Question

European Countries have invested heavily in manufacturing technologies to create or preserve their comparative advantage in the production of such things as turbines. In contrast, U.S. companies have exploited the comparative advantage of producing abroad, locating newer plants overseas and outsourcing jobs to countries with lower labor costs. Discuss the relative merits of the European versus the United States approach in terms of (1) maximizing the country’s well-being in the short-run and (2) in the long-run. Which country’s approach do you think puts investment dollars to their highest valued use and why? Explain your answer.

Answer 1

The relative merits of the European versus the United States approach in terms of maximizing the country's well being in the short run mainly includes fall in the cost of production and concentration of American companies on their core businesses. There is no doubt that in the short run this a good approach to lower cost of production and increase efficiency of firms. It also helps in concentration of firms on their core business by outsourcing other works in branches where labor cost is low. This has helped in increasing overall output in the short run for the American firms.

On the other hand, this approach is not a win-win situation in the long run. This is because it can be observed that employment rate in the United States has fallen and now the President is imposing tariffs on foreign goods production to encourage domestic production. The country has also put restrictions on the employment of foreign national in the nation. All these are measures taken to increase employment rate of the United States.

Thus, in the short run the United States approach is a good approach to increase output and reduce labor cost. In the long run, on the other hand, the European countries approach of investing heavily in manufacturing technologies for preserving the comparative advantage works.