Download Trade

Do not look in the bag until
you are asked to do so.
How do you feel about your collection of candy?
1
Very Dissatisfied
2
3
4
5
Dissatisfied
Neutral
Satisfied
Very Satisfied
What is trade?
Exchange
 Exchange goods produced for goods not
produced.
Specialization  Diverting resources away from a
competitive disadvantage toward a
competitive advantage.
What drives trade?
 Differences in tastes
What drives trade?
 Differences in productive advantage
A Tale of Two Countries
Country A
Hourly Wage
Country B
$1
Hourly Wage
$20
1 Food
40 Hours
1 Food
8 Hours
1 Cloth
10 Hours
1 Cloth
4 Hours
Cost of 1 Food
$40
Cost of 1 Food
$160
Cost of 1 Cloth
$10
Cost of 1 Cloth
$80
Country A can produce both Food and Cloth at lower cost than can Country B.
What does Food cost in the two countries?
Recall from the first experiment: Money is illusory.
In country A, move 40 hours from
Cloth production to Food production
In country A, move 40 hours from
Cloth production to Food production
– 4 Cloth
+ 1 Food
In country B, move 40 hours from
Cloth production to Food production
In country B, move 40 hours from
Cloth production to Food production
– 10 Cloth
+ 5 Food
To produce 1 more food, country A must give up 4 cloth.
– 4 Cloth
+ 1 Food
Country B has a comparative advantage in the production of food.
Country A has a comparative advantage in the production of cloth.
To produce 1 more food, country B must give up 2 cloth.
– 2 Cloth
+ 1 Food
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country A wants 1 more Food. How can Country A get more Food?
1. Shift Resources
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country A wants 1 more Food. How can Country A get more Food?
2. Sell 3 Shirts on World Market for $150
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country A wants 1 more Food. How can Country A get more Food?
2. Buy 1 Food on World Market for $150
1. Shift Resources
2. Buy/Sell on world market
This deal looks too good. No one is going to want
to buy/sell from country A at those world prices.
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country B wants more Cloth. How can Country B get more Cloth?
1. Shift Resources
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country B wants more Cloth. How can Country B get more Cloth?
2. Sell 1 Food on World Market for $150
Suppose that, on the world market, the price of Food is $150 and the price
of Cloth is $50.
Country B wants more Cloth. How can Country B get more Cloth?
2. Buy 3 Cloth on World Market for $150
1. Shift Resources
2. Buy/Sell on world market
1. Shift Resources
2. Buy/Sell on world market
What Are the Benefits From Trade?
Protectionist Assumption:
Trade leads to a centralization of political power, decreased
competition, and the concentration of wealth.
Globalist Assumption:
Trade leads to a decentralization of political power, increased
competition, and the dissemination of wealth.
What Is the Impact on Per-Capita Income?
Protectionist Assumption:
Trade is exploitive of peoples and industries, therefore percapita income will be lower for countries that trade more.
Globalist Assumption:
Trade is beneficial to both parties, therefore per-capita
income will be higher for countries that trade more.
Per-Capita Income
$40,000
Luxembourg
$35,000
Belgium
Per-capita Trade (US$)
$30,000
R2 = 0.56
Ireland
$25,000
Netherlands
$20,000
Bahrain
$15,000
$10,000
US
Japan
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
Per-Capita Income (Lower Middle, and Low Income)
$3,500
Suriname
$3,000
Per-capita Trade (US$)
$2,500
Lithuania
R2 = 0.59
$2,000
Samoa
Guyana
$1,500
Russia
$1,000
Peru
Colombia
$500
$0
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
Per-Capita Income
Vietnam
Workers in foreign-owned apparel and footwear factories rank in the top
20% of wage earners.
Indonesia
In 2000, Nike paid $720 annually compared with an average annual
country-wide wage of $241.
Mexico
Firms that exported most or all of their product paid wages 60% higher
than wages of non-exporting firms.
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, “The Effects of Multinational Production on Wages
and Working Conditions in Developing Countries,” discussion paper no. 483, School of Public Policy, The
University of Michigan, August 2002.
What Is the Impact on Income Distribution?
Protectionist Assumption:
Trade consolidates income in the hands of the powerful,
therefore countries that trade more will have a less equitable
income distribution.
Globalist Assumption:
Trade disseminates income across trading partners,
therefore countries that trade more will have a more
equitable income distribution.
Income Distribution
$40,000
No carrot: A too inequitable distribution
signals a lack of
entrepreneurial opportunity.
Singapore
$35,000
Hong Kong
Per-capita Trade (US$)
$30,000
No stick: A too equitable distribution
signals no cost to free riders.
Ireland
$25,000
Netherlands
Switzerland
$20,000
Norway
Denmark
Sweden
Austria
$15,000
Finland
Canada
Germany
Israel
Slovenia
$10,000
France
Malaysia
Cyprus
US
Gabon
South Africa
$5,000
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
60.0
65.0
Income Distribution (Lower Middle, and Low Income)
$3,000
Per-capita Trade (US$)
$2,500
Lithuania
$2,000
Fiji
Thailand
$1,500
$1,000
Ukraine
$500
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
60.0
65.0
What Is the Impact on Health?
