Star Begin at an output level of – 1000 stancrafs – Produced using 10 units of labor (L) and 10...

Star

• Begin at an output level of – 1000 stancrafs

– Produced using • 10 units of labor (L)

and • 10 units of capital (K)

• Mark this output level with a star

LK

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 100 118 131 141 149 156 162 168 173 177 182 186 189 193 196 200 203 205 208 211

2 168 200 221 237 251 263 273 282 291 299 306 313 319 325 330 336 341 346 351 355

3 227 271 300 322 340 356 370 383 394 405 415 424 432 440 448 455 462 469 475 482

4 282 336 372 400 422 442 460 475 489 502 515 526 537 547 556 565 574 582 590 598

5 334 397 440 472 500 523 543 562 579 594 608 622 634 646 658 668 678 688 698 707

6 383 455 504 542 573 600 623 644 664 681 698 713 727 741 754 766 778 789 800 810

7 430 511 566 608 643 673 700 723 745 765 783 800 817 832 846 860 873 886 898 910

8 475 565 626 672 711 744 773 800 823 845 866 885 903 920 936 951 965 979 993 1005

9 519 617 683 734 777 813 845 873 900 924 946 967 986 1005 1022 1039 1055 1070 1084 1098

10 562 668 740 795 840 880 914 945 974 1000

1024 1046 1067 1087 1106 1124 1141 1158 1174 1189

11 604 718 794 854 903 945 982 1015 1046 1074 1100 1124 1146 1168 1188 1208 1226 1244 1261 1277

12 644 766 848 911 964 1009 1048 1084 1116 1146 1174 1200 1224 1247 1268 1289 1309 1328 1346 1363

13 684 814 901 968 1023 1071 1113 1151 1185 1217 1246 1274 1300 1324 1347 1369 1390 1410 1429 1447

14 723 860 952 1023 1082 1132 1177 1217 1253 1287 1318 1347 1374 1400 1424 1447 1469 1490 1511 1530

15 762 906 1003 1077 1139 1192 1239 1281 1320 1355 1388 1418 1447 1474 1500 1524 1547 1569 1591 1611

16 800 951 1052 1131 1196 1252 1301 1345 1385 1422 1456 1488 1519 1547 1574 1600 1624 1647 1670 1691

17 837 995 1101 1183 1251 1310 1361 1408 1450 1488 1524 1558 1589 1619 1647 1674 1700 1724 1747 1770

18 873 1039 1150 1235 1306 1367 1421 1469 1513 1554 1591 1626 1659 1690 1719 1747 1774 1800 1824 1848

19 910 1082 1197 1287 1360 1424 1480 1530 1576 1618 1657 1693 1728 1760 1790 1820 1847 1874 1900 1924

20 945 1124 1244 1337 1414 1480 1538 1590 1638 1681 1722 1760 1795 1829 1861 1891 1920 1948 1974 2000

21 980 1166 1291 1387 1466 1535 1595 1649 1699 1744 1786 1825 1862 1897 1930 1961 1991 2020 2048 2074

22 1015 1208 1336 1436 1519 1589 1652 1708 1759 1806 1849 1890 1928 1964 1999 2031 2062 2092 2120 2148

23 1050 1248 1382 1485 1570 1643 1708 1766 1819 1867 1912 1954 1994 2031 2066 2100 2132 2163 2192 2221

24 1084 1289 1427 1533 1621 1697 1763 1823 1878 1928 1974 2018 2058 2097 2133 2168 2201 2233 2263 2293

Square

• Begin at an output level of – 330 stancrafs

– Produced using • 15 units of labor (L)

and • 2 units of capital (K)

Mark this output level with a square

LK

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1 100 118 131 141 149 156 162 168 173 177 182 186 189 193 196 200 203 205 208 211

2 168 200 221 237 251 263 273 282 291 299 306 313 319 325 330 336 341 346 351 355

3 227 271 300 322 340 356 370 383 394 405 415 424 432 440 448 455 462 469 475 482

4 282 336 372 400 422 442 460 475 489 502 515 526 537 547 556 565 574 582 590 598

5 334 397 440 472 500 523 543 562 579 594 608 622 634 646 658 668 678 688 698 707

6 383 455 504 542 573 600 623 644 664 681 698 713 727 741 754 766 778 789 800 810

7 430 511 566 608 643 673 700 723 745 765 783 800 817 832 846 860 873 886 898 910

8 475 565 626 672 711 744 773 800 823 845 866 885 903 920 936 951 965 979 993 1005

