Note: this lecture has two parts, one on foreign wages and the other on the balance of trade
To listen to this part of the lecture, click here.
We understand comparative advantage when it comes to individuals--getting your shirts laundered, having your lawn mowed, eating out
We understand comparative advantage when it comes to states in the U.S.--Iowa in corn, Silicon Valley in high tech, Las Vegas or Orlando in leisure/vacations, St. Louis in medical care
But we are suspicious of other countries' low-wage workers
Impersonal prices--no difference between trading with a high-wage country or a low-wage country; regardless of wages, America is more likely to export agricultural products than manufactured goods to Japan
Wages determined by productivity--trade cannot lower wages unless it lowers productivity; more likely to raise productivity than to lower it
Effect of outsourcing on wages--rising rapidly in India
Key Points: comparative advantage does not stop at the border; trade is advantageous regardless of whether the other countries' wages are high or low; our wages are tied to our productivity, not to their wages
To listen to this part of the lecture, click here.
Imagine a barter economy
One country prefers future output
Trade deficit = borrowing, trade surplus = saving
saving up leads to interest rates down, leads to cheap currency, leads to trade surplus
borrowing up leads to interest rates up, leads to expensive currency, leads to trade deficit
Our deficit about 6 percent of GDP--very large historically
Lucky to be denominated in dollars
Two deficits: government budget deficit and private investment-savings deficit
Global savings glut?
Asian Reserve Accumulation?
Hard landing? Soft landing? Does it matter?
Wealth effects; expenditure switching