🎧 I Found 5 Imported Items in My Bedroom — Here's What They Teach Us About Trade

Why we import and export goods, the two types of advantage: absolute and comparative

Photo by Ries Bosch on Unsplash

As I invited you to do before: look around your home. How many items are from foreign countries?

Just on my little over-the-bed desk that I use for reading, I can spot a pill tray and a calculator from China, reading glasses made with Italian lenses, and a package of Delsym® from India.

Apple produced the iPad I work on in China with parts and labor from Vietnam, Taiwan, and several other countries.

Those are all examples of imports, the stuff made in other countries that we buy. Contrast that with exports, which is what we make to sell to them.

The supply and demand of exports and imports

If there are transactions, then there must be a supply and a demand. But also, there must be a reason we would want to buy merchandise from countries as far away as China and India.

Given that we demand certain goods and we’re willing to buy more of them if the price is lower, any way to provide us with more of the goods we need and want at cheaper prices is a good thing.

We saw this at work when Henry Ford produced the first assembly line. Ford continued to improve the assembly line until it produced more cars even faster.

The same happened with China, where wages were lower. While cars, expensive to ship, aren’t often made overseas, a lot of items that go into making cars in the US, like chips and door handles are.

Similarly, it makes sense for certain goods to be made here and shipped overseas. This is because we have an advantage in producing certain goods, just as other countries have an advantage in producing other goods.

Advantage in trade

Advantage takes two forms in economics, absolute and comparative. Absolute advantage means you are better or faster at doing a task. Take a modern example: as an economist I can draw supply and demand graphs better and faster than my husband can. That’s due to tons of practice as an instructor.

And I can write a post like this one better than he can. But as for plain typing skills, he’s got me beat. He took typing in high school. But my mother wouldn’t let me, even though all the other kids on the academic track in high school did.

Instead, I spent the year helping to rebuild the library and getting credit for library science. We had a new consolidated school in my junior year.

But it became easier for me to do both when I was writing academic papers. (Especially after Mark went on strike during the revisions of my dissertation!) I always wrote the drafts by hand and could have gotten him to type them for me. That freed him to do what he did best, work as a software engineer.

This is a comparative advantage at work. Even though I’m a terrible typist and a slow one, it makes sense for me to type my own work even now. He specializes in housework now that he’s retired and my ability to stand is limited.

The same concept applies in international trade. If one country has a comparative advantage in producing a good, then they should specialize in producing that good, even if another country is better at it.

Benefits from foreign trade

The benefits from trade come from differences in climate, resources, and technology. Countries in tropical regions produce goods like avocados and coffee, while a country in a temperate environment may produce corn, wheat, and potatoes. Tropical climates, such as the island nations of the Caribbean, draw tourists from northern countries. If you want to ski, you’d travel to the Alps in Switzerland and France and the Canadian and American Rocky Mountains.

Differences in available resources, such as land, may also favor one country over another. Oil, for example, is available in Saudi Arabia and the US, while Canada produces many of the goods that come from trees, such as timber and paper. Nations with large populations, like China and India, have an advantage in factory production.

Technology also differs among nations. Japanese innovation in the production of automobiles led to smaller, more environmentally friendly cars in the US after the oil crises of the 1970s. The US has an advantage in the manufacture of military-grade semiconductors, due to years of technological innovation.

For example, before independence, St. Lucia specialized in producing bananas. Now they, like many other Caribbean countries, specialize in tourism. They still grow bananas and sugar cane, but mostly for home use and the tourist trade.

We import goods and services that others that they have an advantage producing, whether absolute or comparative. We exports those goods and services that we have an advantage making.

In the next post, we’ll look at how we pay for goods and services from abroad.

Thanks for reading,

Nikki