9 519 617 683 734 777 813 845 873 900 924 946 967 986 1005 1022 1039 1055 1070 1084 1098

10 562 668 740 795 840 880 914 945 974 1000 1024 1046 1067 1087 1106 1124 1141 1158 1174 1189

11 604 718 794 854 903 945 982 1015 1046 1074 1100 1124 1146 1168 1188 1208 1226 1244 1261 1277

12 644 766 848 911 964 1009 1048 1084 1116 1146 1174 1200 1224 1247 1268 1289 1309 1328 1346 1363

13 684 814 901 968 1023 1071 1113 1151 1185 1217 1246 1274 1300 1324 1347 1369 1390 1410 1429 1447

14 723 860 952 1023 1082 1132 1177 1217 1253 1287 1318 1347 1374 1400 1424 1447 1469 1490 1511 1530

15 762 906 1003 1077 1139 1192 1239 1281 1320 1355 1388 1418 1447 1474 1500 1524 1547 1569 1591 1611

16 800 951 1052 1131 1196 1252 1301 1345 1385 1422 1456 1488 1519 1547 1574 1600 1624 1647 1670 1691

17 837 995 1101 1183 1251 1310 1361 1408 1450 1488 1524 1558 1589 1619 1647 1674 1700 1724 1747 1770

18 873 1039 1150 1235 1306 1367 1421 1469 1513 1554 1591 1626 1659 1690 1719 1747 1774 1800 1824 1848

19 910 1082 1197 1287 1360 1424 1480 1530 1576 1618 1657 1693 1728 1760 1790 1820 1847 1874 1900 1924

20 945 1124 1244 1337 1414 1480 1538 1590 1638 1681 1722 1760 1795 1829 1861 1891 1920 1948 1974 2000

21 980 1166 1291 1387 1466 1535 1595 1649 1699 1744 1786 1825 1862 1897 1930 1961 1991 2020 2048 2074

22 1015 1208 1336 1436 1519 1589 1652 1708 1759 1806 1849 1890 1928 1964 1999 2031 2062 2092 2120 2148

23 1050 1248 1382 1485 1570 1643 1708 1766 1819 1867 1912 1954 1994 2031 2066 2100 2132 2163 2192 2221

24 1084 1289 1427 1533 1621 1697 1763 1823 1878 1928 1974 2018 2058 2097 2133 2168 2201 2233 2263 2293

Which group matches these categories?

• High income, industrialized economies, with relatively large quantities of both capital and labor?

• Middle income economies, with somewhat less capital and labor?

• Low income economies with very little capital and relatively high amounts of labor?

Instructions• When you are in class, you would have one person

on each team draw one card from the envelope (designated “TRIANGLE” “STAR” “SQUARE”)

• Everyone on the team, will write down the change in capital (K) and/or labor (L) shown on the card, new level of output/income, and calculate the change in output/income

• From the new spot, repeat (draw, note changes) four more times (total of 5 times)

• This activity has the ‘feel’ of a board game

Here are the cards used in this activity: Triangle CardsAfter years of little or no population growth, immigration and a higher birth rate increase the labor supply. L + 1

A growing portion of the population is elderly and retiring. L -1

Individuals and businesses from other nations decide to invest more in your country. K +1

More women enter the nation's labor force. L +1

Private savings increase, interest rates fall, and businesses borrow more for new factories and equipment. K + 1

Individuals and businesses from other nations decide to invest less in your country. K -1

Older workers postpone their retirement. L +1

Private savings decrease, interest rates increase, and businesses borrow less for new factories and equipment. K -1

Political and economic instability in other nations leads to more investment in your country. K +1

Here are the cards used in this activity: Star CardsPopulation increases moderately. L +1




Private savings increase, interest rates fall, and businesses borrow more for new factories and equipment. K + 1



Private savings decrease, interest rates increase, and businesses borrow less for new factories and equipment. K -1

Political and economic instability in other nations leads some people and firms in other countries to invest more in your country, but others fear that the instability will develop in your country, too, and so invest less. No net change in K.

Here are the cards used in this activity: Square CardsPopulation growth is extremely high due to high birth rates and falling mortality rates. L +2




A sharp increase in loans and grants from foreign governments and international agencies is used to fund new public and private investments. K +1



A sharp decrease in loans and grants from foreign governments and international agencies reduces funding for public and private investments. K -1

Political and economic instability in your nation leads to less investment in factories and equipment. K -1

Things to note about this exercise:

Holding either the amount of capital or labor fixed while adding successive units of the other input, output will rise at a diminishing rate.

