Question

Patrick J. Buchanan, a political commentator and former presidential candidate, argued in his book on the global economy that there is a flaw in David Ricardo's theory of comparative advantage: Classical free trade theory fails the test of common sense. According to Ricardo's law of comparative advantage \(\ldots\) if America makes better computers and textiles than China does, but our advantage in computers is greater than our advantage in textiles, we should (1) focus on computers, (2) let China make textiles, and (3) trade U.S. computers for Chinese textiles.... The doctrine begs a question. If Americans are more efficient than Chinese in making clothes \(\ldots\) why surrender the more efficient American industry? Why shift to a reliance on a Chinese textile industry that will take years to catch up to where American factories are today? Do you agree with Buchanan's argument? Briefly explain.

Short answer

We don't necessarily agree with Buchanan's argument because it misses the concept of opportunity cost, which is at the heart of comparative advantage. Even if the US is more efficient in both clothing and computer production, it doesn't mean it should produce both. The key is to focus on the production of goods that have the lowest opportunity cost -- where the US has a comparative advantage. This allows for a more efficient allocation of resources and increases global economic output.

Step-by-step solution

Understanding The Debate

First, it's crucial to understand the argument. Ricardo's law of comparative advantage suggests that a country should focus on what it's more efficient at producing (in terms of opportunity cost), and trade for the rest. Buchanan’s argument implies the U.S. should not abandon the industry where it has an absolute advantage.

Comparative vs. Absolute Advantage

It's important to clarify the definition and difference between comparative and absolute advantage. Absolute advantage refers to being more productive or efficient than others, it means a worker needs fewer resources to produce goods. Comparative advantage refers to the ability to produce a particular good or service at a lower opportunity cost than other entities.

Analyzing Buchanan’s Criticism

Buchanan's argument is based on absolute advantage, if US is absolutely more efficient in making both computers and textiles it should not abandon the textiles industry. However, this argument misses the point of comparative advantage. Even if one country is more efficient in producing both goods in terms of man-hours, there is still room for trade because of the differing opportunity costs of producing the goods in each country.

Final Thoughts

It's not a matter of abandoning an industry or not, but of where resources can be used most efficiently. Even if the U.S. has an absolute advantage in textiles and computers, if it has a higher comparative advantage in computer production, resources should be allocated there, and textiles should be imported from China. The theory of comparative advantage states that trade can lead to an increase in overall economic output that benefits both countries.

Key concepts

Absolute Advantage

Absolute advantage is a fundamental concept that helps us understand productivity differences between countries or workers. It indicates when an entity can produce more of a good or service using the same amount of resources as another. This means having a higher level of efficiency, often leading to competitive superiority in production processes.
For example, if the United States can produce 100 shirts using one day of labor, while China can only produce 50 shirts with the same labor, the U.S. has an absolute advantage in making shirts. This advantage arises because American workers are more proficient, using fewer resources, such as time, to achieve the same output. Understanding absolute advantage is crucial in analyzing production capabilities and efficiencies at an international level.

Opportunity Cost

Opportunity cost is a key element in economic decision-making, highlighting the cost of foregone alternatives when choosing one option over another. It helps countries decide what to produce and trade. In the context of trade, it's not about merely being good at producing a good, but rather about what you're giving up to produce it.
If the U.S. makes both computers and textiles but its opportunity cost for producing computers is lower (meaning they sacrifice less textile production than China would for the same increase in computers), it's beneficial for the U.S. to focus on computers. Selecting to produce goods with the lowest opportunity cost ensures the most efficient allocation of resources, maximizing economic output and benefits.

International Trade Theory

The international trade theory, particularly Ricardo's theory of comparative advantage, suggests that countries benefit most from specializing in industries where they hold a comparative advantage. Despite Buchanan's critique, this theory isn't about abandoning industries where a country holds an absolute advantage.
Rather, it emphasizes optimizing resource allocation to maximize trade gains. By focusing on products where countries have the lowest opportunity costs, the overall economic surplus increases. Trade allows each nation to enjoy goods it can produce less efficiently by acquiring them from a country that produces them more efficiently, often leading to better products at lower costs for consumers globally.