Transportation costs of imported products can result in cheap imports damaging the overall world economy
A typical situation involving transportation of products long distances from point of production to point of sale, follows the Xaw + Xat < Aw equation, where Xaw is the wage cost for producing product Theta in location Xa which exports product Theta, Xat is the transportation cost for moving product Theta from location Xa to location A for sale in location A, and Aw is the wage cost in order to produce product Theta in location A the location importing product Theta.
There exists, a hyper-enthusiasm for utilizing low-cost labor to build things and then ship these things long distances to the point of sale, in situations of the type described in the equation. This hyper-enthusiasm damages the overall world economy.
Building on the equation, the wage costs that would occur if product Theta were to be produced in nation A the importing nation, exceed the wages paid at location Xa by wdiff, the wage differential.
Wdiff is not lost to the world economy if the alternative of using the higher wage labor in location A is employed, because wdiff is spent and invested by the workers in location A.
At the same time the world economy incurs (the inefficiency of?) the loss of expending time, energy, money, and natural resources, on the unnecessary (busy-work of?) transporting product Theta thousands of miles from production point Xa to sale point A, if the alternative of producing product Theta in location Xa, where wage costs are lower, and then transporting the productto point of sale at location A is followed. I call this effect the Tloss effect.
(Transportation of a product is not a necessary aspect of the production of the product.The world underestimates the extent to which unnecessarily transporting products long distances is inefficient busy-work).
At the same time, there is a negative impact on the world income/prices ratio equation, which acts to reduce the real world GDP as measured taking into account prices, when consumers in location A consume higher-priced product Theta made in location A, instead of lower-priced product Theta made in location Xa. I call this the price-index effect.
Thus the judgement regarding comparing the expensive domestic labor approach vs the cheap foreign labor approach, with regards to the effect on the world economy, comes down to the Tloss (unnecessary transportation of product Theta), weighed against the price-index effect (world prices pushed upwards through higher prices for product Theta when product Theta is produced in location A where wages are higher).
If the Tloss negative impact on the world economy outweighs the price-index effect, the alternative involving the goods produced where wages are cheaper and then unnecessarily transported thousands of miles to point of sale, is inferior from the total world economy perspective compared to the alternative involving domestic production.
Forces of supply and demand tend to establish an equilibrium wherein approximately speaking, Xaw (wage cost in location Xa) + Xat (cost of transporting product from Xa to location A) = Aw (wage cost for producing product in location A). Changes to this equilibrium tend to be balanced by other changes that restore the equilibrium.
The equilibrium illustrated through the Xaw + Xat = Aw equation, is an equilibrium that persons religiously devoted to persecuting what they call "protectionism", seek to disrupt in favor of the alternative involving using the cheaper labor located in location Xa:
"SENATOR BLATHER: Internashunal trade is th' engine of wo'ld economic growth. Internashunal trade is superio' t'domestic trade in terms of effeck on wo'ld economic growth. Domestic trade is shamefully proteckshunist an' interferes wif th' superio' internashunal trade. Ev'ry time a produck crosses internashunal bo'ders, waves of psychic wo'ld unity spread throughout th' wo'ld, promotin' wo'ld economic prosperity.
Docko' Easterneuropinsky has invented a brilliant noo fo'mula thet explains th' situashun. When th' low foreign labor costs Docko' Easterneuropinsky calls Xaw, plus th' transpo'tashun costs he calls Xat, is equal t'th' domestic labor cost he calls Aw, we sh'd step in t'make sho'nuff thet th' low foreign labor combined wif th' transpo'tashun shippin' costs alternative is used. We sh'd tax th' expensive domestic labor alternative an' use th' money t'subsidize th' cheap fo'eign labor combined wif shippin' th' produck t'th' point of sale even eff'n its a million miles away fum th' produckshun locashun."
A simple analysis of the equation shows that such interpretation of the Xaw + Xat = Aw equation is irrational.
