Class Summary #24 for 10/28/11

Today in class, we learned about a variety of different economics topic.

To start, Prof. Rizzo began class touching on a topic he went over frequently last class: If you are concerned with trade costing jobs, then you must be concerned with everything else that costs jobs as well. This includes technology. But as Prof. Rizzo points out, he doesn't see anyone doing that so why do people do that with trade?

What is it that decides whether a job gets shipped over season? Two notions:

• Absolute advantage
• Comparative advantage

Then we learned a formula: How much more stuff I can produce with one more hour of work. Thus, the following formula allows us to calculate an opportunity cost of how much I am giving up by not doing an extra hour of work:

Wages

______________________ = (this is an example)---> 

Marginal product of labor

China:

$8 hr

_____________ = $2/unit

4 units per hr 

US:

$30 hr

______________ = $1.50/unit

20 units per hour

Thus, US is more efficient because one's productivity is what matters. It is not just how much a wage is. It is also about what is a person's ability to produce  with a certain wage. One needs to know the wage amount and productivity among all sectors to determine who is more productive.

In short, productivity reduces manufacturing and jobs (in technology, it takes over jobs because technology is more productive than the person working).

Here are other important notes from class:

• Trade surplus does not necessarily create job
• Today, we are capable of growing triple the amount of food we did in the past on a smaller scale of land. This is a reason why agricultural employment has been reducing
• Trade deficits also don't create and/or destroy jobs
• You pay for imports with exports
• When you specialize, you get richer. This is known as the "income effect". 
• Because of specialization, trade will allow us to consume more more in turn creates more jobs
• A good example of trade deficit can be seen by Rizzo's relationship with Wegmans. Rizzo buys food from them, so he is getting food, yet he is not exporting to them. Therefore, there is an infinite trade surplus for Rizzo. Also a trade surplus for Rizzo with UR, because they pay him but he buys no merchandise from them.
• There is also a relationship between all of this: He exports knowledge to us, we pay him, and with that money he goes to buy food.
• Rizzo firmly supports trade- raw data shows trade creates jobs

Rizzo concluded class with a very important concept:

What happens when I buy $10 of toys from China? According to Rizzo, this is not a problem at all because the money has to come back to me in one form or another. If it doesn't come back to me, however, that is even better.

So lets say I buy $10 of toys from China, which is a merchandize trade deficit for me. With this $10, lets say a Chinese student pays $5 for education in America. Well than the other $5 could do three things that show it will come back to us:

1. Buy more American goods
2. Buy an American asset (mutual funds, etc.)
3. Buy a product from another country and that country uses the money on American asset at one point or another.

Prof. Rizzo also pointed out that if we rip up money, we are making every American richer because the US loses money in circulation, so the rest of the money in circulation is worth more and raises the value of American currency by however much we rip up.