Protectionist Assumption:
Trade exploits labor, therefore countries that trade more will
have lower health measures.
Globalist Assumption:
Trade empowers labor, therefore countries that trade more
will have greater health measures.
Life Expectancy
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
R2 = 0.59
Botswana
US
$1,000
$100
India
$10
$1
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Life Expectancy (years)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Life Expectancy (Low Middle, and Low Income)
$10,000
Per-capita Trade (US$)
$1,000
Congo
Lesotho
$100
India
R2 = 0.51
Sierra Leone
$10
$1
30
35
40
45
50
55
60
65
70
75
80
Life Expectancy (years)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Infant Mortality
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
US
Gabon
2
R = 0.79
$1,000
Botswana
South Africa
Azerbaijan
$100
Ivory Coast
$10
$1
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Infant Mortality (per 1,000 live births)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Caloric Intake
$100,000
Hong Kong
Per-capita Trade (US$, logarithmic scale)
recommended
$10,000
US
R2 = 0.60
$1,000
$100
Myanmar
$10
$1
1,500
2,000
2,500
3,000
3,500
4,000
Daily per capita Supply of Calories
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Protein Intake
$100,000
Per-capita Trade (US$, logarithmic scale)
recommended
$10,000
US
R2 = 0.59
$1,000
$100
$10
$1
30
40
50
60
70
80
90
100
110
120
Daily per capita Supply of Protein (grams)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
What Is the Impact on the Environment?
Protectionist Assumption:
Trade exploits the environment.
Globalist Assumption:
Trade encourages protection of the environment.
Deforestation
$30,000
73% of countries with above median
trade have rates of deforestation below
the median.
Ireland
$25,000
Per-capita Trade (US$)
$20,000
$15,000
$10,000
US
Malaysia
$5,000
Lebanon
Jamaica
Armenia
$0
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
Average Annual Rate of Deforestation (1990-1995)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
What Is the Impact on Social Equality?
Protectionist Assumption:
Trade exploits the weak.
Globalist Assumption:
Trade empowers all.
Female Adult Literacy (relative to male)
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
Oman
R2 = 0.41
Libya
$1,000
Morocco
Yemen
Haiti
$100
Myanmar
$10
$1
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Female Adult Literacy Rate (relative to male)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Gender Related Development Index
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
Botswana
Oman
US
R2 = 0.80
$1,000
Ivory Coast
Azerbaijan and Albania
$100
Myanmar
$10
GDI measures equality of quality of life
(longevity, education, literacy, income).
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Gender Empowerment Measure
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
R2 = 0.58
$1,000
$100
$10
GEM measures the proportion of women in legislatures, among senior
officials, and holding technical and management positions as well as
gender differences in income (as a proxy for economic power)
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Empowerment Measure (0 = low empowerment, 1 = high empowerment)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Child Labor
$100,000
Per-capita Trade (US$, logarithmic scale)
Hong Kong
$10,000
US
Botswana
Gabon
$1,000
R2 = 0.54
$100
Burundi
Sierra Leone
$10
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Human Development Index
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
$1,000
$100
R2 = 0.80
$10
$1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Human Development Index (0 = low human development, 1 = high human development)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human
Development Report, United Nations Development Programme, 2002
1.0
What Is the Impact on Unemployment?
Protectionist Assumption:
Trade destroys jobs.
Globalist Assumption:
Trade creates jobs.
Unemployment vs. Trade Over Time
January 1975 to June 2006
12%
Unemployment Rate
10%
8%
6%
4%
2%
0%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
Unemployment vs. Trade Over Time
January 1975 to June 2006
Average Real Hourly Earnings (2000 $)
$15.00
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
What About Outsourcing?
Protectionist Assumption:
Outsourcing puts Americans out of work.
Globalist Assumption:
Outsourcing is trade (of labor), and trade is beneficial.
Outsourcing (2002)
$50,000
$45,000
$40,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Russia
China
India
UK
France
Italy
Netherlands
Japan
US
$0
Germany
Billions current $
$35,000
Source: Balance of Payment Statistics Yearbook, IMF
Outsourcing as Fraction of GDP (2002)
40.00%
35.00%
25.00%
20.00%
15.00%
10.00%
5.00%
US
Japan
China
UK
France
Russia
Germany
India
Vanuatu
Ireland
Mozambique
Congo (Rep. of)
0.00%
Angola
Billions current $
30.00%
Source: Balance of Payment Statistics Yearbook, IMF
Insourcing less Outsourcing (2002)
$25,000
$20,000
$10,000
$5,000
Germany
Japan
Indonesia
Korea
Italy
Russia
France
China
Singapore
India
Hong Kong
($5,000)
US
$0
UK
Billions current $
$15,000
($10,000)
($15,000)
Source: Balance of Payment Statistics Yearbook, IMF
Name two metrics that
distinguish the first world from
the third world.
If you hit a light bulb with a
hammer, will you make a mess?
Count of articles on outsourcing from Dow Jones News Service, Financial Times,
New York Times, Seattle Times, Wall Street Journal, Washington Post
1993-I to 2004-I
Source: Amiti, M. and S. Wei, 2004. Fear of service outsourcing: Is it justified. IMF Working Paper WP/04/186