(microeconomics concept of diminishing marginal product)

DEBRIEF• Some cards were the same across groups:

– More women entering the labor force

– Older workers postponing their retirement

– Increased or decreased investments by individuals and companies from other nations.

• All had the same impact on K and L in each country, but how that change in K and L translated into changes in output differed

Debrief

• Some of the cards were different in the three groups' envelopes, reflecting the different circumstances of high, middle, and low-income nations.

Card Differences

• Some population cards reflected different patterns:

– Immigration playing a larger role in the high-income nations

– High birth rates playing a large role in the low-income nations.

Card Differences

• Labor Force Cards indicated a decrease in the size of the labor force

– Based on a rising share of the population being elderly in high and middle-income nations

– Resulting from deaths following droughts and crop failures in the low-income nations.

Card Differences

• Differences in Investment Activity

– Result from changes in private saving and interest rates in the high and middle-income nations

– Changes in loans and grants from foreign governments and international agencies in the low-income nations.

Card Differences

• Differences in political and economic stability

– These are positive influence on international investments in the high-income nations

– Instability is included as a negative in the cards for low-income nations.

Note that there are exceptions to these patterns of differences between high, middle, and low-income nations.

If investment in capital goods is important to economic growth, why don’t low income nations save and invest more? . . .

How can a country attract foreign investment?. . . .

Differences in quality of capital

• Some capital goods use old technologies, and some use new technologies.

• Historically, countries that have led the way in developing and adopting new technologies have achieved higher levels of output/income.

Differences in quality of labor –human capital• Education, training, and health of a nation's labor force are key to

the process of economic growth

• Labor productivity varies greatly across individual workers and across labor forces in different nations.

WHY?

– Education and training

– Differences in the quantity and quality of capital goods that workers have available to use in their jobs

– Differences in institutions and public policies that affect workers' incentives to produce

• Wage differentials that are closely tied to productivity• Lower tax rates on wages, salaries, and profits.

THE SOURCES OF GROWTH IN U.S. REAL NATIONAL INCOME, 1929-1982

(1) Increase in quantity of labor

32

(2) Increase in labor productivity*

68

(3) Technological advance 28 (4) Quantity of capital 19 (5) Education and training 14 (6) Economies of scale 9 (7) Improved resource allocation

8

(8) Legal, human, environment and other

-9

100

Sources of growth Percent of total growth

Source: Edward F. Denison. Trends in American Economic Growth, 1929-1992, Washington: The Brookings Institution, 1985, p. 30. *

Details do not sum to 68% due to rounding.

Factors responsible for economic growth in the U.S. economy:

• more labor and capital inputs were used

•new technologies and improvements in the quality of labor

• negative effects of laws and regulations reflect the costs

• Which type of group (triangle, star, or square) had the best chance to experience economic growth in the activity?

• Do you believe it is easier for high, middle, or low-income nations to sustain long periods of economic growth.

• The rates of growth in real GDP per capita for many industrialized nations converged in the 20th century.

• During the last hundred years, the United States has had the highest level of income, but the other nations have been catching up, or converging, to the U.S. level of income.

Why do you think this convergence occurred? . . . .

What economists think about the conversion a. Technology transfer -- nations with lower incomes import and copy

technology and business practices from the wealthiest nation.

b. Diminishing returns to capital – the wealthiest nation is likely to have the most capital, so additional capital is likely to be more productive in other nations

c. International capital flows -- businesses and individuals in the wealthiest nation are likely to finance some investments in other nations.

d. Research and development can increase output and income in all nations, so when technological progress is gradual and widespread, combined with the factors listed earlier, this helps other nations catch up with the richest nations.

e. Education and training in other nations also speeds the flow of capital goods from the richest nations.

Do you think low income nations have been converging to the income level of high income nations?

THE GROWING DIVERGENCE OF INCOME IN HIGH-INCOME AND LOW-INCOME NATIONS

• Estimates of divergence of per capita income (in dollars) since 1870 using 1985 purchasing power parity dollars.

• Purchasing power parity is a method for comparing incomes looking at all goods and services produced and consumed in a nation, not just the goods and services traded with other countries that determine exchange rates for national currencies.

1870 1960 1990Per capita income in USA $2063 $9895 $18054Per capita income in world's poorest nation

$250 $257 $399

Ratio of GDP per capita of richest to poorest nation

8.3 38.5 45.2

Some Reasons for Divergence:1) Lower saving and investment rates in poorer

nations.

2) Faster population growth in poorer nations.

3) Political and economic instability in poorer nations.

