In a world in which productivities are often not fixed by nature but are often acquired we have shown the following possibilities:There is a grain of truth here, but It isn't time to write of the Ricardian model. In the Heckscher-Ohlin model, the 'dominant' country benefits from trading with 'dominated' countries because the capitalists get the benefits of cheap labor. As productivity grows in 'dominated' countries, our capitalists have less advantage over them which would simply reduce trade if everything else were homogenous (which it is not), so there is no real problem in the Ricardian and Hechscher-Ohlin models. The real potential problem is outside of those models. The problem would be if the US specializes in industries which do not grow in productivity and/or demand in the future and the formerly 'dominated' countries do specialize in these industries. China in particular is specializing in manufacturing which has traditionally been the sector with the very highest productivity growth, so that is a good sector to specialize in for developing future productivity and wealth and the US may lose out by losing relative manufacturing capacity to other countries. The oil industry has been seeing declines in productivity for decades, but demand is price inelastic and is income elastic and demand grows as global incomes grow and so that sector has a bright future despite its declines in productivity. The US used up most of our cheap oil a long time ago, and we have been a net importer for 40 years, so this is unlikely to be a bright spot for the US.
That the economic development of a trading partner can be harmful to the home country. Although the effect of that development starts good, it ends badly.
That there is a dominant and dominated relation possible between two countries, a relation that is good for the dominant one and bad for the dominated one.
That a country can attain a dominant position only by having an undeveloped trading partner. This can occur naturally if the trading partner is simply there in an underdeveloped state, or the underdevelopment can be brought about by mercantilist actions that destroy industries.
There is inherent conflict not only between a nation in a dominant position but between that dominant partner and the interests of a two-county world.
While a country cannot gain a dominant position by building up its industries, it can avoid a dominated position and assure a good outcome by developing a particular subset of its own industries and not allowing them to be destroyed.
It is possible that the United States and China were in the dominant and dominated position some time ago. We should recognize that China’s evolution away from that state can be harmful to the United States. Furthermore we can observe that China’s gain has been accompanied by the disappearance or at least decline of a number of our industries. We need to be cautious because, as these standard models show, there is a distinct possibility that this situation can even lead to significant loss through deindustrialization in an initially prosperous economy.
Saturday, June 18, 2011
Ricardo Revisited?
NewAmerica.net, Baumol and Gomory:
Not all productivity gains are the same. Here's why.
McKinsey: What Matters:
In 2000, imports of computer and electronics products from China and Mexico accounted for about 10 percent of the net supply to the US market (domestic shipments plus imports minus exports). By 2010, that percentage had risen to 37 percent. Meanwhile, the share of net supply coming from G7 countries, including the United States, fell from 69 percent to 43 percent (domestic shipments less exports, plus imports from other G7 countries).
These shifts in sourcing from high-cost to low-cost suppliers can show up as productivity growth in the United States. Let’s look at one example. Suppose a US automaker imports one million parts from a Japan-based supplier at $10 per part, for a total import bill of $10 million. Consider two scenarios:
Scenario 1: The US automaker improves its production process in its domestic factories, so it only needs half as many components. The import bill goes down to $5 million.
Scenario 2: The US automaker switches to a China-based supplier that only charges $5 per part. The import bill goes down to $5 million.
Surprisingly, these two scenarios are indistinguishable in the US economic statistics. In both scenarios, the import bill goes down to $5 million. The value-added of the US auto company goes up (sales minus the cost of materials), as does its profitability (sales minus cost of labor and materials) and measured productivity (value-added per worker).3
However, the two scenarios have very different implications for incomes and jobs. In the first scenario, the productivity gains come from an improvement in the domestic production process, which increases the value-added by each worker in its domestic factories. All else being equal, economic theory suggests this should result in an increase in the real wages of US auto workers and/or an incentive to boost the US employment of auto factories.
In the second scenario, the gains come from an improved ability of the company’s managers to identify new sourcing opportunities... All else being equal, economic theory suggests in this scenario, real wages and/or employment should rise for managers who are capable of identifying additional global opportunities to cut costs.