The price-index effect, which is the effect on world prices when the alternative of more expensive domestic labor is used, is Aw - (Xaw + Xat), that is, the expensive domestic labor cost minus the combination of the cheap foreign labor cost and the transportation cost. This is always zero, when the equilibrium condition (Xaw + Xat = Aw) exists.
However the unnecessary transportation cost, is always greater than zero when the Xaw + Xat = Aw condition exists.
Since that which is greater than zero is always greater than zero, when the Xaw + Xat = Aw condition exists, the (unnecessary) transportation cost outweighs the non-existent advantage derived through lower prices, indicating that when such conditions hold, the domestic production alternative is superior for the world economy as a whole. This correct interpretation directly contradicts Senator Blather quoted above.
Even when Xaw (foreign labor cost) + Xat (cost of transportation of product from production point to sale point) < (is less than) Aw (domestic labor cost), the equation incisively illustrates how using the less espensive foreign labor, Xaw, could be worse for the overall world economy compared to use of the more expensive domestic labor, Aw.
If Xaw is 7, and Xat is 2, and Aw is 10, then: the price of the product using the produce-in-the-foreign-location and import to home alternative is 7+2=9; the price of the product using the produce-at-home alternative is 10; the effect on the world price index if the produce at home alternative is used is 1; the shipping cost effect is 2 if the produce-foreign-and -import alternative is used.
Since 2 is greater than 1, the equation shows that the world economy in this case featuring the situation illustrated by the Xaw 7 + Xat 2 < Aw 10 equation, would be better off if the domestic production alternative were to be employed, despite the fact that the cost of the product is less using the produce-using-cheap-foreign -labor and import-via-shipping-to-point-of -sale approach.
An economy featuring an emphasis on doing lots of unnecessary things, begins to become an absurd economy. What is unnecessary becomes a source of inefficiency and busy work. The lower cost of a transported product, is balanced by the cost of the unnecessary transportation of the product; the higher wages paid when the product is not transported, are used not for madcap unnecessary busy-work purposes, but rather to satisfy the normal rational desires of persons.
@2009 David Virgil Hobbs
There exists, a hyper-enthusiasm for utilizing low-cost labor to build things and then ship these things long distances to the point of sale, in situations of the type described in the equation. This hyper-enthusiasm damages the overall world economy.
Building on the equation, the wage costs that would occur if product Theta were to be produced in nation A the importing nation, exceed the wages paid at location Xa by wdiff, the wage differential.
Wdiff is not lost to the world economy if the alternative of using the higher wage labor in location A is employed, because wdiff is spent and invested by the workers in location A.
At the same time the world economy incurs (the inefficiency of?) the loss of expending time, energy, money, and natural resources, on the unnecessary (busy-work of?) transporting product Theta thousands of miles from production point Xa to sale point A, if the alternative of producing product Theta in location Xa, where wage costs are lower, and then transporting the productto point of sale at location A is followed. I call this effect the Tloss effect.
(Transportation of a product is not a necessary aspect of the production of the product.The world underestimates the extent to which unnecessarily transporting products long distances is inefficient busy-work).
At the same time, there is a negative impact on the world income/prices ratio equation, which acts to reduce the real world GDP as measured taking into account prices, when consumers in location A consume higher-priced product Theta made in location A, instead of lower-priced product Theta made in location Xa. I call this the price-index effect.
Thus the judgement regarding comparing the expensive domestic labor approach vs the cheap foreign labor approach, with regards to the effect on the world economy, comes down to the Tloss (unnecessary transportation of product Theta), weighed against the price-index effect (world prices pushed upwards through higher prices for product Theta when product Theta is produced in location A where wages are higher).
If the Tloss negative impact on the world economy outweighs the price-index effect, the alternative involving the goods produced where wages are cheaper and then unnecessarily transported thousands of miles to point of sale, is inferior from the total world economy perspective compared to the alternative involving domestic production.
