Microeconomics Question from Walter E. Williams:[]

"Evaluate. 'Chinese labor is far less productive than American labor as evidenced by the fact that it takes so much of it to get jobs done. One the other hand, American wheat land is less fertile than wheat land in Europe (e.g., France) as evidenced by the lower yield per acre in the United States.' "


This statement is incorrect since it focuses on the relative quantities of the inputs utilized in production instead of considering the ratio of the marginal product of an input over its price. That more of input X used in production relative to input Y in place A compared against place B does not imply that input X in location A is less productive than input X in location B.

Where , there will be substitution away from resource to resource in production until the values of the ratios equalize. Since China has far more labor available than capital in relation to the demand for each input, the price of labor is lower relative to the price of capital. That is, the opportunity cost of using capital in China is high compared to the opportunity cost of labor. Therefore, using the same mix of inputs as used in America would make the Chinese output far more expensive. Thus, the mix of inputs in China skews toward cheaper labor as a substitute for capital in order to bring down the costs of production. While this will mean that the productivity of the marginal Chinese worker is lower than that of the marginal American worker, this does not imply that Chinese labor is less productive than American labor ceteris paribus.

Similarly, with respect to land, America has far more land available than Europe does, meaning land in Europe will on average be more expensive per acre. As such, the opportunity cost of land is Europe is higher than in America, which implies that only the acreage with the highest yields for wheat are used for wheat farming; that is, only farm land with the highest marginal product will be used. With less expensive land available in the America, acreage with lower marginal products can be used for growing wheat crops. Again, while the marginal acre used in America will have a lower marginal product, that does not mean that American acreage is inherently inferior.

The takeaway here is that even if American and China, or America and France, have the exact same technological production function, the relative availability or scarcity of inputs will influence both the opportunity costs and prices of those inputs, which will in turn affect the mixture of inputs used to produce the same amount of output. This analytical reality generally implies nothing about the inherent qualities of the inputs used.

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