Aug 29 2007

Comparative advantage, plain and simple

Published by at 11:33 pm under Comparative advantage,Specialization,Trade

Managing Globalization » Business Blog » International Herald Tribune » Blog Archive » Employment versus the environment?

This article represents the perfect example of comparative advantage. Almost a textbook version of the concept of countries producing the types of products for which they have a lower relative opportunity cost than other countries. Read this very short article and discuss below how this illustrates the basic concept of comparative advantage, specialization and trade. What decision should the European Commission make and why should they make it?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

16 responses so far

16 Responses to “Comparative advantage, plain and simple”

  1. Howard Linon 30 Aug 2007 at 2:18 am

    It illustrates the opportunity cost, "European Union is not the optimal place to produce the bulbs. Importing them from China would free up resources that could be used more efficiently".

    I think that the European Commision should make the decision of letting china to produce light bulbs, and European country should specialize in something else that would have a lower cost. Or a higher comparative advantage. In order to calculate this, the European Commision needs to first evaluate the comparative causes.

  2. Claire Mon 30 Aug 2007 at 7:30 am

    I agree with Howard that the European Commision should make the decision to let china produce light bulbs, and European countries to specialize in some other products. However, I am wondering whether the decision could be made easily and all the decisions could be actually made by the European Commision

  3. Trevor Sunon 30 Aug 2007 at 8:08 pm

    I think this is an interesting situation for the British; whether to bring in cheaper and more efficient light bulbs at the cost of their own domestic workers jobs. The most economical solution would be to specialize in something else and let the imported bulbs in. However the British must be willing to cover for the workers that will lose their jobs, for example by teaching them a new trade. This way they would be able to maximize their labor instead of having however many workers idle without jobs,

  4. kevin maon 30 Aug 2007 at 9:28 pm

    I agree that they should let China produce the light bulbs and use the resources for something more efficient. But that can cause problems such what about all the people who just lost their jobs? Where will they go? I also found it funny how the importing companies are the main backers of the idea, not the people who want cheaper and more efficient lightbulbs.

  5. robertwangon 30 Aug 2007 at 9:38 pm

    From a pure monetary profit aspect, I believe the EU should cease to produce light bulbs and simply buy the cheaper ones from China. Here, China has the comparative advantage, and they have a larger population that can be dedicated to specialize in that industry. In addition, this would also promote trade between the EU and China, a nation that the EU would benefit largely in the future as well as the present from as at trading partner.

    From a collective point of view, I think the EU should consider a gradual transition out of the producing light bulbs. This is due to two reasons. One, China lately has been producing many faulty products (a drug that has killed at least 11 people for whom the FDA guy in the Chinese government has suffered the death penalty). Two, a sudden switch out of the industry will leave many people jobless, but a gradual one can teach them a new line of work to eventually switch them out.

  6. Michael Dailyon 30 Aug 2007 at 10:02 pm

    Obviously, the British should let the tariff drop and have their resources used in areas more efficient. However, the major marginal cost of this would be having to lay-off many English workers. In terms of the world economy the choice is obvious, but no country wants to increase their unemployment.

  7. Alex Goldmanon 30 Aug 2007 at 10:21 pm

    In this situation, China holds both comparative and absolute advantage in making lightbulbs. If the EC drops the tariff and imports lightbulbs it's likely that there will be a great deal of cutbacks, resulting in social unrest. In the long run, importing lightbulbs from China will be beneficial because it allows Britain to allocate its resources to a business sector it specializes in. The job losses to China are an unfortunate result, but by making that sacrifice Britain will ultimately benefit. That's Globalization.

  8. Drew Venkatramanon 30 Aug 2007 at 11:19 pm

    Although China holds the absolute and competitive advantage in the lightbulb making process. The political and social ramifications also have to be considered. If you are to strip people of their jobs for cheaper lightbulbs the amounts of riots could be huge. However if you have the consumer on your side its hard to tell how it will play out. Obviously the move should be made to China for the sake of financial benefit

  9. Rebecca Sungon 30 Aug 2007 at 11:20 pm

    I agree with Rob that from a money point of view, the EU will benefit from having all its lightbulbs produced in China. China has botht he absolute and comparative advantage in this resource. With the EU having China produce all of its lightbulbs, tHis will free up the EU's resources to produce other products.

