Exports—What to Do with Potatoes?

Consideration of exports is symmetrical to the case for imports. Suppose we're in Idaho, and we're wondering what to do with all the potatoes that can be grown in our fertile soils. More generally, the question before us is this: when should an output be consumed locally, and when should it be exported?

To address this situation, let's initially assume that input cost is the same for locally-consumed and exported potatoes. This isn't true because of transportation costs, but we can adjust for the difference later.

With this assumption in place, our choice can be based entirely on comparative effectual values.

The first effectual value to be considered is what we can achieve from consuming the potatoes ourselves. The second is the effectual value of the highest-value import that can be obtained by exporting these potatoes. See the following figure.

What to do with potatoes
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The effectual value of potatoes (EV) is higher than the effectual value of the highest-value import (EVM) until Q1. All potatoes up to this point should therefore be consumed rather than exported. After this point, potatoes should be both consumed and exported.

The top line, labeled EV, is for the locally-grown potatoes. The bottom line, labeled EVM, is for the highest-value import.

The effectual value is higher for local potatoes than for the import until Q1. We should therefore consume rather than export the potatoes up to this point.

If we consume them at higher quantities, for example to Q2, their effectual value will have dropped well below that of the import, and we should therefore switch.

We should mix importing and local consumption after Q1, with the quantitative details determined by the relative slopes of the two lines.

The necessary correction for the input cost of transporting the potatoes out of Idaho can be accomplished by shifting the bottom effectual value line down. In effect, the labor cost and natural cost associated with transportation will decrease the health benefits achieved by the import. A downward shift of the bottom line will accurately reflect this adjustment.

To summarize ENL's approach to concrete trade issues, the decision to import is driven by the relative input costs of the lowest-cost export and the locally produced output.

Conversely, the decision to export is driven by the relative effectual values of the highest-value import and the locally produced output.

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