Question

Professor Frank Wolak argues that countries with low-priced labor, such as China, have a comparative advantage over the United States in manufacturing goods that are labor-intensive. He also posts that the U.S. has a comparative advantage producing goods that are more capital-intensive (needing more physical capital, i.e., machinery, and/or human-capital, i.e., knowledge). He presents this as an argument for why goods are developed in the U.S., but manufactured in China or other low-cost labor countries.

Knowing what you have learned about comparative advantage and gains from trade, do you agree with Professor Wolak's argument? Why? (I'm looking for understanding of the concepts of comparative advantage, how you calculate it, etc.)

The article "Our comparative advantage" was written by Professor Frank Wolak to debate the topic of green energy, but what other industries could it apply to?

Professor Wolak describes a trade situation where, because of comparative advantage, even though manufacturing jobs are lost to China, the U.S. as a whole will benefit from paying cheaper prices for the items and technologies produced. Do you agree?

Let's keep this to economic analysis and leave politics out of it.

Answer 1

Answer) I will answer the given question in following 4 parts

1. Concept of comparitive advantage and subsequent gains from trade
2. Professor Wolak 's given argument about comparitive advantage
3. Which other industries we can apply comparitive advantage on
4. On a whole,looking at Professor's statement

1. Concept of comparitive advantage and subsequent gains from trade

When we talk about comparitive advantage,what we are actually looking at is specialization and opportunity cost,suppose you and your friend has to set up a juice and sandwitch stall for a college festival,now you make 10 glass of juices and 20 sandwitches in 1 hour,while your friend makes 20 glasses of juices and 10 sandwitches in 1 hour,now either you both can continue doing the same and come up with 30 sandwitches and 30 glasses of juices in together in 1 hour or you can specialize in what you have lesser opportunity cost,that i you for making 1 sandwitch has to give up 1/2 glass of juice while your friend for making 1 sandwitch has to give up 2 glasses of juice,so you have lesser opportunity cost compared to your friend and should make sandwitches,for same example,your friend therefore would have lesser opportunity cost in making juices compared to you and should make juices,now you making sandwitches and your friend making juices will give you 40 sandwitches and 40 juices together in 1 hour ,now the gains from such specialization are 10 extra sandwitches and 10 extra juices and this is what in general is gains from trade,so this concept of comparitive advantage is applicable at country level too as different countries have comparitive advantage in different products owing to resources,geography and other factors.

2.Professor Wolak 's given argument about comparitive advantage-Professor is right,as explained above comparitive advantage is very important for companies in terms of costs and resources deployed and it benefits countries involved as well,in fact low cost labour is what a lot of companies seek in such countries and this is the reason why some of these countries are manufacturing hubs of the world.

3. Which other industries we can apply comparitive advantage on-Comparitive advantage is not just limited to green energy,but is present in industries such as automobile or gadgets manufaturing where parts are assembled in low labour cost countries,another could be tele communications such as tele sales or tele support or customer support where you need abundant salesforce,low labour countries with high and skilled population is the answer.

4. On a whole,looking at Professor's statement-It is indeed beneficial for US as a country because it allows it to do what it does best and focus on that,in fact such specialization and comparitive adbvantage is beneficial for both countries involved and as they save their costs ,they can use them for development projects in their countries too which can produce equivalent jobs alongside development,so on a whole it is just ensuring that US is doing what it can do with lesser opportunity cost which allows it to benefit in the whole process.