[Closed] The Economics of Buying British

So, what's wrong with this logic?

There are only 27 products left that we actually make in this country nowadays. And 3 of those are different flavours of Pot Noodle

Economists will point you to the theory of trade and comparative advantage. The theory is not water-tight by any means, but the basic argument is that both parties/countries benefit is they specialise in and allocate resoures to making things that they have a competing advantage in and then trading with each other. As with most things in economics it comes down to opportunity cost.

Edit: ignore Binners' joke, we still manufacturer a lot and are either the 10 or 11th biggest trader in the global economy, and our biggest export remains manufactured goods.

It's not a zero sum game.

Also it won't be you personally paying for the consequences of somebody British going out of business - by buying cheaper from Taiwan you're getting all the other taxpayers to subsidise your purchase.

[url= http://kkozak.wz.cz/Porter.pdf ]The Competitive Advantage of Nations by Michael Porter[/url]

Well worth a read. Ultimately though it's your money and its up to you how you spend it.

Did anyone see the Mary Portas programme not long back? Comparing the price of Chinese and British made goods? In this case textiles?

Increased wages in emerging economies (10-15% pay rises a year against our stagnant wages), and transport costs are now reaching a tipping point. Companies are now shifting production back to the UK, as while the costs are still a little bit higher, there's not much in it any more. And quality-wise there is no comparison as the Chinese economy is still based on a largely unskilled workforce.

Actually, since I'm the one buying British whenever I can, I guess it's me subsidising everybody else's purchases 🙂

Thanks for the link on trade and comparative advantages teamhurtmore. The 2 country 2 commodity example does make sense. There still seems to be a leap of faith involved in applying it to the many country many commodity situation with intermediate goods. But I guess I could try and track down:

Yoshinori Shiozawa, A New Construction of Ricardian Trade Theory / a Many-Country, Many-Commodity Case with Intermediate Goods and Choice of Production Techniques, Evolutionary and Institutional Economics Review, Volume 3 Issue 2, pages 141-187, March 2007. Andrew J. Cassey, An Application of the Ricardian Trade Model with Trade Costs, Applied Economics Letters, 2012, 19, 1227-1230.

[b][u]geetee1972:[/b][/u] The Competitive Advantage of Nations by Michael Porter

Well worth a read. Ultimately though it's your money and its up to you how you spend it.

Thanks, that looks a little easier to digest than the Shiozawa paper 🙂

I broadly agree with this. I would add though:

Buy quality.

Although UK goods are not guarenteed to be better, many are, and many will also be economic to repair or get spares.

If we import a lot of stuff, does that not mean that we're selling a lot of GBP and buying a lot of other currencies? This would weaken the pound and lead to a more competitive home market and a stronger export market. So long term good?

I agree with point 3 as long as you are not seriously disadvantaged by doing it.

There's nothing wrong with your logic, you're right.
If you're a greengrocer & buy a bike from the shop next door, he's got the money to buy carrots from you. If the bike is made in Britain, then the manufacturer's employees can buy from you. The taxes on ransactions & profits & wages pay for the NHS, teachers, etc
If the money goes to China via Amazon, then all the wages & profits go elsewhere, & little tax is due here.

Moses, if the logic was correct, no one would engage in trade at all.

if the logic was correct, no one would engage in trade at all.

This - taken to its illogical conclusion you would only buy or sell things from yourself.

Porter is a case study in making money out of something very, very simple. (Although a recent Forbes article branded him a charlatan!!). Take the basic things that economic theory assumes are constants, make them variables, package them in a "model" and charge $100k per hour to lecture about it! Wow, what a business model.

I tend to follow the ten crack commandments.

"if you follow these rules you'll have mad bread to break up; if not 24 years on the wake up"

Thanks Moses, that's pretty much the logic I use. It's simple and it seems to make sense. But, as teamhurtmore points out, it's probably worth thinking about why we trade with each other at all. Why don't I just build my own bike? Well, clearly there isn't time for me to acquire all the skills I'd need to do everything I'd need to do in a modern world myself. Also, while I may not be the best in the world at what I do, it still makes more sense for me to do that rather than something I'm even less good at, which seems to be the "competitive advantage" argument. Still not sure it really works for international trade though, but it's food for thought.

I'm glad I'm not alone in a dim view of Michael Porter, had to consume a lot of his output in my studies, and it always seemed like a case of taking some common sense, drawing a grid around it et voila, a matrix for which businesses will pay handsomely.

What's his one that basically boils down to "if your product isn't the cheapest in the market then you need to differentiate it some other way in order to sell it"? Really? Thanks for that Michael, I'd never have figured that out if you hadn't drawn a grid around it...

