Author Question: Mexico has lower wages than the United States. Does this necessarily mean that it will have a ... (Read 109 times)

scienceeasy · **on:** Jun 29, 2018

Mexico has lower wages than the United States. Does this necessarily mean that it will have a comparative advantage in the production of everything compared to the United States?

What will be an ideal response?

Question 2

With respect to income redistribution programs, what is meant by The Big Tradeoff, and what causes it?

What will be an ideal response?

ambernicolefink · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Wages are only one factor in the input mix. What matters is the overall opportunity cost of production. If wages are 1/5 the in Mexico compared to what they are in the United States and workers in Mexico are 1/5 as productive as American workers this doesn't translate necessarily into a comparative advantage for Mexico. Also, goods that are produced with a lot of capital which turns out to be more expensive in Mexico and less expensive in the U.S. will tip the comparative advantage to the United States.

Answer to Question 2

The big tradeoff refers to the tradeoff between equity and efficiency. A dollar collected from a rich person passes through a leaky bucket before getting to a poor person. The poor person doesn't receive all of that dollar. The cost of administering the program takes some of that money. More importantly, redistribution creates a disincentive to work, which decreases efficiency.