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192 IRET Congressional Advisory 1 (2005)

handle is hein.taxfoundation/iretcgadv0189 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. July 26, 2005 Advisory No. 192 DR-CAFTA DESERVES HOUSE SUPPORT The House of Representatives is to vote this week on the free trade agreement with the Dominican Republic and five Central American nations (DR-CAFTA). The vote is expected to be very close. Perhaps a reminder of why trade is beneficial is in order. Trade enables people to generate more goods and services with the resources that are available. It increases the productivity and efficiency of the participants. How? Trade lets people specialize in the production of what they do relatively well, increasing their output. They can then swap some of their increased output for products they have more difficulty making, obtaining those items from other people who do relatively well producing them. Everyone can produce more than before, and exchange the output to make them all better off. Trade does not depend on one group of people being absolutely more efficient (having an absolute advantage) making one set of products, and another group of people being absolutely more efficient making another set of products. Trade can occur, and can enhance living standards, even if one region is more efficient at everything than another. All it takes for trade to be beneficial is for one region's relative efficiency in producing the two sets of goods to differ from the other region's relative efficiency in producing the two sets of goods. These differences are called comparative advantage. The classic example in the economic textbooks (see table) is a world consisting of two countries, Britain and Portugal, and two products, wine and textiles. Assume that workers in Britain are more efficient at producing both products, but that their efficiency edge in making cloth (9 to 1) is even greater than their edge in making wine (3 to 2). If so, it will benefit workers in both countries for Britain to reduce its output of wine and raise its Gains from specialization and trade Units of output Potential change from per worker per day specialization Country Textiles Wine Textiles Wine Britain 9 3 +9 -3 Portugal 1 2 -3 +6 Combined change in output +6 +3 Change in production if Britain shifts one worker from wine to textile production, and Portugal shifts 3 workers from textile to wine production. (Adapted from James D. Gwartney, Richard L. Stroup, and Russell Sobel, Economics: Private and Public Choice, 9th edition, exhibit 17-2, p. 437.)

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