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Trade and Productivity

Posted By Don Boudreaux On March 20, 2012 @ 1:44 pm In Data,The Economy,Trade | Comments Disabled

Here’s a letter to the Washington Post:

You report that some researchers “have shown that the price savings that U.S. factories have realized from outsourcing have incorrectly shown up as gains in U.S. output and productivity” (“Economists offer more pessimistic view on manufacturing in upcoming report [1],” March 20).

There’s nothing incorrect about counting such benefits of trade as gains in output and productivity.  Adam Smith himself explicitly and correctly identified the expansion of markets through trade as a major source of rising productivity [2].

Suppose that you’ve traditionally used in-house workers to repair your printing presses.  If you today hire, at a lower cost, an outside firm to do these repairs, your company’s productivity rises: you produce the same output while using fewer inputs.  And it makes no difference whatsoever to any measure of your productivity (or to the resulting potential growth of the U.S. economy) if the outside firm whose repair services you ‘import’ into your factories is headquartered in Virginia or in Vietnam.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

There’s much else that is wrong and misleading about this WaPost report.  If my unusually busy schedule over the next few days and weeks allows, I’ll address some other problems that lurk in that report.

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[1] Economists offer more pessimistic view on manufacturing in upcoming report: http://www.washingtonpost.com/business/economy/economists-offer-more-pessimistic-view-on-manufacturing-in-upcoming-report/2012/03/19/gIQAKSpZNS_print.html

[2] Adam Smith himself explicitly and correctly identified the expansion of markets through trade as a major source of rising productivity: http://www.econlib.org/library/Smith/smWN1.html#B.I,%20Ch.3,%20That%20the%20Division%20of%20Labour%20is%20Limited%20by%20the%20Extent%20of%20the%20Market

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