Rizzo started off class by saying that the trade deficit and the federal budget deficit both don’t always mean debt. Only sometimes does it. Usually it’s more of the federal budget deficit meaning debt than a trade deficit but it is not always this way. Debt is okay if your using the money to be more productive in the future. Trade accounts are in balance. They are always perfectly balanced for nations as a whole. They cant take the form of other countries purchasing our debt.
American government securities are what Japan and China purchase from us. China does well by buying 1 billion in American treasury returns. When these countries buy American securities, it keeps the interests rates lower in America. People are very hypocritical when they say that selling our debt to other nations is bad. There is no difference whether China trades us for bricks to give us money, or gives us money to pay for the bricks in a building. Both are trades that we lose something in order to get something. It doesn’t matter who you trade with. North Carolina sells more stuff to other states than they buy. S.C is the opposite. If both of these states left the union tomorrow, their trade statistics would stay the same. It doesn’t matter who we trade with. The trade deficit means nothing.
Trade statistics aren’t meaningful entities. A Philly design school built a suit by searching for materials only within a 100 mile radius of Philly. Took 500 man hours to produce it. By producing it locally, took $10,000 of material and labor. 8% of the material came out of the 100 mile radius. If they made it from totally within the 100 mile radius, it would have cost $600,000 and taken 1.5 years.
Whirlpool has 1,000 workers in Tennessee. Every job loss devastates that worker and each employee costs $100,000 a years. We know alcoholism and divorce rates increase in recessions. $100,000,000 total costs of program saved. Assume none of them find a job again. By doing this, products are $2 cheaper. Gain is $120,000,000 but loss is $100,000,000. $20,000,000 net gain. Consumers don’t realize a $2 difference. Where is the line drawn where trade matters. Would the decision if rather than outsourcing to India, went to greener Ohio. What if it was lifesaving drugs instead of whirlpool. We forget about the benefits that Indian workers would get for getting outsourced jobs. Indian workers would benefit more since they are poorer than people in America. Still helping the world. If we truly cared about the poor, we would outsource our services to India. This is not factored into American trade. We only look at America and not world. Benefit poor in India more than we hurt the poor in America. The $2 benefit is worth nothing to Americans. Satisfaction gained is swamped by the sadness of people who are fired.
If Rizzo got $1 from every American, he would get $310,000,000 to go great things with. Nothing is unique with international trade. Other countries have lower labor standards than the US. Businesses are attracted to other countries because it is cheaper there from lower standards. No correlation between environmental quality and labor standards when trading. If this was the case, we’d produce everything in Mississippi. We’d build stuff in the Ivory coast if this was the case. Nations with the highest environmental standards attract the most trade. Trade occurs between industrialized countries. 2% of firms costs to go to environmental standards. Everything has to be right for countries to invest in other countries. Trade leads to more environmental consequences. We produce things in places that have lower environmental impact. Wheat belt in Canada makes wheat a lot more efficient so we don’t have to fill Maine with wheat. Trade makes things cheaper. More money in the budget from this allows us to spend more on the environment. A 10% increase in income makes a 20% increase on money spent on the environment.
Low wage exploited labor. People think this is why China is attractive. Slavery in agriculture, not in industrialized places. Why isn’t China more productive under Mao then they are today when workers were exploited more.
Trade is beneficial because of Smithian nations and Recardian nations.
Smith- 1. When we specialize we spend less time at the job learning aspects of everything. We learn certain tasks better. 2. Allows us to develop knowledge and apply capital where we haven’t before. Rizzo knows more about Econ by not having to learn chemistry to teach as well. Makes sense for power points in class because of the amount of people he teaches at once.
Ricardo- Comparative advantage- specialization and trade lowers cost. Can do things cheaper.
If you put the Ricardo and Smith ideas together, and it shows why trade is great.
In economics, having people value things differently is needed for trade to happen. The world has a massive amount of TRANSACTION COSTS.
Baseball card trade- trade property rights to those products.
Transaction costs-costs of negotiating the trade and agreement. Has to help buyers and sellers overcome
1. physical costs- distance between people was a big barrier prior to the internet. The internet took this barrier away.
2. Ignorance of opportunity- Don’t need to know all opportunities in market economy. This is due to search costs.
3. Interference- Barriers and laws. Ex. People need a license to cut hair.
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