January 9, 2008

Tale of Two cities

In the last six chapters of Tim Harford’s “The Undercover Economist” many interesting ideas and concepts were touched upon. There was one line in the chapter titled, “Beer, Fried, and Globalization” that stood out from the rest. The line is, “if you would like to be rich, then it is a good idea to forge close links with the rest of the world. The example discussed just prior to this line involved two cities in the fifteenth century. The cities of Bruges and Antwerp were both located on the Zwin estuary. Bruges for the previous 250 years had enjoyed great economic success through trading with other cities. Bruges had an enormous amount of wealth, twice the population of London, and was developing new industries.
The Zwin began to silt up and ships trading goods could no longer reach the Bruges port. The “Hanseatic League” then moved its trading operations to the nearby city of Antwerp which still had access to the Zwin. Bruges quickly became what we would call a ghost town. The entire economic activity taking place in Bruges moved to Antwerp which experienced a great amount of economic prosperity. Today, Antwerp remains an economic powerhouse while Bruges is still essentially a ghost town.
The example shows that cities gain much from trading with each other. If one country (A) can create something cheaper and quicker than another country (B) than it should produce that item and sell it to the other country. Perhaps country A could create guitars for $20 and it takes them 30 minutes to create one which was twice as fast and half as expensive as country B could do it. Country B may also make drums for $20 and it takes 30 min while country A takes double the time and money. If each country practiced isolationism they would each spend a total of $60 and 90 minutes on creating a drum and guitar set. If the two countries each produced what they were best at then both counties could have a guitar and drum set that cost only $40 and took only 60 minutes to produce.
This goes to show how trade helps our economy. Trade barriers such as tariffs, quotas, or subsidies may help some domestic company but will only hurt the consumers/citizens of that country. Antwerp is successful today because of trading and if one were to locate Antwerp and Bruges on Google Earth one would be able to see that Bruges (which was once the capital city) looks like nothing more than a tiny suburb of Antwerp.

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