Economics Questions

Re: Multi-party comparative advantage

Smiling Dave — Tue, 10 May 2011 14:11:35 GMT

Andris,

I hope we are assuming that A, B and D together do not provide all the world's needs, leaving C with nothing to do, for that is an uinrealistic assumption, as AE emphasizes.

So that C focuses on what there is a scarcity of, that either A, B, or D do not do best [w.lo.g it's furniture], and gets in there making furniture for A, freeing up A's time for cars.

Here's a bit of Mises on the subject:

Ricardo’s first aim in expounding this law was to refute an objection
raised against freedom of international trade. The protectionist asks: What
under free trade will be the fate of a country in which the conditions for any
kind of production are less favorable than in all other countries?

Now, in a
world in which there is free mobility not only for products, but no less for
capital goods and for labor, a country so little suited for production would
cease to be used as the seat of any human industry. If people fare better
without exploiting the—comparatively unsatisfactory—physical conditions
of production offered by this country, they will not settle here and will leave
it as uninhabited as the polar regions, the tundras and the deserts.

But Ricardo
deals with a world whose conditions are determined by settlement in earlier
days, a world in which capital goods and labor are bound to the soil by
definite institutions. In such a milieu free trade, i.e., the free mobility of
commodities only, cannot bring about a state of affairs in which capital and
labor are distributed on the surface of the earth according to the better or
poorer physical opportunities afforded to the productivity of labor. Here the
law of comparative cost comes into operation.

Each country turns toward
those branches of production for which its conditions offer comparatively,
although not absolutely, the most favorable opportunities. For the inhabi-
tants of a country it is more advantageous to abstain from the exploitation
of some opportunities which—absolutely and technologically—are more
propitious and to import commodities produced abroad under conditions
which—absolutely and technologically—are less favorable than the unused
domestic resources.

The case is analogous to that of a surgeon who finds it
convenient to employ for the cleaning of the operating-room and the
instruments a man whom he excels in this performance also and to devote
himself exclusively to surgery, in which his superiority is higher.

Re: Multi-party comparative advantage

Andris Birkmanis — Tue, 10 May 2011 06:53:19 GMT

Dave:

A is great at making cars, average at making furniture, average at flipping burgers.

B is great at making furniture, average at making cars and flipping burgers.

C sucks at everything.

Introduce D, who is great at flipping burgers. C (in short term) is out of luck - though he may still survive by working for much less than the proficient A, B, and D. In longer term, he will learn a skill, or invent a new service - or remain a marginalised (possibly temporary worker), occassionally benefiting from charity.

In case where parties are not persons but countries, labor and capital will tend to migrate from C until the marginal product in other countries lowers to that in C (if ever - otherwise C will become a ghost country).

Jack Roberts:

I might have miss understood the question and what legal barriers are you referring to in this instance ?

It looks like you understood me correctly. By legal barriers I mean the usual laws the countries have to prevent mobility of labor and capital.

The reason I started the thread is trying to understand, how my country of origin can survive (meaning avoiding the ghost town scenario).

Re: Multi-party comparative advantage

Jack Roberts — Mon, 09 May 2011 23:57:05 GMT

Sometimes people will have to use the supplier of a good that is not their first choice for a variety of reasons. Availability, cost, urgency etc. If the good has a demand that is not met by the A or B then C will be able to fill some of that demand. If the demand is met by A and B then C would have to try and improve his good or try something else.

I might have miss understood the question and what legal barriers are you referring to in this instance ?

Re: Multi-party comparative advantage

Smiling Dave — Mon, 09 May 2011 23:44:32 GMT

Even if C does everything worse than A and also everything worse than B, everyone stands to profit by division of labor if A and B do some things better than others. For instance, assume:

A is great at making cars, average at making furniture, average at flipping burgers.

B is great at making furniture, average at making cars and flipping burgers.

C sucks at everything.

Then everyone [A, B and C] is best off if A makes the cars, B the furniture, and C flips the burgers.

The books on the subject do the math for you, but the basic idea is this. Since C flips the burgers, he frees up valuable time for A and B to make what they are great at in greater quantity and quality, thus lowering prices and increasing the standard of living for all.

Re: Multi-party comparative advantage

Andris Birkmanis — Mon, 09 May 2011 23:02:52 GMT

C does NOTHING better than the best of A and B. Therefore, it will only trade if the capacity of the best producer (either A or B) is not enough to meet the demand.

I realize that no economy is fixed, and new goods/areas will appear, or new technological developments will change the playing field. Still, any thought experiment always relies on some simplifications.

Re: Multi-party comparative advantage

Merlin — Mon, 09 May 2011 22:53:36 GMT

In your example you have a market of three guys and 100 services/goods. There goes the answer, A will specialize in the 34 things he does best (the top 34 of the list), B in his 33 things (bottom 33 of the list) and C the rest (the middle 33 of the list).

Multi-party comparative advantage

Andris Birkmanis — Mon, 09 May 2011 22:44:58 GMT

I must be missing something obvious...

In the case of two parties, it is highly probable that each of them will have a comparative advantage in at least some area - except a very unlikely situation of efficiencies being in a perfect linear correspondence.

However, the more parties there are, the more likely is a situation in which one party has no comparative advantage at all. E.g., for 100 areas, let's A's efficiency be 100, 99, ..., 2, 1, B's efficiency be 1, 2, ..., 99, 100, and C's efficiency 50, 50, ..., 50. A and B can trade for mutual profit, but C can enter the trade only if the capacity of A or B is not sufficient (which in long term corrects, possibly without changing the efficiencies much). What will happen to C? Will its labor and capital gradually migrate to A and B (even despite heavy legal barriers)?