Question

During the 1928 U.S. presidential election campaign, Herbert Hoover, the Republican candidate, argued that the United States should import only products that could not be produced here. Briefly explain whether this policy would be likely to raise average income in the United States.

Short answer

Herbert Hoover's policy of restricting imports to only goods that could not be produced domestically might not increase average income in the U.S. While it could potentially benefit certain domestic industries, overall it would likely lead to less efficient resource allocation, lower total output, higher consumer prices, and decreased real income.

Step-by-step solution

Understanding the Concept of Trade

Trade between countries allows them to specialize in the production of goods and services they have a comparative advantage in. This means they can produce these items more efficiently (at a lower opportunity cost) than other goods or services. This leads to a more efficient allocation of resources and an increase in total output and income within participating countries.

Evaluating the Impact of Import Restrictions

Implementing a policy that restricts imports to only products that could not be produced in the United States would mean that the U.S. would have to produce a wider range of products domestically. If the United States doesn't possess a comparative advantage in producing these goods, it would likely lead to less efficient allocation of resources, lower total output, and potentially lower average income.

Considering the Role of Domestic Industries

While such a policy might protect and perhaps even bolster incomes for workers in certain domestic industries, it could also lead to higher prices for consumers, which would likely decrease their real income. Furthermore, it would limit the variety of goods available to consumers.

Key concepts

International Trade

International trade allows countries to exchange goods and services across borders, benefiting from each other's strengths. By trading, countries can specialize in producing items where they hold a comparative advantage. This concept means they can produce these goods more efficiently compared to others.

For example, if one country can produce wine more efficiently due to favorable climate conditions, while another excels at producing technology because of advanced innovation, both countries can trade these goods to mutual benefit.

This specialization results in a more effective allocation of resources, enhancing total output and income for the countries involved. The overall efficiency of global production increases, sparking economic growth and improving standards of living.

Without international trade, countries would be forced to produce a range of products domestically, some of which they might not produce efficiently. This would lead to higher costs and reduced availability of important goods.

Trade Restrictions

Trade restrictions refer to policies that governments put in place to limit the import or export of goods and services. Such policies can include tariffs, quotas, and regulations. The intent behind these restrictions often revolves around protecting domestic industries and preserving jobs.

The 1928 proposal by Herbert Hoover suggested importing only goods that the U.S. could not produce. While this aims to support domestic production, it can also cause inefficiencies. If the U.S. lacks a comparative advantage in certain goods, producing them domestically could lead to unnecessary resource allocation and lower overall productivity.

Moreover, trade restrictions can result in higher consumer prices as domestic producers may charge more due to lack of competition from foreign goods. This might also lead to a decreased variety of products for consumers.

• Higher prices for domestic goods
• Less variety for consumers
• Potential inefficiencies in domestic production

In the end, while protecting local industries, such restrictions can dampen the economy's overall performance.

Economic Efficiency

Economic efficiency occurs when resources are allocated in such a way that maximizes total output and value. It's a state where goods and services are produced at the lowest possible cost and distributed in a manner that meets consumer demand.

Achieving economic efficiency involves making the most out of resources, often by embracing international trade and the principle of comparative advantage. When countries produce what they do best and trade for other necessities, they utilize resources optimally.

However, implementing trade restrictions can disrupt this balance. If a country attempts to produce goods without a comparative advantage, it can lead to an inefficient use of resources. The domestic economy might use more resources than necessary, resulting in higher prices and reduced consumption.

• Sub-optimal resource usage
• Higher production costs
• Decrease in consumer welfare

In essence, when trade restrictions hinder comparative advantage, the goal of achieving economic efficiency becomes much harder to attain.