whole world would buy from us and produce nothing, obviously not the real world.
BUT, what causes some countries to have more efficient production or lower costs is a very important economic consideration. Government policy has a great impact on costs. In America, the over regulation, red-tape, and bureaucracy has been a significant negative factor in making us less competitive compared to other countries with less restrictions.
Many countries have materials we do not have or can produce them cheaper, or labor at very low rates, or a regulatory environment that fosters efficiency, or capital for large scale production, etc. Whoever can produce the most for the least has an ‘Absolute Advantage’ over other competitors. That means they can produce something using less or cheaper resources than others and at the lowest possible price.
And maybe that country could produce 3 different products at the lowest cost - Product A, B and C. But they can produce A much more efficiently than B and C relative to the competition, but their resources are limited so they cannot fulfill demand for all 3 products. So they will produce the one item A that has the best Comparative Advantage, and forgo producing B & C, even though they are efficient at it.
By focusing on the item they do the best, the total output is increased. While others may produce B and C less efficiently, the total output increases as the extraordinary output of A combined with the output of B and C from others, is greater than if the country produced all 3 and sacrificed the extra output of A.
Why is this important to us and our policy makers? We will explore this in more detail next week, and you will understand more about international trade and appropriate policies for us to follow.
BOTTOM LINE
Understanding this concept and the idea of regulatory efficiency is the key to making good economic and policy decisions. And understanding why international trade is so important if we are to improve our standard of living. More on this next week.
LEARN ECONOMICS, THEN VOTE SMART