Moses, if the logic was correct, no one would engage in trade at all.

The logic is fine.
However we don't make everything on our doorstep, so some trade is inevitable: not all foods grow here, most minerals originate elsewhere. But the more added value we put in here, the richer we are. By buying manufactured goods and services from abroad (like EDF electricity & German cars), most of the profits are made & taxed elsewhere so we are poorer.

A case in point: when we closed many of our uneconomic coal mines, in favour of nominally cheaper imported coal, the overall cost to the British economy was higher, because of the social support required for the ex-miners and the industries which depended upon the industry.

Buying British, in the context of a global market, means very little - even if you buy something made in the UK, where did the parts come from? there is virtually nothing within the modern world, that is made in one country that solely comes from one country - so the very idea of buying british only has limited effect, the money will find itself overseas eventually (and back again, as money comes into this country from other countries - although mainly through finance, but also tourism and universities etc.)

So, what's wrong with this logic?

You are only one person
If you were a million people then you may see some noticeable return on your investment. But instead you will see zilch so logic dictates you should buy the cheapest available product.

This is also the reason I don’t recycle – because it’s akin to turning up at an earthquake with a dust pan and brush.

Moses - I will beg to differ and even your first para partly explains why (ie your more value added point). Trade does not mean that we are poorer, otherwise we would no engage in it. Lets take a very simple example and assume that the UK and Taiwan both make road and MTB bikes and they share resources equally between producing both.

Assume output of UK is 1 MTB and 4 road bikes
Assume output of Taiwan is 2 MTB and 3 road bikes

[u]So in total 3 MTB are made and 7 road bikes are made.[/u]

From this we can see that to make 1 MTB, the UK gives up making 4 road bikes (the opportunity cost), The cost to the UK of making one road bike is 1/4 of a MTB. For Taiwan the cost of making 1 MTB is 1.5 road bikes, and the cost of making one road bike is 2/3 road bike.

So just look at road bikes - making 1 road bike in the Uk has a cost of only 1/4 of a MTB. If Taiwan makes a road bike then its cost is 2/3 of a MTB ie its a higher opportunity cost. So wouldn't it make sense for the UK to make the road bikes and Taiwan to make the MTB?

Instead of splitting their resources between the two bikes they allocate all to road (UK) and all to MTB (Taiwan). Assume the returns to scale are the same ie double resources = double output.

What happens now?

The UK produces 8 road bikes but no MTB
Taiwan produces 4 MTB but no road bikes

The result is instead of total production of 3 MTB and 7 road bikes, [u]the same resources now produce 4 MTB and 8 road bikes.[/u] The UK and Taiwan can now trade between each other and both economies are better off.

The logic behind why we trade with each other is that is allows countries to specialise in things that they have a competitive advantage in, it can give access to more output and choice (see above) and cheaper prices. Simple really.

But in that example the UK is more efficient that Tiawan at making road bikes. What happens when we're less efficient at everything?

Since we all live on the same planet we really need to grow up and realise we are all running out of recourses.

Add to that the fact you wont live very long and it takes far longer to change a society.

The only logical response is to buy quality that you can afford. Anything else is not logical.

Very good question - that is the difference between absolute and comparative advantage. Countries can have absolute advantages in the production of eg MTB if an equal amount of resources can produce more MTB than another country. But that does not necessarily mean that it has a competitive advantage. [u]The key is the concept of opportunity cost. What is the opportunity[b] given up[/b] to produce the MTB? [/u]

Countries may well be more efficient at producing one good in absolute terms, but if this involves a greater sacrifice in terms of producing other things, it remains logical to concentrate on the one with the competitive advantage and trade the other. Obviously this also works in reverse (to answer your question directly).

Roverpig - my example above is very simplified obviously and is the very basics of Trade Theory devised by a guy called Ricardo. There are much more complicated (and realistic models) but the basic logic and principle (opportunity cost) is easiest to see with Ricardian examples - I hope!!

The only logical response is to buy quality that you can afford. Anything else is not logical.

Agreed, but what you can afford is not necessarily what is cheapest in the short term. If buying all my goods from China means that loads of people here lose their jobs (leading to poverty, civil unrest etc) it's quite possible that the cost (even in my lifetime) will be higher than it would have been if I'd just paid a bit more for my bike in the first place.

I hear the council of despair. I'm just one person; I can't make a difference. But that's not a path I'm comfortable following. Do what you think is right and try to convince others to do the same seems a better philosophy to me.

However, the "comparative advantage" argument is a powerful one.

Looking around, people are more mobile these days, talk different and come from different places. Should you buy stuff from the country/town you were born in, the one you are currently in or one you'd like to live in next ? Is this about getting stuff back yourself? Or helping people that are like you? How do you decide?

