Trade and Comparative Advantage - The PPC is bowed because individuals specialize in the production of goods for which they Have a comparative advantage. - For a society to produce on its PPC, individuals must produce those goods for which they Have a comparative advantage and trade for other goods. - According to Adam Smith, humankind’s proclivity to trade leads to individuals using them Comparing advantage Application: U.S. Textile Production and Trade - Two hundred years ago, the U.S. had a comparative advantage in textile production - Now, countries with cheaper labor (such as Bangladesh) have the comparative Advantage in textiles - The gains from trade are higher wages for workers in Bangladesh and lower-priced cloth For U.S. consumers Outsourcing, Trade and Comparative Advantage - Outsourcing - Outsourcing is the relocation of production once done in the United States to foreign Countries - Outsourcing occurs because many other countries have a comparative advantage in Labor costs - The U.S has comparative advantage in technology, institutional structure, and Specialized knowledge - Globalization - Globalization is the increasing integration of economies, cultures, and institutions Across the world - A positive effect of globalization is that it provides larger markets than the domestic Economy - The global economy increases the number of competitors and this increased Competition can be a negative effect of globalization. - Exchange rates and comparative advantage - The U.S. comparative advantage in innovation results in higher wages in the U.S - As industries mature, they move to lower wage countries - To regain our comparative advantage, the U.S exchange rate will decline and Foreign wages will increase to make U.S exports cheaper and imports to the U.S more. Expensive - The law of one price - The law of one price is the wages of equal workers in one country will not differ Significantly from the wages of workers in another institutionally similar country - If the U.S. loses its comparative advantage based on technology and institutional Structure, U.S wages will decrease relative to wages in many other countries