COMPARATIVE ADVANTAGE CONFUSION
May 28, 2004
For every job outsourced abroad, nearly two jobs were created between 1991 and 2001, say observers. According to the Bureau of Economic Analysis:
- Between 1991 and 2001, employment in foreign affiliates of American multinational companies increased by 2.8 million jobs.
- However, domestic employment in the parent companies rose by 5.5 million jobs.
- Multinational corporations reported greater job growth than other corporations; additionally, higher sales by foreign affiliates of American multinational corporations translated into greater domestic job growth.
In other words, outsourcing not only increases foreign and domestic jobs, but it also increases the demand for inputs in the United States needed for the production at the foreign affiliates.
The worry put forth by politicians and the media that free trade is no longer beneficial to Americans is based on confusion between what economist term "absolute advantage" and "comparative advantage."
When a country has an absolute advantage over other countries, it can produce a specific good using fewer inputs (such as labor and capital) than other countries.
However, when a country has a comparative advantage, it may have an absolute advantage in producing one or more goods, but will benefit more from concentrating its resources in producing one good while trading with another country for the other good. For example:
- If China were to have an absolute advantage over the United States in the production of all goods, they would still benefit more by producing only some of the goods and trading with the United States for other goods.
- This case holds true even if all inputs used in production (i.e. land, labor and capital) were able to transfer to the country with the absolute advantage
Source: Editorial, "Outsourcing 101," Wall Street Journal, May 27, 2004For more on the BEA http://www.bea.gov/
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