Note: this lecture has two parts, one on foreign wages and the other on the balance of trade

1. Foreign Wages

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

2. Trade Balance

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