Thursday, January 7, 2010

Say on Trade

I ran across a very thought-provoking quote (HT to The Night Watchman) by Jean Baptiste Say that, I think, can be helpful to students trying to grasp the idea of comparative advantage. Here it is:
A nation that should export to the value of 20,000 dollars, and import to the value of 24,000 dollars wholly in goods, without any money passing on either side, would make a profit of 4,000 dollars, in direct contradiction to the theory of the partizans of the balance of trade.
It's advantage is that it forces us to focus on the real flows, and not the nominal. Now, you may ask why a nation would import less than it exports.  To this, remember the concept of value and how it is in the eye of demander.  Furthermore, this is what comparative advantage is about. Produce what has a low opportunity cost and trade for what has a higher opportunity cost.

What do you think?

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