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Comparative advantage and when to blow up your island

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Re: Comparative advantage and when to blow up your island

#111

Post by AQXt »

What about dumping? From wikipedia:

"Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product."

How would it work in this example?

The other guy would sell you coconuts and bananas well below the Zone of Possible Agreement (ZOPA), and you would be so glad to buy everything from them -- destroying your industry.

A few years go by, and they raise their prices above the ZOPA -- and you have no option because it would cost you a lot to rebuild your industry from scratch.

If you try to produce bananas, they drop the price of bananas; and make profit from coconuts. If you try to produce coconuts, they drop the price of coconuts, and make profit from bananas. (You need coconuts and bananas!)

That's what happens in real world -- developing countries export iron for $100/ton (2,200 pounds) and buy high value-added products (phones, tablets, computers) for $500/unit.

Rich countries use the profit they make from high value-added products and services to subsidize their farmers, pushing the price of food down. For instance, wheat costs $188.75 per metric ton, less than $0.20 per kg ($0.10 per pound).

Without subsidies, the farming industry would be decimated from rich countries, and prices would go up.

So, "free market" is an abstraction that doesn't exist in the real world -- and you can see it in this idealized model of two islands.

Re: Comparative advantage and when to blow up your island

#112

Post by foolinaround »

admax88q wrote: post #53
merpnderp wrote: post #47

Earlier quoted context omitted.

I'm starting to see a consensus that one of the biggest drawbacks to free trade is the loss of skills. It is great to get cheap steel from China and great for China to sell steel at a profit, but it sucks losing the engineering jobs. But what truly is awful is now there is hardly anyone who knows how to run a steel mill anymore in the US. The US might not always be friends with China, but the US will always need stee…

On the other hand free trade stops wars. If each party is specialized in a needed item that the other side no longer knows how to produce, its much harder to go to war. The fact that the US will always need steel helps ensure that they _will_ always be friends with China, so long as they also specialize in something that China needs.

> so long as they also specialize in something that China needs

tomorrow, China may learn to specialize in that something.

It is never a good strategy to depend on the weakness of others for the long term.

Re: Comparative advantage and when to blow up your island

#113

Post by bluGill »

jbay808 wrote: post #54
bluGill wrote: post #40

Earlier quoted context omitted.

The US can produce large numbers of N95 masks. What we cannot do is produce large numbers tomorrow. If you are willing to bankroll me I'll setup a factory and in 2 years I'll produce any arbitrary number of N95 masks you care. There are two obvious problems above. First, 2 years, will we even need N95 masks in two years? Second, I said I'd make them, but I cannot promise I can make them cheaper than China can.

I think it took both China and Taiwan much less than 2 years to ramp up production. Why would it take you so long?

Depends on where I start. If I can buy machines from china I can ramp up much faster than if I have to design and make the machines myself. I also need to develop supply chains.

Note too that I have no expertise in either building a business or designing mask making machines, so I'll need to hire people as experts in both of those which will take time. Probably my mask making machine experts will be experts in designing machines (engineers), but not masks and so they will have to learn what works and doesn't.

Re: Comparative advantage and when to blow up your island

#114

Post by bluGill »

jgeada wrote: post #46
bluGill wrote: post #40

Earlier quoted context omitted.

The US can produce large numbers of N95 masks. What we cannot do is produce large numbers tomorrow. If you are willing to bankroll me I'll setup a factory and in 2 years I'll produce any arbitrary number of N95 masks you care. There are two obvious problems above. First, 2 years, will we even need N95 masks in two years? Second, I said I'd make them, but I cannot promise I can make them cheaper than China can.

You are severely underestimating the necessary level of manufacturing "culture", logistics and processes that were lost when we outsourced manufacturing. For many things, including probably making N95 masks, we can no longer just decide to make them now without reconstructing that entire logistical tail, all the myriad of small manufacturers, and train people with specialized know-how and the years of experience that…

All of that can be regained for a price. Remember I'm being supplied with an arbitrary large budget. There are a lot of manufacturing experts in the US working for the likes of GM who still make things here, if I hire half of them away (for a nice pay raise) I can make all the pieces of the puzzle I need.

Re: Comparative advantage and when to blow up your island

#115

Post by nautilus12 »

pdonis wrote: post #8
nautilus12 wrote: post #7

Earlier quoted context omitted.

But can't you leverage cutting off trade in the same way that he talks about threatening to blow up your island, and it wouldn't result in total loss of everything (which any rational player would see through as a bluff, as opposed to losing trade which would be a negative but still survivable). IE think about the modal logic intersected with the game theory, no one will believe that you will blow up your own island,…

> can't you leverage cutting off trade in the same way that he talks about threatening to blow up your island If you are the only possible party the other party can trade with, then blowing up the bridge and blowing up your own island are, as far as the other party is concerned, equivalent, yes. So if there is any benefit to the other party in trading with you, they have an incentive to have that trade available to t…

I'm not sure you are following my point though, whether its blowing up a bridge or building a wall, if you look at the payout to the party that is blocking it is higher than blowing up the island. If you then use modal logic to analyze the opposite parties perspective of whether or not that party would actually go through with it then their threat seems much more believable.

Re: Comparative advantage and when to blow up your island

#116

Post by pdonis »

nautilus12 wrote: post #115
pdonis wrote: post #8

Earlier quoted context omitted.

> can't you leverage cutting off trade in the same way that he talks about threatening to blow up your island If you are the only possible party the other party can trade with, then blowing up the bridge and blowing up your own island are, as far as the other party is concerned, equivalent, yes. So if there is any benefit to the other party in trading with you, they have an incentive to have that trade available to t…

I'm not sure you are following my point though, whether its blowing up a bridge or building a wall, if you look at the payout to the party that is blocking it is higher than blowing up the island. If you then use modal logic to analyze the opposite parties perspective of whether or not that party would actually go through with it then their threat seems much more believable.

> if you look at the payout to the party that is blocking it is higher than blowing up the island

Ah, yes, you're right. I was only looking at the payoff for the other party. You're correct that for the party that is making the threat, they're much better off after blowing up the bridge or building a wall than they are after blowing up their own island, so the former is a much more credible threat. I think the "modal logic" thing confused me because I don't really see how modal logic in particular is involved here; but game theory certainly is, yes.

Re: Comparative advantage and when to blow up your island

#117

Post by admax88q »

foolinaround wrote: post #112
admax88q wrote: post #53

Earlier quoted context omitted.

On the other hand free trade stops wars. If each party is specialized in a needed item that the other side no longer knows how to produce, its much harder to go to war. The fact that the US will always need steel helps ensure that they _will_ always be friends with China, so long as they also specialize in something that China needs.

> so long as they also specialize in something that China needs tomorrow, China may learn to specialize in that something. It is never a good strategy to depend on the weakness of others for the long term.

That's the whole argument of comparative advantage though, even if China is better at everything its still in their best interest to trade because everyone comes out ahead if they specialize in what they're best at.
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