Comparative Advantage and Economic Growth

The basic principle of global trade is comparative advantage among different nations. We live in a world that is easily traveled and seems to shrink in size. Our lives and choices in the United States impact many individuals all over the world and vice verse. To observe comparative advantage easily we look at a Production Possibilities Frontier model. How much does one country sacrifice in producing one good over another; what are their opportunity costs? Each country has limited resources and different resources available to them in comparison to other countries. The most important resource in producing any good are human resources. Many use this fact to help explain the trade deficit between the U.S. and China. It is more efficient for American companies to develop and design goods and have them assembled in another country like China where there is a vast supply of inexpensive labor. It would be inefficient for the U.S. to use its higher skilled labor force to assemble inexpensive products in factories, the opportunity cost would be great.

However another factor in trade between the U.S. and China is the standard of living in China. Countries are better off when they trade with each other but at times there can be an imbalance. Few Americans would prefer higher priced domestic goods over their efficient and inexpensive goods 'Made in China'. What can be done? Well using tariffs to 'push' China would be ineffective and possibly harmful. We essentially seem to be waiting for China's growing economy to 'catch-up'. Based on GDP China is second in the world but GDP per captia is 92nd (http://en.wikipedia.org/wiki/Economy_of_China). Luckily China is the world's fastest growing economy and this is a good thing even for Americans, "...new ideas are public goods that spread across continents." (http://www.nytimes.com/roomfordebate/2011/01/18/can-the-us-compete-with-china-on-green-tech/how-we-gain-from-chinas-advances) 


An emerging middle class is coming in China and this is a sign for American companies. When the standard of living increases, demand for goods increases, thereby increasing production and the effect is felt beyond country borders. When one country succeeds and experiences growth many other countries experience the benefit. (http://www.bankrate.com/finance/economics/chinas-economy-influences-us-2.aspx)