Is U.S. Manufacturing in Decline?
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Is U.S. Manufacturing in Decline? Pop wisdom says Yes some evidence. But these facts do not mean that American manufacturing output is declining absolutely or per-person. Real Per-Capita Manufacturing Output in America. 1970: $7,569 (2011 dollars) 2008: $11,687 (2011 dollars).

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Is U.S. Manufacturing in Decline?

Pop wisdom says Yes

some evidence....


But these facts do not mean that

American manufacturing output

is declining absolutely or per-person....


Real per capita manufacturing output in america
Real Per-Capita ManufacturingOutput in America

1970: $7,569 (2011 dollars)

2008: $11,687 (2011 dollars)


This happy trend is the result of

steadily and dramatically improving

productivity......


But would America’s manufacturing

sector be even larger if low-wage

foreign countries weren’t

becoming so dominant in

manufacturing?


Adam smith
Adam Smith:

  • An Inquiry Into the Nature and CAUSESof the Wealth of Nations



Division of labour1
Division of Labour

  • By dividing labor, output in an 18th-century pin factory from from about 10 pins per worker per day to 4,800 pins per worker per day



Why?

  • 1. specialized workers don’t waste time moving from task to task


Why?

  • 1. specialized workers don’t waste time moving from task to task

  • 2. specialized workers hone their skills


Why?

  • 1. specialized workers don’t waste time moving from task to task

  • 2. specialized workers hone their skills

  • 3. specialization more readily suggests practical means of mechanization


Specialization is the key
Specialization is the Key

  • But specialization is the key for one other reason in addition to the three identified by Adam Smith


David ricardo vacations in bath
David Ricardo Vacations in Bath

  • ... and reads The Wealth of Nations


Principle of comparative advantage
Principle of Comparative Advantage

  • familiar (to economists) two-person, two-good ‘model’


Alone on an island
Alone on an Island

Maximum Amounts Possible to Produce


Good not to be dependent upon others
Good Not to be Dependent Upon Others?

Amounts Produced AND Consumed


Let s trade
Let’s Trade

Tom offers to give me 37 fish if I give him 25 bananas


Let s trade1
Let’s Trade

Some more simplifying assumptions:

1. Don’s fish and bananas are identical to Tom’s

2. Don and Tom are trustworthy

3. Don and Tom each want, with trade, to continue to consume the same number of bananas that each consumed without trade (that is, 25 bananas for Don and 50 bananas for Tom)


Specialization
Specialization...

Amounts Produced with Trade


Amounts consumed with trade....





A parlor trick
A Parlor Trick? produce!

Not at all.

Ask: What does It Cost me to produce a fish? A banana?

Then ask: What does it cost Tom to produce a fish? A banana?

If those costs are different, then there is the potential for mutual gains from trade


Tapping into each other s talents our productioncosts per unit
Tapping Into Each Other’s Talents: Our ProductionCosts Per Unit

Don is the lower-cost bananaerererer...

Tom is the lower-cost fisherman



Don wants fish and bananas and can produce his own fish at a cost of 1 banana. Because Tom also wants bananas yet can produce his own only at a cost of 2 fish, Tom figures out that, (1) because he (Tom) can produce a fish at a cost of 1/2 banana; (2) that Don wants fish; and that (3) Don’s cost of catching his own fish is 1 banana per fish -

Tom realizes that he (Tom) can enable Don to profitably “produce” his (Don’) own fish by him (Don) first gathering bananas (at a cost of 1 fish per banana) and then trading each of those bananas to Tom in exchange for more than one fish (say, 1.5 fish per banana).


The result of Don getting from Tom 1.5 fish for each banana that Don produces and exchanges is that each fish that Don “produces” in this way cost him only 2/3rds (or 0.67ths) of a banana.


Any ratio of exchange (“price”) of fish for bananas that has fish fetching at least slightly more than 1/2 banana yet no more than 1 banana is mutually advantageous.

The reason is that Tom’s cost of producing each fish is 1/2 of a banana, and Don can produce his own fish at a cost of 1 banana


Smith and ricardo together
Smith and Ricardo Together has fish fetching

Tom’s Concentration on fishing makes him a better fisherman


But Tom’s becoming a better fisherman makes has fish fetching

him a worse bananaerererer....

That is, each banana now costs Tom 3 fish to produce

rather than 2 fish


And Tom’s becoming a better fisherman also makes has fish fetching

me a relatively better bananaerererer....

That is, whereas before I could produce bananas

at 1/2 the cost that Tom incurred to produce

bananas,

Now I can produce bananas at 1/3 the cost that Tom

incurs to produce bananas.


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