Scarcity Compared

Definition

Scarcity Compared is a fundamental economic concept that refers to the comparison of the scarcity of resources between different economies, introduced by David Ricardo in his theory of comparative advantage, 1817.

How It Works

The comparison of scarcity is based on the idea that economies have different factor endowments, such as labor, capital, and natural resources, which affect the opportunity costs of producing different goods. Ricardo's comparative advantage model, 1817, suggests that countries should specialize in producing goods for which they have a lower opportunity cost, relative to other countries. For example, the United States has a high level of capital investment in agriculture, which makes it more efficient in producing wheat, while Brazil has a larger amount of arable land, making it more efficient in producing soybeans. According to Boeing's annual report, the company produces ~800 aircraft annually, benefiting from the comparative advantage of the United States in aircraft production.

The comparison of scarcity also involves the concept of opportunity cost, which is the value of the next best alternative that is given up when a choice is made. When a country decides to produce more of one good, it must reduce the production of another good, due to the limited availability of resources. The opportunity cost of producing a good is determined by the resources required to produce it, such as labor, capital, and raw materials. For instance, the production of wheat in the United States requires ~2.5 million acres of land (USDA), which could be used to produce other crops, such as corn or soybeans.

The comparison of scarcity is also influenced by trade barriers, such as tariffs and quotas, which can affect the prices of goods and services. The World Trade Organization (WTO) reports that the average tariff rate for developed countries is ~3.5% (WTO), while for developing countries it is ~10.5% (WTO). These trade barriers can increase the prices of imported goods, making them less competitive in the domestic market, and affecting the comparison of scarcity between countries.

Key Components

• Factor endowments: The availability of resources, such as labor, capital, and natural resources, affects the scarcity of goods and services. An increase in factor endowments can lead to a decrease in scarcity, while a decrease can lead to an increase in scarcity.
• Opportunity cost: The value of the next best alternative that is given up when a choice is made determines the scarcity of a good. A higher opportunity cost increases the scarcity of a good, while a lower opportunity cost decreases it.
• Trade barriers: Tariffs and quotas can affect the prices of goods and services, influencing the comparison of scarcity between countries. An increase in trade barriers can lead to an increase in scarcity, while a decrease can lead to a decrease in scarcity.
• Comparative advantage: The idea that countries should specialize in producing goods for which they have a lower opportunity cost, relative to other countries, affects the comparison of scarcity. A country with a comparative advantage in a good will have a lower scarcity of that good.
• Resource allocation: The allocation of resources, such as labor and capital, affects the scarcity of goods and services. An efficient allocation of resources can lead to a decrease in scarcity, while an inefficient allocation can lead to an increase in scarcity.

Common Misconceptions

• Myth: Comparative advantage is based on absolute advantage — Fact: Comparative advantage is based on the opportunity cost of producing a good, not the absolute advantage (Ricardo, 1817).
• Myth: Trade barriers always increase scarcity — Fact: Trade barriers can increase scarcity, but they can also decrease it if they protect a domestic industry that is more efficient than the foreign industry (WTO).
• Myth: Scarcity is only determined by the availability of resources — Fact: Scarcity is also determined by the opportunity cost of producing a good, which is influenced by the allocation of resources and trade barriers (Boeing annual report).
• Myth: Comparative advantage is only relevant for international trade — Fact: Comparative advantage is also relevant for domestic trade, as it determines the allocation of resources within an economy (USDA).

In Practice

The comparison of scarcity is illustrated by the trade relationship between the United States and Brazil. The United States has a comparative advantage in producing aircraft, with Boeing producing ~800 aircraft annually (Boeing annual report), while Brazil has a comparative advantage in producing soybeans, with ~120 million metric tons produced annually (USDA). The two countries have a trade agreement that reduces trade barriers, such as tariffs, making it easier for them to specialize in producing goods for which they have a comparative advantage. The United States imports ~20% of its soybeans from Brazil (USDA), while Brazil imports ~30% of its aircraft from the United States (Boeing annual report). This trade relationship illustrates how the comparison of scarcity can lead to mutually beneficial trade between countries.