Is U.S. Manufacturing in Decline?

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Is U.S. Manufacturing in Decline? Pop wisdom
says Yes some evidence....
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But these facts do not mean that American
manufacturing output is declining absolutely or
per-person....
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Real Per-Capita ManufacturingOutput in America
1970 7,569 (2011 dollars) 2008 11,687 (2011
dollars)
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This happy trend is the result of steadily and
dramatically improving productivity......
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But would Americas manufacturing sector be even
larger if low-wage foreign countries
werent becoming so dominant in manufacturing?
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Adam Smith

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

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Division of Labour-
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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

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WOW!
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Why?

• 1. specialized workers dont waste time moving
  from task to task

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Why?

• 1. specialized workers dont waste time moving
  from task to task
• 2. specialized workers hone their skills

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Why?

• 1. specialized workers dont waste time moving
  from task to task
• 2. specialized workers hone their skills
• 3. specialization more readily suggests
  practical means of mechanization

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Specialization is the Key

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

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David Ricardo Vacations in Bath

• ... and reads The Wealth of Nations

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Principle of Comparative Advantage

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

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Alone on an Island
------ DON TOM
FISH 50 200
BANANAS 50 100
Maximum Amounts Possible to Produce
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Good Not to be Dependent Upon Others?
DON TOM
FISH 25 100
BANANAS 25 50
Amounts Produced AND Consumed
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Lets Trade
Tom offers to give me 37 fish if I give him 25
bananas
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Lets Trade
Some more simplifying assumptions 1. Dons fish
and bananas are identical to Toms 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)
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Specialization...
DON TOM
FISH 0 150
BANANAS 50 25
Amounts Produced with Trade
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Amounts consumed with trade....
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DON TOM
FISH
BANANAS (50-25) 25
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DON TOM
FISH
BANANAS (50-25) 25 (25 25) 50
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DON TOM
FISH (037) 37
BANANAS (50-25) 25 (2525) 50
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DON TOM
FISH (037) 37 (150-37) 113
BANANAS (50-25) 25 (2525) 50
DonTomania is Wealthier by 25 fish!
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With trade, each of us can consume more than each
of us can produce!
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With trade, each of us can consume MORE than each
of us can produce!
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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
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Tapping Into Each Others Talents Our
ProductionCosts Per Unit
DON TOM
FISH 1 banana 1/2 banana
BANANA 1 fish 2 fish
Don is the lower-cost bananaerererer... Tom is
the lower-cost fisherman
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Trade enables each of us to tap into the better
talents of the other
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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)
Dons 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).
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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.
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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 Toms
cost of producing each fish is 1/2 of a banana,
and Don can produce his own fish at a cost of 1
banana
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Smith and Ricardo Together
DON TOM
FISH 50 300
BANANAS 50 100
Toms Concentration on fishing makes him a better
fisherman
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But Toms becoming a better fisherman makes him a
worse bananaerererer.... That is, each banana
now costs Tom 3 fish to produce rather than 2 fish
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And Toms becoming a better fisherman also
makes me a relatively better bananaerererer.... T
hat 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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