    In the case of actually trusting the efficiency of the lighbulbs, it's a risk. As Rob said, China has been producing faulty exports like pet food and toothpaste. In looking it this way, I think that the EU should wait until China has proven itself to be a safe exporter.

  10. Jonathan Lauon 31 Aug 2007 at 12:03 am

    The EC should let China be the ones to produce lightbulbs. First of all, in this situation, China has both the absolute and comparative advantage because it can produce more lightbulbs with the same amount of resources as well as produce the lightbulbs at a lower opportunity cost than the EU can. And second, although it would mean unemployment for a few thousand people, it makes sense for the long run because it would mean the EC would be able to allocate and produce goods/services that it specializes in.

  11. Hansen Guon 31 Aug 2007 at 12:33 am

    Yes, the EC should allow for China to enter their market by lowering the tariffs. This will indeed cause a flood of Chinese light bulb products. However, let's examine the self-interest aspect. For the consumers, they are receiving a cheaper, more energy efficient bulb. Yes, there are risks involved with the recent Chinese deficiencies but I believe that if China were to enter the European market, they would naturally strive to increase the quality to match that of what it was with Siemens. For the importing companies and suppliers, they would increase their margins of profit because the production cost is so much lower. And for the government, the EC has a comparative advantage in other areas over China. Redirecting and re assimilating the idle workforce will only make a positive impact in the long run.

  12. Dana Yeonon 31 Aug 2007 at 5:24 am

    Unemployment is a huge issue that affects almost all countries; there are no countries that have perfect full employment like economists assume in production possibilities curve. Thus, I believe that it is not only logical but beneficial for the European Union to import light bulbs from China. This is especially true as China has both the absolute and comparative advantage over the European Union in the production of light bulbs. Like we studied, if light bulbs are manufactured in Europe, Siemen workers might get their jobs, but they will have higher opportunity costs. Thus, I suggest that Europe find something else to specialize in and let China produce light bulbs.

  13. Angel Liuon 31 Aug 2007 at 11:44 pm

    It is logical for EU to trade with China, but I don't think the European Commission should eliminate duties on MIC lightbulbs. Our economics should function under laissez-faire. Furthermore, from a business class discussion, we discussed that there is a growing social stratification in western Europe due to high opportunity cost on resources and inadequate service positions for its population. Right now in the European lighbult market, there is competition between European-manufactured and MIC lightbulbs; competition would force European manufacturers to either decrease their cost or move away from this industry, and such subtle change would not create public frustration. Therefore, i believe that the best solution is not to eliminate duties on MIC lightbulbs, instead let public demand and price determine their desired good.

  14. Ji Eun Hwangon 02 Sep 2007 at 10:16 pm

    I think the EU will have to switch to importing lightbulbs from China.

    Opportunity cost will be huge if the EU continues to produce lightbulbs in Europe, because the EU can raise more profit by investing in other markets. Other than the production of lightbulbs, the EU is technologically more advanced than China is. Therefore, the EU can make more profit with allocating its resources for other consumer goods in which it has more advantage over China (such as semiconductor production, etc.).

    However, transferring to producing other goods will take much time as indicated in a typical Production Possibilities Curve. Because resources are scarce and it is inflexible that the resources used for the production of lightbulbs cannot simply turn to producing other goods. For example, the workers for lightbulbs should learn how to produce or take a part in producing other goods and thus take more time to get used to it.

    Although a substantial amount of time is required, a change is definitely needed for the future economy.

  15. Calvin Luon 03 Sep 2007 at 7:05 pm

    This will be a hard one because the importance of the opportunity cost on both decisions is pretty much the same. Either save the world or save the people. Since I won’t be affected by unemployment, I think they should lower the duties, since the world is more important than the population. We can live without full employment, but not without a world.

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    Comparative advantage, plain and simple | Economics in Plain English