Forces of supply and demand tend to establish an equilibrium wherein approximately speaking, Xaw (wage cost in location Xa) + Xat (cost of transporting product from Xa to location A) = Aw (wage cost for producing product in location A). Changes to this equilibrium tend to be balanced by other changes that restore the equilibrium.
The equilibrium illustrated through the Xaw + Xat = Aw equation, is an equilibrium that persons religiously devoted to persecuting what they call "protectionism", seek to disrupt in favor of the alternative involving using the cheaper labor located in location Xa:
"SENATOR BLATHER: Internashunal trade is th' engine of wo'ld economic growth. Internashunal trade is superio' t'domestic trade in terms of effeck on wo'ld economic growth. Domestic trade is shamefully proteckshunist an' interferes wif th' superio' internashunal trade. Ev'ry time a produck crosses internashunal bo'ders, waves of psychic wo'ld unity spread throughout th' wo'ld, promotin' wo'ld economic prosperity.
Docko' Easterneuropinsky has invented a brilliant noo fo'mula thet explains th' situashun. When th' low foreign labor costs Docko' Easterneuropinsky calls Xaw, plus th' transpo'tashun costs he calls Xat, is equal t'th' domestic labor cost he calls Aw, we sh'd step in t'make sho'nuff thet th' low foreign labor combined wif th' transpo'tashun shippin' costs alternative is used. We sh'd tax th' expensive domestic labor alternative an' use th' money t'subsidize th' cheap fo'eign labor combined wif shippin' th' produck t'th' point of sale even eff'n its a million miles away fum th' produckshun locashun."
A simple analysis of the equation shows that such interpretation of the Xaw + Xat = Aw equation is irrational.
The price-index effect, which is the effect on world prices when the alternative of more expensive domestic labor is used, is Aw - (Xaw + Xat), that is, the expensive domestic labor cost minus the combination of the cheap foreign labor cost and the transportation cost. This is always zero, when the equilibrium condition (Xaw + Xat = Aw) exists.
However the unnecessary transportation cost, is always greater than zero when the Xaw + Xat = Aw condition exists.
Since that which is greater than zero is always greater than zero, when the Xaw + Xat = Aw condition exists, the (unnecessary) transportation cost outweighs the non-existent advantage derived through lower prices, indicating that when such conditions hold, the domestic production alternative is superior for the world economy as a whole. This correct interpretation directly contradicts Senator Blather quoted above.
Even when Xaw (foreign labor cost) + Xat (cost of transportation of product from production point to sale point) < (is less than) Aw (domestic labor cost), the equation incisively illustrates how using the less espensive foreign labor, Xaw, could be worse for the overall world economy compared to use of the more expensive domestic labor, Aw.
If Xaw is 7, and Xat is 2, and Aw is 10, then: the price of the product using the produce-in-the-foreign-location and import to home alternative is 7+2=9; the price of the product using the produce-at-home alternative is 10; the effect on the world price index if the produce at home alternative is used is 1; the shipping cost effect is 2 if the produce-foreign-and -import alternative is used.
Since 2 is greater than 1, the equation shows that the world economy in this case featuring the situation illustrated by the Xaw 7 + Xat 2 < Aw 10 equation, would be better off if the domestic production alternative were to be employed, despite the fact that the cost of the product is less using the produce-using-cheap-foreign -labor and import-via-shipping-to-point-of -sale approach.
An economy featuring an emphasis on doing lots of unnecessary things, begins to become an absurd economy. What is unnecessary becomes a source of inefficiency and busy work. The lower cost of a transported product, is balanced by the cost of the unnecessary transportation of the product; the higher wages paid when the product is not transported, are used not for madcap unnecessary busy-work purposes, but rather to satisfy the normal rational desires of persons.
@2009 David Virgil Hobbs
Labels: costs, equation, formula, free trade, protectionism, shipping, tariffs, transportation, wages
posted by David Virgil at 2:15 AM
0 Comments:
Post a Comment
<< Home