Absolute advantage and comparative advantage determine whether or not jobs are shipped overseas. This equation helps asses the situation:
Wages
Marginal Product of Labor
For example: China- $8/hour America- $30/hour
4 units 20 units
China can produce something for $2/unit, and the United States can produce the same something for $1.50/unit. America has a comparative advantage at producing that particular unit over China. The United States also has the absolute advantage at producing this specific unit over China. Obviously the jobs should remain in America, right? Not necessarily because we don't know the opportunity cost of those American employees working those jobs as opposed to the opportunity cost of the Chinese workers. Perhaps the American workers currently employed in that manufacturing job could be curing cancer if they didn't spend the majority of their time in a factory. The opportunity costs might be higher than the production costs.
China can often produce something much more cheaply than America can. Some people advocate for tariffs being established on Chinese goods. Raising tariffs on Chinese products would hurt American manufacturing rather than help it. This is because imports from China are usually inputs into other American products that are already produced in a America.
Trade surpluses don't create jobs, and trade deficits don't take jobs away. People who say they do ignore:
- We pay for our imports with our exports.
- Specialization makes us wealthier because, on net, employment increases.
Trade deficits do, however, affect capital account balance. For example, Prof. Rizzo buys $10 worth of toys from China, and a Chinese person buys $5 worth of classes from him. If that Chinese person doesn't spend that $5 in America, it makes us wealthier. This is because reducing the number of bills in circulation raises the value of existing American currency.
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