Is U.S. Manufacturing in Decline? Pop wisdom says Yes some evidence....

1. Is U.S. Manufacturing in Decline? Pop wisdom says Yes some evidence....

4. But these facts do not mean that American manufacturing output is declining absolutely or per-person....

6. Real Per-Capita ManufacturingOutput in America 1970: $7,569 (2011 dollars) 2008: $11,687 (2011 dollars)

7. This happy trend is the result of steadily and dramatically improving productivity......

10. But would America’s manufacturing sector be even larger if low-wage foreign countries weren’t becoming so dominant in manufacturing?

13. Adam Smith: • An Inquiry Into the Nature and CAUSESof the Wealth of Nations

14. Division of Labour***-

15. 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

16. WOW!

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

18. Why? • 1. specialized workers don’t waste time moving from task to task • 2. specialized workers hone their skills

19. 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

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

22. David Ricardo Vacations in Bath • ... and reads The Wealth of Nations

23. Principle of Comparative Advantage • familiar (to economists) two-person, two-good ‘model’

24. Alone on an Island Maximum Amounts Possible to Produce

25. Good Not to be Dependent Upon Others? Amounts Produced AND Consumed

26. Let’s Trade Tom offers to give me 37 fish if I give him 25 bananas

27. 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)

28. Specialization... Amounts Produced with Trade

29. Amounts consumed with trade....

33. DonTomania is Wealthier by 25 fish!

34. With trade, each of us can consume more than each of us can produce!

35. With trade, each of us can consume MORE than each of us can produce!

36. A Parlor Trick? 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

37. Tapping Into Each Other’s Talents: Our ProductionCosts Per Unit Don is the lower-cost bananaerererer... Tom is the lower-cost fisherman

38. Trade enables each of us to tap into the better talents of the other

39. 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).

40. 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.

41. 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

42. Smith and Ricardo Together Tom’s Concentration on fishing makes him a better fisherman

43. But Tom’s becoming a better fisherman makes him a worse bananaerererer.... That is, each banana now costs Tom 3 fish to produce rather than 2 fish

44. And Tom’s becoming a better fisherman also makes 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.