Specialisation and foreign trade

If people specialise they are more productive if you are like me, you probably could not make a good pair of shoes, do brain surgery or advise on investing for pensions! We tend to do what we are best at. Imagine the result if we did what we are worst at! Countries are the same if they concentrate on what they are best at, they produce more and better goods or services. As a rule of thumb, countries that follow a protectionist policy (protecting their industries from foreign competition) are trying to do what they are worst at, or at least not trying to do what they could be best at. Most economists would probably think that protectionism is not exactly a good idea. Two concepts of advantage Absolute advantage this means a country can produce more of almost everything than another, i.e., it is a wealthy country. The USA can produce more than Egypt for instance clearly, the USA has an absolute advantage over Egypt. It is of no particular interest as an idea: the rich are just rich! Comparative advantage this means that a country is better at producing something, but not necessarily everything, than another. For instance, Sweden is better at making marine engines than the UK, but we are better at organising financial markets and insurance. All countries are better at doing a few things more than others. Comparative advantage is the one that matters in economics and it is the main reason why countries trade with each other. We do not simply buy pineapples from tropical countries because it is too cold to grow them here. We could in fact grow them under glass and with heating, but we clearly lack a comparative ad- vantage in the pineapple producing business. Hawaii on the other hand has a strong comparative advantage in that area. The gains from trade If a country tries to produce everything for itself, it will stay poor. Examples: China under Mao Zedong and Russia under Stalin both followed such a policy and the people suffered a very low standard of living as a result. The message is that trade helps the people in a country to gain wealth! The gains from trade consist of: Comparative advantage we do what we are best at and thus produce more. We then exchange our surplus with other countries for something we are less good at. Both the other countries and our country do better and enjoy higher living standards as a result.

 Economies of scale if we specialise we can follow a system of mass production, and lower our costs. We can then exchange the surplus with other countries. Economies of scale are examined in Unit 2. We can gain wider consumer choice e.g., we can drive Volvos, Renaults or BMWs, as well as lo- cally-made Fords!

The effects of trade unions

Trade unions prevent the normal market supply and demand of the competitive situation from working perfectly. There are two kinds of unions: 1. Inclusive. These are the normal general trade union we see in the West, such as the Transport and General Workers Union. This is the focus of attention usually. 2. Exclusive. These are craft unions, such as the Musicians Union. The Inclusive TU The trade union negotiates with the employers and an agreed wage is set for the industry, or a factory if negotiating at that level. In effect this says that any firm may hire as many workers as it likes, but it must pay that agreed wage. If it does not pay, there will be trouble with the union, and possibly a strike. Unions try to get a closed shop, where every worker hired must be a union member and the union then does the collective bargaining for all workers. The union tries to include all the relevant workers in its ranks. The Competitive Wage Situation (With No Unions)

The Situation with an Inclusive Trade Union In effect, the negotiated agreement alters the supply of labour from the diagram above to the one below: note the new thicker supply curve of labour. The horizontal part indicates the firm can hire all it likes but only at the agreed wage. As we push out to the

right, once we reach the normal supply curve of labour, the original supply curve becomes operative again. The union cannot force people to work for that wage and has to accept the number of workers that are available and are willing to work. Fewer workers will be employed although the demand curve for workers has not changed; at the higher minimum wage, we extend back up the existing demand curve.

By comparing the situations with and without a union, we can examine the changes in the market:

Without a union: the wage is W1 and the employed workers are at Qlab 1. With a union: the wage rises to the minimum agreed wage, but employment falls to Qlab 2. And unemployment appears in the industry, as more workers offer themselves for work there (Qlab 3 reading from the supply curve) than are demanded (Qlab 2 reading from the demand curve). So the unemployed are represented by 0Qlab3 minus 0Qlab2 which is the distance Qlab2 Qlab3. Note: in different textbook diagrams, the quantity of labour may be presented as Q, Qlab or Qn; do not let it bother you! Qlab is often preferred as it shows you know you are dealing with labour markets and not, say, with the quantity of tomatoes. The exclusive trade union

The exclusive union tries to prevent (exclude) workers from working unless they join the union, and to do this they must pass a test. Such unions are common in professions like electricians, musicians, and medical doctors. If such a union can organise in the same was as the inclusive ones above, they might do so. If they cannot organise in this way then: 1. The union may place its effort on trying to restrict the supply of labour in order to increase wages. 2. The union may also try to increase the demand for the workers (its members). The diagram for a decrease in supply is exactly the same as the one you are used to in microeconomics for the price of any good or service but with altered labels. And it works in exactly the way you are used to. If the union is suddenly able to prevent non-union people from working, the effect is to move the supply curve upward and to the left.

The other effort of the union may be to try to increase the demand for its workers. When I was a member of it, the Musicians Union steadily tried to get the BBC to us more live musicians and fewer recorded music items on what were then called gramophone records as CDs had not yet been invented. (Ah, the days in my youth going round doing one night gigs in the good old MU; happy but long gone!) This is the diagram for the union trying to increase demand: