Specialization and Trade vs. Self-Sufficiency.

This is why trade makes us better off...we all can't be good at everything. Of course there is the satisfaction (utility) you receive from doing it yourself.

Economic Concepts Described by Stevie Nicks

Stevie Nicks has a new album coming out titled In Your Dreams and there is an interview with her on Spinner.com. The third question is particularly relevant for this blog. It shows how the concept of specialization works for song-writing. There evidently are benefits from cooperation and division of labor.

Interdependence Updated

I'm sure many of you are familiar with I, Pencil. You may even use it to demonstrate the gains from trade and increased standard of living or to demonstrate the value of interdependence. I have used it and continue to use in appropriate circumstances.

Here is a new twist from TED Talks (HT to Carpe Diem). You can call it I, Toaster - Attempted. It offers a new view on an old concept. 

Share your thoughts. Do you like one better than the other?  Why?

Hypothetically, What Would It Cost?

Visualeconomics has an engaging visual on some of the costs we might associate with celebrating Independence Day in the U.S. Included is information on where various parts of the traditional mid-summer cookout come from. As I looked at the chart, I thought "what would our celebration cost if we imposed trade barriers between the states - depending totally on locally grown or produced items? Alternatively, how would we celebrate differently if it weren't for ideas like comparative advantage, productivity and specialization?"

It's just a thought as we pass the "mid-point" of summer and start thinking ahead (the local stores have their "back-to-school" displays up).

Relative Labor Costs

This graphic (HT to Chartporn) is telling in a couple of ways. On the surface, it would seem to reinforce the idea that firms move to other countries to save on wages. (But as is sometimes said "if wage was the whole story, Bangladesh and Ethiopia would be the industrial capitals of the world.")

But the true value of the graphic is in the follow-up questions. If so many countries have a wage advantage, why does organized labor often support a higher minimum wage? And why do many firms stay in the U.S.?

The answers may lie in the concept of productivity and/or self-interest. I'd be interested in your thoughts.

Some Would Call It "Specialization"

You just have to find someone willing to exchange (pay) for it.

Specialization, Absolute or Comparative Advantage

This is an interesting map.  Granted, I'm not sure some of these #1s are things to be proud of or things that you can "trade".  But you never know.

(HT to Chartporn.)

Everyone Works for Everybody

Here is a very good video that shows how the modern economy offers more diversity and more "wealth" due to exchange and specialization.

Some will call it simplistic, but the idea is correct. Because of the power of specialization and the division of labor that is possible with the modern marketplace, we have more choice and most of us enjoy better living standards than the wealthy of even a century ago. And, a great many people are involved in making those standards possible. And those same people benefit by providing us our wants and needs through the exchanges we make for their goods and services.

Making of Florida One

There are so many concepts you can pull out of this video (HT to Cafe Hayek): exchange, specialization, division of labor, interdependence, economies of scale (imagine the cost if you were building only one), productivity, economic institutions, etc.

Please share other ideas.

Substitutes and Inferior Goods?

Finally, here is a little levity to help ease you into the weekend.

Feel free to share your thoughts.

Comparative Advantage, Interdependence & Volcanoes

Take a look at this story from National Public Radio's Planet Money blog. While many of us are aware of the economic problems related to air travel caused by the volcano in Iceland; I suspect few even considered this aspect. I know I didn't. But it's an excellent example of the concepts of comparative advantage (Kenya's advantage in growing and providing flowers); and interdependence (Kenya's exports and GDP are impacted by sale of flowers to Europe). More posts later today.

Business Organization

When teaching about firms, here is an example of vertical integration that is priceless.

Poverty and a Pair of Jeans

I know many of you are using Haiti as a way to focus your students on economic issues. Here's a very informative piece from National Public Radio's Planet Money blog. (I especially like the information in the table.) It speaks to a number of ideas: globalization, specialization, tariffs and trade, incentives, and economic growth.

There was a companion story on All Things Considered that spoke to Haiti's need for trade rather than aid. In both cases, the comments are even worth perusing. Please share what you and/or your students think.

Economic Development, Comparative Advantage and Complexity

There was an article in a recent issue of The Economist that is definitely worth your time. The topic is economic development. But the twist on this article is not just size but sophistication. It seems that the complexity of the economy can be a factor in development, as much as size.

The article looks at the joint work of an economist and a physicist, examining the complexity of many of the world's economies. They have developed some fascinating visual models that you can find at this web site.

One of my big takeaways was the spin this puts on concepts like absolute and comparative advantage; and the role of the entrepreneur in economic development. As I stated above, this one is worth reading.

