Comparative Advantage vs. China
Boudreaux, Donald J, Tribune-Review/Pittsburgh Tribune-Review
He was confident of the truth of all that he uttered. And he uttered a lot.
He -- call him Ben -- is an urbane man who was seated across from me recently at a lunch group organized by a mutual friend. Ben spoke speedily and with authority on everything from cinema to Miami restaurants to bookstores in the Tel Aviv of his youth. Knowing little about these matters, I nodded my head politely at all he said. I had no reason to doubt its truth.
But my attitude changed when Ben turned his verbal virtuosity to economics. "You watch," Ben warned. "The Chinese work so hard and are so smart that they'll soon gain a comparative advantage over Americans at producing everything."
I knew immediately that Ben knew far less about economics than he fancied himself knowing.
I politely asked Ben a few questions to be certain I understood what he was saying. Sure enough, he was asserting that producers in China will soon be producing everything at costs too low for any American producers to match. Ben believed that, unless Congress stops Americans from buying so much from China, trade with China will eventually impoverish Americans.
Ben's understanding of trade, and of comparative advantage in particular, is entirely wrong.
"Comparative advantage" has a precise meaning in economics. Smith has a comparative advantage over Jones at producing hams if the number of goods and services that Smith "gives up" in order to produce hams is smaller than the number of goods and services that Jones gives up to produce hams.
But here's a surprising implication of the principle of comparative advantage: To become more efficient at producing one good means that you become less efficient at producing other goods. This occurs not just sometimes or usually. …