Market Monday #6: Comparative Advantage

It is Memorial Day, and we are celebrating our freedom by bragging about the economy, putting immigrants in “detention centers” reminiscent of WW2 concentration camps, and punching drunk women on the Jersey shore. We need to realize the value of our fellow human beings, whether they be soldiers, immigrants, or even drunk women on the beach. Let’s stop blaming each other and hurting each other. Empathy is better for morality, but it is also better for the economy.

Quote of the Day

Screen Shot 2018-05-28 at 10.10.59 PM

Term of the Day

Comparative advantage explains how we all can benefit from each other economically. The concept, identified by David Ricardo in his On the Principles of Political Economy and Taxation in 1817, is not that different from Adam Smith’s division of labor. Douglas Irwin explains:

The key idea behind comparative advantage is that every country, no matter how advanced or behind it might be in the productivity of its labour compared to other countries, would be able to engage in beneficial trade with others. A country with a productivity advantage over other countries would not export everything, but only those goods in which it had a comparative advantage. Thus, paradoxically, an advanced country would find it advantageous to import goods even if it could produce those goods more efficiently than other countries. Conversely, countries behind the technological frontier without an “absolute” productivity advantage in anything (in comparison with others) could still export goods in which its comparative disadvantage was the least and import goods in which its comparative disadvantage was the greatest — and benefit from doing so.

Tweet of the Day

In contrast to another President’s tweet today, President Barack Obama captures the essence of Memorial Day in with both realism and reverence:

Chart of the Day

As interest rates dropped, junk bonds make up an increasing percentage of debt issuance:

junk bonds rise

This reminds me of the increase in subprime mortgages leading up to the Great Recession. It is one of a few vulnerabilities in the economy that have the potential to be the next recession trigger.

Read

The Corporate Bond Bubble Is Starting To Burst
Harry S. Dent, Jr., Business Insider, 05.26.2018

Trump’s Outdated View of the Economy
Rick Newman, Yahoo! Finance, 03.07.2018

Recession 2020?
Menzie Chinn, Econbrowser, 05.28.2018

Watch

“Trade” episode of the PBS series First Civilizations (aired 05.05.2018)

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