But in that example the UK is more efficient that Tiawan at making road bikes. What happens when we're less efficient at everything?

The trouble is we all seem to want to live in nice houses, own 2 cars, have 3 meals a day etc etc and so labour rates are an order of magnitude higher than in Taiwan where expectations are a tad lower. We also seem to agree that everyone ought to have all these nice things even if they don’t contribute to the economy - which adds further overhead to the cost of producing anything.

In the past we overcame these issues by producing things that nobody else could; unfortunately the rest of the world has kind of caught up. Also we were quite good at getting a lot of people work for peanuts and people from other countries to work for free! Now we are all very ethical so this doesn’t happen either.

Nowadays the only way we seem to be able to make money is by shuffling other people’s money around from one risky venture to another - as recent events have shown- I don’t think there's much of a future in this.

Thanks teamhurtmore. You are right, the simple examples are indeed very helpful in getting the idea across. I see that yours is very similar to the one on the Wikipedia page on Comparative advantage, which in turn leads to Rocardo's 1817 book "On the Principles of Political Economy and Taxation" which deals quite nicely with my question as, in that case, Portugal was more efficient than the UK in making both commodities.

Now, what's the conclusion on this Porter guy? Is the objection to him simply that he is making money by dressing up the obvious as something new, or is there a flaw in his logic too. As far as I can tell he seems to be saying that the best thing I can do for the long term benefit of the country is to be as demanding and unforgiving a consumer as possible (or have I read him wrong?).

So, let's get back to a cycling analogy. Say, for the sake of argument, that I think the Single Pivot is probably not the best suspension system for a mountain bike but that it's good enough for my purposes. By my "rule 3" I'd conclude that I should buy an Orange. The design is fit for purpose and (as long as I pick the right model) it's made in the UK. By Porter's logic I shouldn't as it is neither the best nor the cheapest option on the market. So, which is the right path to follow?

You are only one person
If you were a million people then you may see some noticeable return on your investment. But instead you will see zilch so logic dictates you should buy the cheapest available product.

This is also the reason I don’t recycle – because it’s akin to turning up at an earthquake with a dust pan and brush.

But here you are assuming nobody else does it, whereas if you assume that lots of people do it you're onto a winner. in reality some do, some don't, so the effect won't be massive but could be significant.

I've no idea if that makes sense..................

Roverpig - I cannot claim any originality in my case study, I just tweaked the bike bit!! The numbers I chose are repeated in basic economics text books because they illustrate the concept very easily!! Plus I was recently drilling those numbers into my son's head pre-Econ exams!!!!

Porter is an interesting guy. The work that made him famous was his so-called 5 forces model on what determines industry competition. It remains a very powerful and easy-to-use framework for starting analysis of any industry. Porter extended this into four generic strategies and then into the concept of the value-chain. IMO these are also useful framworks for analysis. He later produced the 855 tome on the Competitive Advantage of Nations where he tries to extend the theory to explain why some countries are better tha others at producing certain goods. It's a lengthy read. I have no objection to him making the money he did, I am just surprised that people paid him $100k an hour to explain it to them. But I guess that's what makes a successful consultant!

Edit: on your final question, this was not Porter's focus. But simply, what you describe is yet another economic concept/question - are we maximisers or satisfiers? A large part of theoretical economics is based in the principle that when seeking to allocate their scarce resources (the basic question of economics), people seek to maximise things such as utliity or profits etc. What you describe is different behaviour altogether, which forms a different part of theory. Even if buying the Orange is not the optimum decision you "could make", it's still satisfies most of what your are looking for, so you make the purchase.

But here you are assuming nobody else does it, whereas if you assume that lots of people do it you're onto a winner. in reality some do, some don't, so the effect won't be massive but could be significant.

Im not assuming nobody else does it. Regardless of how many people do it.........
X + "something insignificantly small" = X

so no change.

Look I’m not say saying it’s not morally the right thing to do - that’s not my area - just don’t expect to see a return on investment thats all.

Did anyone see the Mary Portas programme not long back? Comparing the price of Chinese and British made goods? In this case textiles?

Increased wages in emerging economies (10-15% pay rises a year against our stagnant wages), and transport costs are now reaching a tipping point. Companies are now shifting production back to the UK, as while the costs are still a little bit higher, there's not much in it any more. And quality-wise there is no comparison as the Chinese economy is still based on a largely unskilled workforce.

+1

or like the machine tool industry the Taiwanese bang out some of the best in the industry bar none

they bought all the production of the UK made grinders to do this then used them to make more taiwanese precision machinery hence putting the uk grinder manufacturer out of buisness

"Look I’m not say saying it’s not morally the right thing to do - that’s not my area - just don’t expect to see a return on investment thats all."

