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ECO100 - MAR 27

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James Pesando

Cheap Labour ● Arguments Against Trade (Old notes) ○ Misconceptions about winners/loses ○ Absolute advantage does not determine the winners from trade ○ Depends on the relative efficiency, comparative advantage ○ NAFTA ○ Consider two countries for one hours ● Consider two countries for one hour MP Pworld VMP(L) Country A 20 $2 $40 Country B 1 $2 $2 ● Wage rate: value of marginal product ● Now imagine that the actual wage rates (for one hour) are: Wage Rate Unit Labour Cost Country A $20 $20/20 = $1 per good Country B $2 $2/1 = $2 per good ● Even though the wage rate is only $2 in Country B, country A is still more efficient and would therefore export ○ B: relatively cheap labour, it does not have comparative advantage ○ Country A is still a more successful exporter of this good ● Infant industries need protection from imports, while they are learn by doing ○ Comparative industries are dynamic and can be invested in Tariffs: ● Tariffs: taxes imposed on imported goods ○ man-made (artificial) transportation cost ○ drives up domestic price of imports ○ To protect import competing industries: ■ domestic producers do not have a comparative advantage and so the world price is less than the autarky price ● A product in which we do not have a comparative advantage ○ relatively high price ● Fewer domestic jobs are lost because of the tariff ○ production was only cut to QSTT instead of QST ○ Workers will organize to prevent job loss ■ Lobby for tariff ● Tradeoff: ○ Many consumer benefit less because the price only falls to (world price+tariff) instead of (world price) ○ Consumers do not organize for freer trade ■ MB is small for each consumer
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