Economics of US and China Making Toys

ECONOMICS OF US AND CHINA: MAKING TOYS 3

Economicsof US and China: Making Toys

Economicsof US and China: Making Toys

Despitethe United States having a greater productive efficiency to makecertain toys than China can, Americans still import them from Chinesefirms. This is primarily because China has a comparative advantageover the United States in regard to the production of toys. Accordingto David Ricardo, having a comparative advantage over another countryis having the ability to produce certain goods and services at anopportunity cost that is significantly lower than the other country(Golub&amp Hsieh, 2000).This is in accordance with the Ricardian theory that countriesspecialize in the production of goods they have comparative advantagein as a way of gaining economic welfare. This means that China canproduce toys at a lower cost than the U.S.

Accordingto Adam Smith’s idea of absolute advantage, a country shouldconcentrate on producing goods and services that increase theeconomic welfare (Mankiw, 2014). This means that the United Statesimport toys so as to concentrate on the production of other productsthat it has a lower opportunity cost over China. For example, theUnited States can produce products like iPhones better and at a loweropportunity cost than China. Therefore, despite the U.S having theadvantage of production efficiency, it will only be rational toproduce the products it has comparative advantage over.

Whilethe two countries have absolute advantage in the production of toys,China has a higher comparative advantage over the United States. Thisis because China has a cheaper cost of production for the toyscompared to the United States. One of the most significant lowercosts is the cost of labor, which is lower in China compared to theUnited States (Mankiw, 2014). As a result, China has both theabsolute advantage and comparative advantage in the production andtrading of toys.

References

Golub,S. &amp Hsieh, C.T. (2000). &quotClassical Ricardian Theory ofComparative Advantage Revisited&quot.&nbspReviewof International Economics&nbsp8(2).pp.&nbsp221–234

Mankiw,N. (2014). Principlesof Economics.Stamford: Cengage Learning