I think return on investment is a key issue here. There was also a comment earlier about taiwanese bikes seeming like good value for money. Producing all these goods in places like China increase profit margins. I think they would also be good value for money if they were made in the UK and also sold for the same amount. Can manufactures do this, probably they can (almost certainly) its just investors etc would have a lower return on investment.

I would personally prefer to buy from a local source, knowing that I am supporting a regular bloke in having a job and a decent standard of living. This is preferable for me to paying the same price for the same item produced in china and knowing that the item has been market up 900% and that the extra is going to some fat cat. Also at the cost of the increased pollution in that region.

I have a problem with the idea the money must stay in the UK.

Developing countries are desperately poor. There's plenty of things we can do here that they can't, they don't need us to take away their business in the things they CAN do as well. Most of us are doing better than most Chinese people despite the fact that they make most of our stuff.

It's as if you are saying British people deserve your money more than foreigners do...

Also, it's interesting how people seem to tend towards the right of the political spectrum then they change track and maintain that British workers have a right to work regardless of their product or costs.

Now I'm not saying that's wrong.. I am not a Conservative or even right wing, but it's a point worth considering imo.

[b][u]molgrips:[/b][/u] It's as if you are saying British people deserve your money more than foreigners do.

No it's much more selfish than that 🙂 I'm just trying to work out what's best for me in the long run. It wasn't really a moral argument. Simply a question of whether buying the cheapest bike (for example) in the short term ends up costing you more in the long term if you buy it from abroad. I've always assumed that it does. Now I'm not so sure.

Before this thread veers further off course, as it must, I just wanted to say a quick thanks to all those who have tried to educate me on basic economics. Let's just say that rule 3 is now under review.

roverpig - Member
Now I'm not so sure.

Which is the value in debate!! But the answer is easy - buy the Giant!!

Indeed. Any day where I end up less sure about something is a day well spent. The more I learn the less I know.

I would like to just throw something in there. I have a limited and very simplistic view of economics so don't blast into me 😐

I think that Molgrips has a point. Perhaps we should consider relieving poverty of certain other countries. However, while this is good theory, does it actually work? Countries get trade, but they get trade because they are cheap, workers are paid low salaries while all the big money goes to just a few. Does this not create an incentive to keep salaries low and continue to exploit people?

Spending on local products I would expect stimulates local economy, jobs and hopefully everyones life quality increases a bit. what is the alternative? Spend to get cheaper goods, money goes to other countries, local jobs lost, unemployment then poverty, then crime, then drug problems, then social unrest and violence on the street. Once that has happened, taxes go up to pay for the unemployment, health service, policing and the money you saved by buying cheap is gone and, you end up living in a dump.

Is this too simplistic?

THM: "Trade does not mean that we are poorer, otherwise we would no engage in it. "

I never said that it did mean this, just that by importing / buying frmo abroad, we are impoverishing ourselves when compared with buying locally. Similarly, we are enriching other countries. (Even though they may be porer than we are)

Understood, but I still do not agree Moses, and hoped that my example explained why. But I cant have been clear enough. We are not enriching others - there is a win, win if resources are allocate better. In the simple example the UK MTB maker (who may look like a loser here) can join the road bike firm (ok, assumptions here) where he will do better, the consumer does better and even the environment does better as fewer resources are required to make the same amount of output.

Teamhurtmore,

Producing in low cost economies generally increases environmental impacts.

Cheers

And this is exactly why our economy is ****ed. Economists like those you quote have been telling us that it doesn't matter if we in Britain don't make stuff nor own companies. It does.

What exactly are we exporting to Taiwan to trade for goods, so that both parties benefit? Where will we be in 10 years? We know that by offshoring corporate HQ, foreigh companies avoi paying tax to you & me. Where's the benefit to us?
Yes, we have lots of financial services, but there are easy to replicate, and are being. Trade is good but it has to reciprocal, and at the moment the UK is not exporting. So by buying British we can cut the deficit and improve our lot.

Your bicycle example is a good one.
We import many MTBs, but we don't make the road bikes either. In the real world, the 5000 ex-employees of Raleigh don't make anything, and many were on the dole for many years. Please explain how this benefitted the UK. If Raleigh had continued to make bikes in the UK, by improving efficiency, we could have bought locally and the UK would be better off.

This is also the reason I don’t recycle – because it’s akin to turning up at an earthquake with a dust pan and brush.

🙄

Roverpig, do you work for Orange or Hope 😀

I do agree with buying locally where possible.