Friday, June 3, 2011
Eight of the Ten Largest Private Companies Produce Oil and Gas
And nine of the top ten largest private companies are dependent upon gasoline if you include Toyota. I'm not including Japan Post as the tenth biggest because it is a state-owned enterprise and it is weird because it only has 3251 employees which is the smallest number of any company on the complete list of almost 200 companies. The complete list is also interesting because it reveals industries where there are serious economies of scale and absent industries like plumbing, law, or pediatrics where they do not exist.
Wikipedia: List of companies by revenue
Wikipedia: List of companies by revenue
Sunday, May 1, 2011
Record Food Prices
Why is grain consumption going up? More people and particularly, richer people eat less efficiently. The Chinese are eating lots more meat and beer:
Friday, April 1, 2011
Gas Prices Are Rising,
The New Republic:
According to research by UC Davis's Jonathan Hughes, Christopher Knittel and Daniel Sperling, Americans are now less responsive to increases in gas prices. In the late 1970s, a ten percent rise in the cost of gas would lead to about a three percent decline in the amount of gas consumed. In the early 2000s, on the other hand, gas prices would have to rise about 60 percent to provoke a similar decline in gas consumption.
Saturday, March 26, 2011
The Street Light: Return to the Center of the World
The Street Light: Return to the Center of the World:
Gavyn Davies points us to a neat map created by Danny Quah at the LSE in his recent paper "The Global Economy's Shifting Centre of Gravity" (pdf). In it, Quah calculates "the average location of economic activity across geographies on Earth." Here's the map:
The westernmost black dot on the map represents where the Earth's center of economic gravity was in 1980 - somewhere in the Atlantic Ocean, a bit west of the Madeira islands. Since then it has drifted eastward to its current position near Cairo. The red dots then extrapolate the motion of this point until 2050, assuming the next 40 years are characterized by similar growth patterns to the past 30 years.
One of the things I love about this map is that it reminds me (in an admittedly purely superficial way) of one of my favorite economic models: the "gravity" model of trade flows, in which the trade between two countries or regions is roughly predicted by the size of the two regions and how far apart they are, just like physical gravity.
More substantively, I also find it interesting to think about this movement of the world's economic center of gravity as really just backtracking, an undoing of the point's westward movement that took place between about 1700 and 1900. From the time of the first pyramids until perhaps the 16th or 17th century, the world's economic center of gravity consistently hovered in the Middle East somewhere. Its movement westward into the Atlantic is really a relatively recent phenomenon. (Granted, if Quah's projections are correct, we may overshoot a bit as the point moves back east to where it came from, but that remains to be seen.)
It's not a coincidence that nearly all European maps of the world until the 16th century had the Middle East (often specifically Jerusalem) in the middle of the map.To medieval European map-makers, the Middle East was, and had always been, right at the center of the world, geographically, spiritually, and economically. Note that the requirement to represent that visually is what led to the classic T-O maps of the European Middle Ages. (The T-O maps are oriented with east at the top, with the Mediterranean forming the vertical stroke of the 'T', and with the Middle East right at the center of the world where the three continents meet.)
In that context, Quah's map above - and the changes in the world economy that it so nicely distills - could be interpreted as simply the correction of a temporary global aberration.
Friday, March 11, 2011
Oil: A Commodity Traded On A Global Marketplace
Yglesias:
there’s a single worldwide price of oil that’s determined by global supply and global demand. It’s not possible for one country to unilaterally alter the price its own citizens pay at the pump by altering the quantity of oil it produces. A new well in the United States has exactly the same impact on global prices as a new well in Norway or Venezuela or Saudi Arabis and thus the exactly the same impact on the price American consumers pay.And yet turn it into a political story and suddenly all this knowledge drops away:
“What about domestic supply?” asked Sen. David Vitter (R-LA) this week. “What about the Gulf of Mexico? What about all of our other vast energy resources that we are taking off the table and shutting down?”
Rep. Doc Hastings (R-WA), who is chairman of the House Natural Resources Committee, has cataloged ways he says the administration has frustrated oil production, from suspended drilling leases to increased red tape. House Speaker John Boehner (R-OH) posted highlights of the list on his website.
“Since this administration has taken over, they have done everything to block energy development in this country,” Hastings said.
Well what about domestic supply? Why would it matter if the supply is domestic?
Subscribe to:
Posts (Atom)