How Does Global Trade Build Wealth? - Module 3

Introduction

In this section, Lon Schiffbauer introduces the topic of global trade and explains how it builds wealth for everyone involved.

Why do we trade?

• Countries that specialize in the manufacture of a product can do so more efficiently, which increases quality and decreases costs for customers worldwide.

Mercantilism

• Mercantilism is an economic philosophy advocating that countries should encourage exports and discourage imports.

• For the most part, mercantilism is an outdated concept replaced by ideas such as absolute advantage and comparative advantage.

Absolute Advantage vs. Comparative Advantage

• Absolute advantage is when a country has the ability to produce more of a good or service than anyone else.

• Comparative advantage is the ability of a country to produce a product at a lower opportunity cost than another country due to specialization.

Opportunity Cost

In this section, Lon Schiffbauer explains what opportunity cost is and how it relates to global trade.

What is Opportunity Cost?

• Opportunity cost is the value of what you have to give up in other words, what you can't produce because you're using those resources to make something else.

• The opportunity cost determines whether a country should make wine or cheese based on their finite resources.

Conclusion

In this section, Lon Schiffbauer concludes his lecture on global trade and its impact on building wealth around the world.

Final Thoughts

• Global trade builds wealth for everyone involved by allowing countries to specialize in producing goods they are best at making.

• By doing so, they can increase efficiency, reduce costs, and improve quality for customers worldwide.

• Comparative advantage is a better approach to building wealth than absolute advantage or mercantilism.

Absolute Advantage and Comparative Advantage

In this section, the speaker explains the concepts of absolute advantage and comparative advantage using a hypothetical situation involving France and Italy.

Hypothetical Situation

• France can make 20 units of wine or 10 units of cheese.

• Italy can make either 30 units of wine or 22 units of cheese.

Absolute Advantage vs. Comparative Advantage

• Italy has an absolute advantage in both wine and cheese.

• However, when it comes to comparative advantage, France should focus on making the wine and Italy should focus on making the cheese.

Specialization

• Specializing in one thing allows for economies of scale which leads to lower unit costs.

• Spreading resources too thin reduces core competency.

• Specializing in one thing creates more wealth for everyone involved.

Hypothetical Scenario

• If France makes 10 units of wine and 5 units of cheese while each is worth $10, they will earn $150.

• If Italy makes 15 units of cheese while each is worth $10, they will earn $150.

Conclusion

The speaker concludes by summarizing the importance of specialization and how it leads to increased wealth for everyone involved.

Importance of Specialization

• Specialization leads to increased wealth for everyone involved.

Comparative Advantage

In this section, the speaker explains how countries can benefit from focusing on their comparative advantage.

Wealth Creation through Comparative Advantage

• France and Italy are used as an example to explain how wealth creation can occur when countries focus on their comparative advantage.

• The total wealth created between the two countries is now $420 going up $10 between the two nations.

• Countries are constantly improving their comparative advantage and they're able to make more in one area than in another.

• Comparative advantage allows wealth to grow for everyone involved.

US's Comparative Advantage

In this section, the speaker discusses what areas the United States has a comparative advantage in.

Areas of US's Comparative Advantage

• The US tends to be pretty good at pharmaceuticals and medical equipment, big O industrial engines and semiconductors, telecommunications, aircraft, aircraft engines.

• Several countries can have a comparative advantage in the same thing but that's fine because there's a huge world market.

Offshoring and Outsourcing

In this section, the speaker explains offshoring and outsourcing.

Outsourcing

• Outsourcing is when you move work to a vendor that then provides that good or service to the company at a lower cost and higher quality than you would do yourself.

• Many companies use payroll vendors like ADP because running a payroll operation is a core competency in and of itself.

Offshoring

• Offshoring is when you simply move work overseas.

• If you take jobs and move them overseas, that is offshoring.

Outsourcing and Offshoring

In this section, the speaker explains the difference between outsourcing and offshoring. He also discusses how outsourcing is a normal practice that benefits both companies and individuals.

Outsourcing vs Offshoring

• Outsourcing refers to hiring another company to perform a task or service that would otherwise be done in-house.

• Offshoring refers to moving a business process or service to another country.

• If work is moved from the US to China but still performed by Intel employees, it is considered offshoring.

• The speaker shares his experience of offshoring his own job from the US to Malaysia while working for Intel Corporation.

Benefits of Outsourcing

• The speaker argues that all paid jobs exist because someone chose to outsource that work.

• People work for banks, oil refineries, and manufacturing companies because they outsource those services.

• Most people outsource their needs such as gasoline, food, clothing, cars, satellites, phones etc.

• All these things exist because people outsourced them. Similarly, jobs exist because someone else outsourced them.

Normal Practice

• The speaker emphasizes that outsourcing is a norm rather than some devious thing that amoral companies do.

• There are plenty of companies that practice outsourcing and offshoring in immoral and unethical ways.