Comparative advantage

[Dracon II]

Why is it that Japan is the 2nd most industrialised nation in the world, when it has next to no domestic source of industrial resources, when Australia has extremely high levels of resources and we don't use them to industrialize ourselves, but instead rely on agricultural exports? Australia has enormous industrial potential coupled with a country that is one of the most terribly suited to agriculture in the world, and yet we ship all our raw materials overseas and rely on farming for exports?
We have among the lowest concentrations of forests in the world, and yet we sell timber to Japan, whose forest coverage is the highest in the industrialised world?
Australia is a 1st world country sitting upon a third world economic base.... how long can this last?

[Ted Striker]

You guys don't have enough people for that sort of thing.

I'd say you're doing quite well, relax and enjoy your high quality of life.

[Adam Smith]

Comparative advantage consists not just of the production costs, but also the transportation costs to world markets. Austraila's coal, grain, and iron ore are all close to the coast, which means that domestic transportation costs comparatively little, and close to growing asian markets, which means that maritime transportation costs comparatively little. This gives Austrailia a comparative advantage over countires such as the US (coal, grain), Canada (coal, grain), South Africa (coal), FSU (coal, grain, iron ore), Argentina (grain) and Brazil (iron ore) when selling to asian markets.

I don't know much about the lumber case, except that production would depend on the absolute amount, not on the percentage of forest coverage. How much lumber does Australia sell compared to say Canada, US, or FSU?

If you think of the basic factors of production as skilled labor, unskilled labor, capital, energy, and natural resources, the global view of comparative advantage probably looks something like this:

US, Canada: Skilled labor, natural resources
Japan: Skilled labor, capital (net savers)
Europe: Skilled labor, capital (this latter may be changing)
FSU: Energy, natural resources, skilled labor (maybe)
Mexico, Central America: Energy, unskilled labor
South America: Energy, unskilled labor, natural resources
Middle East: Energy (not enough labor to matter much)
Asian Tigers: Unskilled labor (becoming skilled labor), capital
China: unskilled labor, capital
Australia: natural resources
Africa: unskilled labor, natural resources (esp. Nigeria, South Africa, Congo)
India, rest of third world: unskilled labor.

You can then use the Heckscher-Ohlin, Stolpher-Samuelson, and Rybczynski theorems to figure out likely the patterns of trade and how they will change as factor availability changes.

[Lawrence of Arabia]

its not how much you have or produce, its how efficiently you produce it (or so says ricardo, hecksher-ohlin says you specialize in what you are abundant in, something to do with returns to scale i believe)

[Dis]

Re: Comparative advantage my arse!

Originally posted by Dracon II
Why is it that Japan is the 2nd most industrialised nation in the world, when it has next to no domestic source of industrial resources, when Australia has extremely high levels of resources and we don't use them to industrialize ourselves, but instead rely on agricultural exports? Australia has enormous industrial potential coupled with a country that is one of the most terribly suited to agriculture in the world, and yet we ship all our raw materials overseas and rely on farming for exports?
We have among the lowest concentrations of forests in the world, and yet we sell timber to Japan, whose forest coverage is the highest in the industrialised world?
Australia is a 1st world country sitting upon a third world economic base.... how long can this last?

because you live in a country where people don't want the pollution from industry

[VetLegion]

It's rather interesting.

Australia has lots of coal and iron. It would seem natural to try to produce steel.

How strong is the australian steel industry?

[VetLegion]

Checked. Australia is not among world's top 20 exporters of steel, yet it is world's largerst exporter of both iron and coal

World's largest exporter of steel is Japan, which has neither coal or iron.

[VetLegion]

As far as I know, steel production is not that labor intensive, it is capital and energy intensive. So Australia should not be in a disadvantage from that point.

Looking at the top producers and exporters, it seems that strong steel industries historically developed near big markets, usually domestic. Since Australia didn't have a big domestic market, it didn't make sense to develop a strong industry.

But why Australia is not a big exporter now, when transport costs (and many other barriers to trade) have dropped?

[Qilue]

A present problem with coal exports is the ships aren't being loaded fast enough. Last report I saw for Hay Point/Dalrymple Bay had around 20 waiting offshore.

http://www.pcq.com.au/2004/ports_haypoint.cfm

Also current ship traffic - link

The real problem is all those ships must pass through the Great Barrier Reef which is both a serious risk to shipping and world heritage listed.

[Az]

VetLegion: makes sense. Are they ready to use that coal for energy as well, though?

[molly bloom]

Originally posted by Az
VetLegion: makes sense. Are they ready to use that coal for energy as well, though?

Power stations in Victoria use nasty brown coal.

http://www.agl.com.au/AGL/Press+Releases/3+July+2003.htm

http://www.theage.com.au/articles/2003/09/21/1064082865902.html

[Az]

Nasty coal

State-of-the-art Filters

Filters cut particle emissions bad. If you pass the stuff through a series of bags, everything will be ok. ( well, except CO2)

[VetLegion]

Anyone care to offer an explanation of Australia and steel thing?

[Adam Smith]

Not just any coal is good for producing steel. You need high-carbon content "metallurgical coal", and convert it into even higher carbon content "coke", in order to get enough heat to melt the iron ore. IIRC, only about 10 percent of all coal world wide has high enough carbon content to be used for steel. If Australia has lower grade bitumenous coal, or nasty brown coal, then it won't work. You also need limestone, but I presume Australia has enough of that.

ps: IIRC, if you are recycling scrap you can use electricity to melt it, but that's a pant load of electricity.

[dannubis]

since the late sixties nobody in the developped world has built any new production lines of raw iron (iron that is tapped from the blast furnace) because of labour prices. all the new 'hot' installations are started in brazilia. the raw iron is refined and cast over there and the slabs are brought here for further rolling.

cokes are needed for their structural strength at high temperatures. if you were to use normal coal the shear weight of the iron ore would squeeze the lower layers in the blast furnace and the whole reduction process would stop.