BENEFITS OF SPECIALIZATION

IMPORTANCE OF TRADE

As its volume has increased, trade has become more important to the economic well-being of many countries. For example, in the early 1960s, the United States bought less than $1 billion of foreign cars and parts. By the late 1980s, this figure had increased to more than $85 billion. During the same period, financial ties between the United States and the rest of the world also increased significantly. The number of foreign banking offices operating in the United States rose from fewer than 40 to more than 800, and the amount of money foreigners invested in U.S. companies, assets and real estate—called direct foreign investment—was 20 times greater in 1990 than in 1970. Gross transactions of long-term U.S. government securities by foreigners rose from $144 billion in 1978 to $5.6 trillion in 1991. Since 1950, the costs of international transportation and communication have been drastically reduced, making it easier to conduct business across borders. The economies of many countries have become more closely tied together than ever before.

Because countries are so closely linked, economic trends and conditions in one country can strongly affect prices, wages, employment and production in other countries. This condition is referred to as interdependence. Events in Tokyo, London and Mexico City have a direct effect on the everyday lives of Americans, just as the impact of events taking place in New York, Washington and Chicago is felt around the globe. If stocks on the New York Stock Exchange plummet in value, the effects are not limited only to the, United States; news is transmitted worldwide almost instantly, and stock prices all over the world might change. If factory workers in Taiwan go on strike, prices of Taiwanese toys may be forced up in Europe, Asia and North America. Interdependence means that countries have to work together more closely, and, to a certain extent, rely on each other for prosperity. Let's take a closer look at how this works.

WHY NATIONS TRADE

International trade occurs because there are things that are produced in a particular country that individuals, businesses and governments in other countries want to buy. Trade provides people with a greater selection of goods and services to choose from, often at lower costs than at home. But what makes trade profitable and productive for both trading partners?

In order to become wealthier, countries want to use their resources—labor, land and capital— as efficiently as possible. However, there are large differences in the quantity, quality and cost of different countries' resources. Some countries have natural advantages, such as abundant minerals or a climate suited to agriculture. Others have a well-trained workforce or highly developed infrastructure, like good roads, advanced telecommunications systems and reliable electric utilities, that help the production and distribution of goods and services.

BENEFITS OF SPECIALIZATION

Instead of trying to produce everything by themselves, which would be inefficient, countries often concentrate on producing those things that they can produce best, and then trade for other goods and services. , By doing so, both the country and the world become wealthier. Suppose the mythical of Cottonland is very efficient at producing cloth, but not at making furniture. By dividing its resources evenly between its cotton and furniture industries, Cottonland is able to produce eight bales of cloth and four pieces of furniture each day. The economy of its neighbor, Woodland, is just the opposite; it produces eight pieces of furniture in a day, but only four bales of cloth.

Further, suppose a piece of furniture is the same price as a bale of cloth. In Cottonland, where a bale of cloth can be produced in an hour, but a piece of furniture takes two hours, it makes sense to make a lot of cloth and trade the surplus for furniture. Conversely, for greater productivity, Woodland should direct all of its resources to making furniture.

If Cottonland can produce eight bales of cloth using half of its resources, it will double its cloth production to 16 bales a day by transferring all of its resources to its cloth industry. By doing so, however, Cottonland would eliminate its furniture industry. Nevertheless, Cottonland would become wealthier; it would have as much cloth as before, plus more cloth to trade for other things that it wants, such as Woodland's furniture. (More accurately, people in Cottonland will buy some of Woodland's currency on the foreign exchange market and use it to buy furniture; Woodland will do the opposite to buy cloth. But more on that later.)

Before the two countries directed their resources into their most productive enterprises, total production for both countries stood at 12 pieces of furniture and 12 bales of cloth. After the shift in resources, production increased to 16 bales and 16 pieces. Each country can now trade its surplus goods.

Through specialization and trade, the supply of goods in both Cottonland and Woodland increases; more supply tends to bring prices down, making the goods more affordable. In addition, trade provides a wider variety of goods to consumers: salmon from Scandinavia, bananas from South America and cameras from South Korea, to name just a few of the many thousands of products that trade makes available. If countries did not engage in trade and instead limited their consumption to what they produced at home, consumers would not live nearly as well.

Today, most industrialized nations could produce almost any product they chose. For instance, the United States could conceivably devote all of its resources to the production of tropical fruits. The United States could compensate for an unsuitable climate in certain areas by clearing and fertilizing land, building hothouses, developing new irrigation techniques and retraining workers—no tropical fruit would ever need to be imported and there would plenty left over to export. However, this does not make good economic sense. Much of the labor, land and capital that would have to be directed toward the tropical fruit industry could be used more efficiently in other industries. Countries achieve greater total wealth by devoting more resources to their most productive industries.

Date: 2015-12-24; view: 1003