3.3. Misconceptions About Comparative Advantage Flashcards
Productivity and competitiveness
Free trade is only beneficial if a country is more productive than foreign competition.
This is false.
Even unproductive countries can benefit from free trade by avoiding high costs for goods that it would otherwise produce domestically.
Benefits of trade depend on comparative advantage, not absolute advantage.
In the numerical example in Google Docs 3.2. Home has the absolute advantage, yet both Home and Foreign gain from trade.
Pauper labour argument
Free trade with countries that pay low wages hurts high wage countries.
While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers.
Consumers benefit as products are cheaper.
Producers / workers benefit by earning higher income in the industries that use resources more efficiently.
Explotation
It is important to consider what the alternative to working in demeaning industries is.
If Foreign refused to trade with Home, complaining about the low wages, real wages would fall even lower.
The relative was in Home is 3, with the relative wage in Foreign equal to 1/3.
If Foreign refused to trade, their relative wage would fall to just 1/6 pound of cheese.
This means that workers in Foreign benefit from international trade with Home, as it causes higher relative wages.
