Today, we learned about trade as we have been learning about in the past few weeks.
To begin, Prof. Rizzo explained to us how if you borrow money to increase productivity, it is not a problem even if the borrowing puts you into debt. Also, trade is always perfectly even.
We also learned about how when the US government spends more money than it takes in taxes, US needs to pay off its debt. A lot of countries such as China may buy off some of US debt because they will eventually get paid plus a 3-4% return rate per year. Doing this also keeps interest levels lower in the us.
Trade statistics are really not meaningful entities as well. Consider the trade deficit and surplus between NC, SC and the rest of the US. If NC and SC succeeded from the union, nothing would happen to them, which is proof of the aforementioned postulate.
Prof. Rizzo went on to show us a fascinating example of how inefficient "buying local" is. A group of college students at a Philadelphia-based college made a suit only with materials from towns/companies that were within a 100 mile radius of the school. It took 500 hours to produce the suit that really wasn't great quality and cost the equivalent of $10,000 to make. It would have cost a lot more on the open marker to sell.
Another example Prof. Rizzo shared was that of the Whirlpool Call Center. Let's say there are 1,000 people who work as call receivers at Whirlpool. But, we decide to send those jobs over to India. Each job loss will crush the employees because the job loss is worth about $100,000 per worker (when you take into account all the benefits that were associated with the job, plus any additional costs the worker incurs due to the loss of his/her job). This equates to about $100 million in savings for the company/loss for the workers who were laid off.
The only reason why Whirlpool would do such a thing is because it would reduce prices for consumers. Prof Rizzo says that by outsourcing these workers, whirlpool prices would reduced by $2 per unit. But when you consider how many products are sold, this would be worth the cutting of jobs to send over to India.
Then we learned about trade's impact on the environment. Nations with the highest environmental standards tend to attract the greatest investments.
Trade does two good things for the environment:
-It leads to more environmental consciousness
-Specialization through trade reduces congestion on land- we don't need to fill everywhere with farms. Instead, we can get certain things from different places, which reduces land congestion.
An important thing to consider: Trade gives us more money to spend on other things.
Class concluded with some final notes. They are below:
Adam Smithian notions of trade: When you specialize, there is much less time spent at job doing other things. You have more time to spend on perfecting a specific craft, which leads to more production. Also, specialization allows us to develop knowledge and capital where you otherwise wouldn't be able to. For example, Prof. Rizzo has an incentive to increase his knowledge of economics because that is what he specializes in. He doesn't have to waste his time on chemistry and other subjects. Finally, specialization allows you to expand in market and lowers costs.
Ricardian notion of trade: All has to do with comparative advantage. Trade lowers costs when you take into account which person/group does a task with the lowest opportunity cost and does the tasks that you are most efficient at. By doing this, other people can do the same thing and then everyone in general is more efficient/better off.
-In economics, people valuing stuff at different values is important for trade to happen/for a marker to exist.
At the very end of class, Prof. Rizzo began to talk about supply/demand:
Transaction costs- the cost of negotiating contracts and agreements. Simply put, it is the cost of arranging for a trade to happen. There are three of them that an economy has to help buyers and sellers overcome:
1. Physical- the physical distance among potential traders
2. Ignorance of opportunities - in marker economies, we don't need to know all information before making a trade
3. Interference
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