#comparativeadvantage

International trade serves as a cornerstone of the global economy, facilitating the exchange of goods and services across borders and driving economic growth. At the heart of international trade theory lies the principle of comparative advantage, a concept pioneered by classical economists such as David Ricardo. In this article, we delve into the principles of comparative advantage, exploring its…

1. I was very surprised by the story of Russia’s change in pricing. It’s hard to imagine, as an American, the government having so much control over goods. I definitely think the Russian government realized that they cannot control pricing or they will ultimately fail.

2. International trade is good because it strengthens a country in both what they are best at doing and balances them with what they lack or do not have a comparative advantage in.

3. My opinion on trade stayed the same but I have also already had a fair amount of knowledge on this topic from previous business classes.

4. I try to purchase more locally if possibly and it can be much more expensive. I just recently bought an iPhone case. Apple cleverly puts “designed in California, assembled in China.” I found an article about it and it has a very interesting answer as to why Apple doesn’t produce/assemble their products in the US. The labor force and infrastructure simply cannot keep up with Apple’s needs. Judging by the cost of this case ($35), I’d assume if it were made in the US by Apple, it may be even double the price. There are locally produced options that I could have chosen. Etsy is a great site for finding handmade products produced locally. The only issue I find is that we do not know where the materials are coming from. I think I chose a fairly difficult product to compare. I don’t think there would be a trade-off. I actually think paying more for an iPhone case made in the US would have its perks because if I decided to go with a handmade case versus factory, it would more than likely be a higher quality. My case is very nice material (silicone) but I did sacrifice uniqueness when buying something obviously made in a factory.

In this post I will talk about economic thinking. Just to be explicit, no need to look for any is subtext about energy policy, globalization, industrial policy or political ideology in what follows.

Mr. Winkley notes “Africa’s richest man” announced plans to build an oil refinery in Nigeria, and comments, “Rather ridiculously, Africa’s biggest oil producer relies on imports for 80% of its fuel needs.”

I agree that sounds ridiculous at first blush.

However, thinking a bit more on this, why does it follow that a country that exports raw materials and simultaneously consumes products made (primarily) from those raw materials would be better off were it instead to manufacture the those products domestically?

The production of the raw materials and the production of the finished products are distinct activities.

For any activity, economic thinking suggests that the question of whether or not to engage in that activity depends on the efficiency of specializing in those activities in which you have a comparative (cost) advantage.

It might be cheaper for a country to export cotton and simultaneously import cotton fabrics than for that country to make those fabrics internally. Production of the finished goods requires other resources, different human skills, and perhaps economies of large scale production that may not be available or feasible in the country that produces the raw cotton.

As a result, even if a country produces cotton, it may be more expensive to domestically produce cotton fabrics than to import cotton fabrics. In other words, domestic prices of cotton fabrics to consumers would be higher if the country attempted to produce those fabrics domestically.

Applied broadly, Winkley’s statement actually makes no sense – from the perspective of economic thinking – specifically, he is saying that a country with raw materials and domestic consumption of goods made from those should manufacture those goods domestically, irrespective of the relative cost of doing so.

I don't know enough about the economics of oil refining, scale economies in refining, local availability and cost of appropriately skilled labor, crude oil and refined product transportation costs, etc., to evaluate the economic benefit of domestic production of refined crude products for Nigeria. But it may make perfect sense that cost differences have been part of the reason why Nigeria imports most of its refined oil products.

If it is more costly for Nigeria to produce its own refined products than to import them, then the current status is not ridiculous.

From an economic perspective, the decision by Africa’s richest man to build a Nigerian oil refinery could be positive or negative news.

It could be a triumph of entrepreneurship or reflect changes in the economics of oil production, perhaps reflect accumulated local growth in the society's wealth and prospects.

Or the decision to build such a plant may represent a wealth grab, where the (possibly) increased domestic cost of refined products to local consumers that will result will be borne by the populace generally, while Mr. Dangote is the prime beneficiary of the revenues generated.

I do not argue here that all things must be understood exclusively in terms of economic thinking.

There may be excellent reasons, not related to economic thinking, for Nigeria (as a national industrial policy matter) to increase its domestic production of refined crude products. It may be a national energy security issue. Or, it may be a national development policy. As Dani Rodrik has argued, extreme globalization (i.e., making all decisions based purely on this type of economic thinking) is not practical or desirable because it conflicts with the ability of individual countries to pursue social and development strategies that respect local priorities, customs and institutions.

A fascinating look at why stuff is made in China.  Economies of scale and cheap labor = comparative advantage.  Also some interesting stuff about transactions costs.