I am trying to clue you in on how trade works, Ann. Not the rhetoric you hear, but the facts.
The Ricardian Model
Suppose that the United States can produce 6 cars per worker per year, and 90 tons of wheat per worker per year. Suppose that the rest of the world can produce 4 cars per worker per year, and 50 tons of wheat per worker per year. The United States is more productive in both industries, which means that the U.S. has an absolute advantage in both. The naive view is that the United States cannot gain from trade, because we are more efficient. But we can show that this view is wrong.
Suppose that Americans like to spend half of their income on cars and half their income on wheat, and that we have 100 workers. If we do not trade, then half of our workers will make cars and half will produce wheat. With 50 workers producing cars, we produce 300 cars. With 50 workers producing wheat, we produce 4500 tons of wheat.
Next, suppose that we can trade. We can specialize in producing wheat, so that 100 workers produce 9000 tons of wheat. Then, we keep 4500 tons of wheat and trade 4500 tons of wheat in the world market.
In the world market, 50 tons of wheat can trade for 4 cars. If a car costs $10,000, then a ton of wheat will cost $800. So our 4500 tons of wheat can trade for 360 cars.
With no trade, we produce and consume 4500 tons of wheat and 300 cars. With trade, we produce 9000 tons of wheat, but we consume 4500 tons of wheat and 360 cars. We export 4500 tons of wheat and import 360 cars. The opportunity to trade increases our ability to consume by 60 cars compared with no trade. |
