House of Paine

ohlin's oleo

 
"since  everything's relative
 no matter which nation you are 
              all
       international trade
                        is a win win  "
                     wall street bob rubin  

----------------------------

for well over 70 years 
in one form or other
  this boast
has been backed up
  by the  relative  
   "factor ratios "
  trade  model 
 -----------------------------------
  lets fuck with this 
     top tune 
           on 
  the "good times for all"
                'fallacy as fun' 
                               hit parade 
=======================================================

                  
 under reconstruction and up dating 
==========================


             over at 
 the foreign trade desk
          of  Dismal Science inc 
 the spin meisters
 never stopped playin 
    this  same old  peppy  song 
    
  imagine 
    a hit 
    longer then 
 "white christmas" even

the hit of hits 
since 
the depths of the depression ...

 
  
professor ohlin's fairy tale
               pop chart topper

and its a ferocious stinker 



=====================



"the  sunniest spot
   inside   the  grandest   illusion :
             aah won't that  always be
                      the  best location
                        to  inprison  little minds  " 
         -                              ( cervantes)
-----------------------------------------------------------------
 

what he say?

 under  a false sun ...

 such surely iz 
  the warmth 
         created by 
  the cryptic notion 
     of  
"comparative advantage"

----------------------------

  

while  
 dr pangloss
 basking away ...


while out  
in world  market reality
the first world loots
and
 the  third world wastes away  
------------------------------------


"conventional" text books 
           of  international 
                   trade theory
 contain a concept
 that seems 
as lost on non economists
as 
   "at the margin"
                       "says law"

and 
that brilliant counter stroke 

   "full employment budgeting "

they 
all share one trait 
 
"a blinding refinement of thought" 

so blinding
 you're 
likely 
to stub your toe 
  on real rocks it makes disappear 

--------------------------------------

as to todays topic

  comparative advantage 

well
notice
 first off

here we speak not
             of
  any  absolute advantages

           thats too easy
   deceptively easy

no  
comparative 
or 
 relative advantage has shades of magic to it 

at first lets keep it simple

we'll freeze production
and only exchange stuff 
" voluntary trades between two parties
 ------------------------------------------
 take the example 
   of a two tasks 
           two workers system 
 
say typing and photocopying 

one person may be faster
                      at both 
but 
 what will be the agreed to
time  allocation 

generally not fifty fifty 
not 
"we'll
 each put in half 
of the total time  on both tasks "

 
 the copy part takes a tiny share of total time 

who's faster at  type ups per minute ?

even if faster at both functions
no copying for speedy
total specialization on typing 

  the less fast typest 
will do all the copying 
even if much slower at copying also 
 since typing the longer task 
is  the output  bottle neck 

this is easy 

not so with two sets of type/copy teams 

that merge 

exchanging typing out puts 
for copies --maybe ---

now throw in 
 two different internal productivity ratios 

 --and its trade for sure -----
  

  
  trade is the result of different 
ratios of exchange 
 between similar products 
in different markets 
when joined 
the new overall market ratio 
will direct changes 
in production in the two regions
 now market merged 


using a one factor model
   labor
 
we'l skip how we go from labor hours 
to wages   

at least
for the moment 
at any rate 

take picking 
oranges and apples 

its eden times
in 
mexico and california 
"one merely plucks from the trees al one can pluck"


but we got 
peso wages and dollar wages 
mediating things for some deilish reason

 ok  say Mexicans
on average 
 will pick 
  oranges 
for 6 pesos a piece  
worth of wages 

and an apple for 12 pesos 

the ratio is then  
on average 
2 oranges for each apple 

 in California 
say the pickers on average
pick for  4 cents a piece 
  in wages
  for an orange 
and 10 cents 
for an apple

ratio 10/4   or 2 +1/2 oranges per apple 

notice 
  if one  peso = one cent 
then the gringo labor is cheaper 
picking  both fruits

 but heres where trade steps in anyway

get this its the whole story 

which is 
 comparatively  cheaper ?

seems to be 
 for mex growers 
to up apples 
and cut oranges 
and for
 cal visa versa 

see why?
a mex for 
each of his
his apples
in a  state side market
gets an extra
1/2 of an orange 

the gringo geives up only 2 oranges
in the mex market 
 for a whole apple 
  instead of 2 and a half 

now the adjustments begin

   in production on both sides of the rio 

what exactly happens 
eventually

will depend even in this stick figure world
 on various changes in ouput
 as levels change productivity 
and increases in supply
                effect demand 

------------------------------------


here’s where one added complication can come in 
the exchange ratio between currencies 
       whats the ratio between pesos and cents 
if its one to one then 
california has an absolute advantage in both 
apples and oranges 
mexican buyers will buy cents and then buy cal fruit 
 saving one peso on each orange and 2 pesos on each apple 
mexican growers are shut out if the full calmex demand can be met at those 
prices by cal growers
 or if reduced levels of mex fruit 
can’t be produced cheaply enough
for mex growers  to retain a part of the market 

 one  outside possibility is for the peso to fall below the  penny    
to say 2pesos to the penny 
all else remaining the same 
now the cal growers are out of the market 

  without devaluation 
   only   increasing costs of production 
as production quantity  itself increases
 can avoid this radical live or die outcome  

 is a small notion called diminishing returns 
if both oranges and apples cost more per unit to grow as more are grown
  then the cal/mex production mix shifts to equalize cost ratios 

    notice not necessarily absolute costs only ratios 
    so the cal/mex production cost ratios are the same 

    in cents lets say 10/5
  in pesos    say 20/10 
with the peso/cent ratio 
 2/1 we’re all set 
      apples will go one way oranges the other 
  when things settle down 
the whole system
 will at least produce 
as many of one and more of the other 
then before trade begins 
    both demand and supply changes are relevant 
 even if cal growers are still absolutely better at both fruits 
 from a land and labor input count 

 in two systems with n exchangible products 
the patterns can get complex 
if various technologies don’t obey 
the decreasing outputs
 dictated by the models 


  otherwise a trade gap opens up 
not to mention the end of
 any one product only production outfits   



  where the ecos hide is in the devaluation option 
there is some currency ratio where traded products
 will begin to reverse their flow 
closing the gap 

only if absolute advantage was not 
avoidible through enough  devalation
could one system destroy
 the trade production of another 

  technical advantage may be absolute 
  but exchange ratios really determine trade flows 


if you don’t want to see ratios adjust you can 

scenario A
 
take local currency surplus 
 buy up local real assets 


or 
scenario B

  loan locals your currency 
to pay for surplus