Over the past few decades, international trade has led to greater
specialization and competition among producers in the United States and
throughout the world. By selling worldwide, companies in the United
States and in other countries can reach many more customers.
Specialization is ultimately limited by the size of the market for a good
or service. In other words, larger markets always allow for greater
levels of specialization. For example, in small towns with few customers
to serve, there is often only one clothing store that carries a small
selection of many different kinds of clothing. In large cities with a
million or more potential customers, there are much larger clothing
stores with many more choices of items and styles, and even some stores
that sell only hats, gloves, or some other particular kind of clothing.
International trade is a dramatic way of expanding the size of a firm’s
market. In markets where transportation costs are low compared with the
selling price of a product, it has become possible for producers to
compete globally to take full advantage of highly specialized production.
But international trade also means that businesses must compete more
efficiently against firms from all around the world. That competition
also makes them try to take advantage of greater specialization and the
division of labor.
In many cases, products are produced and sold by firms from two or more
countries that have large production and employment levels in the same
industry. Often, however, these firms still specialize in the kinds of
products they produce. For example, though many small cars and small
pickup trucks are made in Japan and sent to the United States, large
pickups and four-wheel drive sport utility vehicles are often exported
from the United States to Japan and other nations. Similarly, the United
States exports large commercial passenger jets to most countries, but
imports many small jets from Canada, Brazil, and other nations. While
this may seem strange at first glance, it allows greater specialization
in production for particular kinds of products.
Transportation costs can also help to explain the pattern of international production and trade. It often makes sense to produce goods close to the markets where they will be sold, or close to where the resources used in the production process are found or made. In recent years, the availability of a skilled and hard-working labor force has become more important to producers in many different industries, so new factories are often located in areas with large numbers of well-trained workers and good schools that provide a future supply of well-educated workers.
Production Patterns: Past, Present, and Future
Several dramatic changes in production patterns occurred in the United
States during the 20th century. First, most employment shifted from
farming in rural areas to industrial jobs in cities and suburbs. Then,
during the second half of the century, production and employment patterns
changed again as a result of technological advances, increased levels of
world trade, and a rapid increase in the demand for services.
Technological changes in the transportation, communications, and computer industries created entirely new kinds of jobs and businesses, and altered the kinds of skills workers were expected to have in many others. World trade led to increased specialization and competition, as businesses adapted to meet the demands of international competition.
Perhaps the greatest change in the U.S. economy came with the nation’s growing prosperity in the years following World War II (1939-1945). This prosperity resulted in a population with more money to spend on services and leisure activities. More people began dining out at restaurants, taking vacations to far-off locations, and going to movies and other forms of entertainment. As family incomes increased, a wealthier population became more willing to pay others for services.
As a result of these developments, the closing decades of the 20th
century saw a dramatic increase in service industries in the United
States. In 1940 about 33 percent of U.S. employees worked in
manufacturing, and about 49 percent worked in service-producing
industries. By the late 1990s, only 26 percent worked in goods-producing
industries, and 74 percent worked in service-producing industries. This
change was driven by powerful market forces, including technological
change and increased levels of world trade, competition, and income.
Some observers worried that this growth of employment in service-
producing industries would result in declining living standards for most
U.S. workers, but in fact most of this growth has occurred in industries
where job skill requirements and wages have risen or at least remained
high. That is less surprising when you consider that this employment
includes business and repair services, entertainment and recreation
occupations, and professional and related services (including health
care, education, and legal services). United States consumers and
families are, on average, financially better off today than they were 50
or 100 years ago, and they have more leisure time, which is one of the
reasons why the demand for services has increased so rapidly.
During the 20th century, businesses and their workers had to adjust to
many changes in the kinds of goods and services people demanded. These
changes naturally led to changes in where jobs were available, and in
what kinds of education, training, and skills employees were expected to
have. As the base of employment in the United States has changed from
predominantly agriculture to manufacturing to services, individuals,
firms, and communities have faced often-difficult adjustments. Many
workers lost jobs in traditional occupations and had to seek employment
in jobs that required completely different sets of skills. Standards of
living declined in some communities whose economies centered on farming
or around large factories that shut down. In recent decades, populations
have decreased in some states where agriculture provides a significant
number of jobs. While high-technology industries in places such as
California's Silicon Valley were booming and attracting larger
populations, some textile and clothing factories in Southern and Midwest
states were closing their doors.
Public Policies to “Protect” Firms and Workers
Historically in the United States, the government has rarely stepped in
to protect individual businesses from changing levels of demand or
competition. There have been some notable exceptions, including the
federal government’s guarantee of $1.5 billion in loans to the Chrysler
Corporation, the nation’s third-largest automobile manufacturer, when it
faced bankruptcy in 1980.
Although direct financial assistance to corporations has been rare, the government has provided subsidies or partial protection from international competition to a large number of industries. Economic analysis of these programs rarely finds such subsidies and protection to be a good idea for the nation as a whole, though naturally the companies and workers who receive the support are better off. But usually these programs result in higher prices for consumers, higher taxes, and they hurt other U.S. businesses and workers.
For example, in the 1980s the U.S. government negotiated limits on
Japanese car imports, and the price of new Japanese cars sold in the
United States increased by an average of $2,000. The price of new U.S.
cars also rose on average by about $1,000. Although the import limits did
save some jobs in the U.S. automobile industry, the total cost of saving
the jobs was several times higher than what workers earned from these
jobs. When fewer dollars are sent to Japan to buy new automobiles, the
Japanese companies and consumers also have fewer dollars to spend on U.S.
exports to Japan, such as grain, music cassettes and CDs, and commercial
passenger jets. So the protection from Japanese car imports hurt firms
and workers in U.S. export industries. Still other U.S. firms and workers
were hurt because some U.S. consumers spent more for cars and had less to
spend on other goods and services.
It is simply not possible to subsidize and protect everyone in the U.S.
economy from changes in consumer demands and technology, or from
international trade and competition. And while most people agree that the
government should subsidize the production of certain types of goods
required for national defense, such as electronic navigation and
surveillance systems, economists warn against the futility of trying to
protect large numbers of firms and workers from change and competition.
Typically such support cannot be sustained over the long run, when the
cost of protection and subsidies begins to mount up, except in cases
where producers and workers represent a strong special interest group
with enough political clout to maintain their special protection or
subsidies.
When the special protection or support is removed, the adjustments that
producers and workers often have to make then can be much more severe
than they would have been when the government programs were first
adopted. That has happened when price support programs for milk and other
agricultural products were phased out, and when policies that subsidized
U.S. oil production and limited imports of oil were dropped in the 1970s,
during the worldwide oil shortage.
For these reasons, if public assistance is provided to a particular industry, economists are likely to favor only temporary payments to cover some of the costs of relocation and retraining of workers. That policy limits the cost of such assistance and leaves workers and firms free to move their resources into whatever opportunities they believe will work best for them.
Most producers in the United States and other market economies must face
competition every day. If they are successful, they stand to earn large
returns. But they also risk the possibility of failure and large losses.
The lure of profits and the risk of losses are both part of what makes
production in a market economy efficient and responsive to consumer
demands.
CORPORATIONS AND OTHER TYPES OF BUSINESSES
Three major types of firms carry out the production of goods and services in the U.S. economy: sole proprietorships, partnerships, and corporations. In 1995 the U.S. economy included 16.4 million proprietorships, excluding farms; 1.6 million partnerships; and about 4.3 million corporations. The corporations, however, produce far more goods and services than the proprietorships and partnerships combined.
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