Let me know if you agree or disagree.

Economics in the Movies

The Princess Bride is one of my favorite fun films. And it's loaded with opportunities to illustrate economic concepts. Probably the most often used is the famous “battle of wits” clip that can be used to illustrate how people choose. But there are more.

At the beginning of this clip, we learn that two of the characters need the help of the "man in black" - Wesley. He seems to have absolute advantage in several areas. At about the 8:00 minute mark, there is a fun example of negotiating prices, with all kinds of incentives thrown into the process.

This next clip begins with a continuation of the price negotiation. But about 1:35 into the clip, we watch Wesley demonstrate some entrepreneurial thinking, bringing his productive resources together in innovative ways to satisfy a need. And at about the 4:00 minute mark, Wesley explains how he can use asymmetric information to his advantage. We also see that wants (problems) are unlimited and can even arise from satisfying other wants. And about 5:00 in, we see the payoff to Wesley's "entrepreneurial" skills.

You can view the clips to see what I mean, but you really should consider purchasing a copy of the DVD. I’ve added it to my carousel at left, and I hope you’ll consider using that venue if you do choose to purchase.

I welcome your ideas and comments.

Econ in Music for Early Elementary

Here are three songs for young children that can be used to introduce economic ideas. And all can be downloaded for under a dollar.

The first is Iko, Iko by Parachute Express. You may also know it as the "Jambalaya" song. The song is about making jambalaya. Students should be able to identify human resources, natural resources and capital resources in this song.

The second is When I Build My House, also by Parachute Express. The lyrics talk about a number of tasks involved in building a house (hammering nails, laying bricks, painting the walls). The refrain is "When I build my house there's so much to do. It's fun when you come along and help me too." The concepts that can be integrated with this song are division of labor (splitting up the work) and specialization (the person who is best at each task).

The final song is Sittin' Down to Eat by Bill Harley. It's a fun song about a meal interrupted by all kinds of large animals. Each is invited to join the meal. But when a caterpillar finally joins, the house explodes. It offers an insight into the concept of marginal cost/benefit. One by one, the house gets crowded until the addition of one more imposes a significant cost.

I hope these are useful for you. I welcome comments.

Mass Production and Specialization

I know many of you know the basics of mass production and specialization. But if you're looking for a basic explanation to keep in the file and to share with the student who missed that day of class, here's a good one-pager, courtesy of The Economist. It should be useful, provided your students are at or near high school reading level.

Let me know if you think it's too hard.

A Lesson Plan for Elementary - Sweet Potato Pie

This post relates to the following Keystone Economic Principles:
6. Do what you do best, trade for the rest.
and
8. Quantity and quality of available resources impact living standards.

I reviewed the book Sweet Potato Pie just a few days ago. Now the Powell Center has an online lesson plan to accompany the book. Enjoy, and please share any comments about the lesson.

Specialization & Comparative Advantage in Sports

Today's post relates to the following Keystone Economic Concepts:

2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
6. Do what you do best; trade for the rest.
and
7. Economic thinking is marginal thinking.

Occasionally, students will have trouble with the difference between specialization and comparative advantage. This fact was reaffirmed for me when I was listening to an Econtalk podcast featuring a conversation between Russ Roberts and Don Boudreaux.

Specialization speaks to the idea reducing wasted resources (moving from step to step on a job); gaining skill through repetition; and eventually finding a way to apply capital to the procedure. But it fails to capture the idea of opportunity cost that is inherent in the concept of comparative advantage. The idea is that we chose an activity because of the opportunity cost - what are we giving up by producing this good or service - not necessarily because it's what we do best.
Because of recent attention on college bowl games, NFL playoffs and even college basketball in my house, the distinction between specialization and comparative advantage caused one of those "ah-ha" moments.

For any game, the coach is going to put players in a position because they are specialists. They likely have the position because they specialize - they have done the procedure many times and are very good at it. But what happens when there is an injury to a player? "You put in the back-up," might be your first response. But what if, because of previous injuries or other circumstances, there is no back up? Is the team forced to forfeit because there's no available point guard or power forward? Does the team take the loss for lack of a middle or inside linebacker for short-yardage situations? In those circumstances, you look to comparative advantage.

Of the resources (players) you have, who can move from their position with the least cost - the least loss of effectiveness? Maybe a receiver moves to defensive back because several other players can fill in on the receiver side. Maybe one of the forwards becomes a temporary shooting guard because they can make the three-pointer, leaving you adequate resources on the bench who can fill in at forward.

Does this analogy help or am I off on the wrong track? Please share your thoughts.