4) Restrictions on business and international trade in some poorer nations.

Source: Lant Pritchett, "Divergence, Big Time," Journal of Economic Perspectives, Summer 1997, p.11.

Activity

Trade Barriers

Conclusion from Previous Lessons:

Free Trade Consensus

• Clear that free trade is beneficial to a country

• Issue closest to unanimity among economists

Free Trade Consensus

• It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy . . .

• What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom . . .

• . . . very good wine can be made [in Scotland] at thirty times the expense for which equally good can be bought from foreign countries . . .

• Would it be reasonable law to prohibit the importation of all foreign wines merely to encourage the making of ... burgundy in Scotland?

Adam Smith

The Wealth of Nations 1776

But … Citizens of Almost Every Country Suspicious of Free Trade

• Free trade, one of the greatest blessings that government can confer on a people, is in almost every country, unpopular.

• Thomas Babington Macauley– Historian, politician, essayist of 1800 – 1850

Why a Great Blessing?


Why So Unpopular?


Free Trade Unpopular

• Erect trade barriers

• Types of barriers . . .

Trade Barriers

• Quotas – An import quota is a legal limit on the quantity of a particular product that can be imported per year

• Tariffs – A tariff is a tax on imports or exports– Specific – a lump sum tax per unit of a good– Ad valorem – a percentage of the costs of the imports

• Embargos – restriction on trading partner• Subsidies – Government assistance to selected industries

• Regulation – i.e. beef restricted to England due to growth hormones in

feed

Overview• Trade allows people to use their scarce resources more

efficiently • Yet, trade restrictions are common• Losers from trade restrictions are consumers, exporting

industries, and industries using the same resources as the protected industries

• Winners from trade restrictions include the domestic producers of goods that compete with imports and, in the case of quotas, those who have secured rights to import a good

• Visit www.izzit.org and www.Stosselintheclassroom.org for a number of good articles on International Trade

• See new NCEE Globalization publication for additional lesson plan ideas.

http://www.izzit.org/

http://www.stosselintheclassroom.org/

Activity

• 1. Japanese auto firms agree to limits suggested by the U.S. Congress on the number of Japanese automobiles that may be sold in the U.S.

• Quota

• 2. China’s Most Favored Nation Trading Status will be taken away if Congress and the President agree that the Chinese government is guilty of human rights abuses. All Chinese imports will experience a sharp increase in taxes if China is no longer considered a Most Favored Nation.

• Tariff

• 3. Farmers in Mexico are allowed to obtain irrigation water from federal dam projects at very low prices to grow rice in the desert, if they promise to sell 90% of their rice to buyers in Asia.

• Subsidy

• 4. State Department officials confirm that the current administration has decided to continue the prohibition of all trade with Cuba.

• Embargo

• 5. Parliament passes a law requiring that all foreign-grown vegetables sold in the country must be organically grown (no use of chemical fertilizers and herbicides.)

• Standard

Arguments for Barriers

• Since free trade is efficient, what are the arguments used to support barriers to free trade?

• A variety of arguments support the imposition of trade barriers . . .

– These are the benefits that supporters of protectionism will cite

– Let’s look at some of these arguments for barriers …

Increase Domestic Output & Employment

• Often arises during recession

• Aggregate expenditure= C + I + G + Exports – Imports

• By reducing imports, aggregate expenditures rise– Stimulating domestic output & employment

• But problems with this approach . . .

Problems

• All nations can’t simultaneously run surplus– Surplus in one → deficit somewhere else

• Other countries retaliate– Choke off trade → all worse off

• Unsustainable in long run– Pay for imports through exports

Defend Against Foreign Low-wage Labor

• Suggests that the law of comparative advantage does NOT work with a rich country (Mary) and a poor (John) country

– Did trade make both countries better off?• Yes!

• Without trade, countries allocate labor resources to relatively inefficient production

– Productivity falls → wages and living standards fall

Protect Domestic Infant Industries

• Not relevant for industrially advanced nations

• Difficult to determine which industries are the infants – capable of achieving comparative advantage

• Once tariffs established, very difficult to remove, even after maturity

Strengthen National Defense

• Preserve industries that produce goods and services for defense

• Problems:

– Difficult to determine which industries

– Many can claim they contribute to defense

• Subject to much abuse

Avoid “Dumping” by Foreign Firms

• Dumping – foreign firms sell exported goods at P < P in own home market

• Tariffs or quotas will cause P to rise and consumers do not get the gains of higher prices

Raise Government Revenues

• Relatively insignificant source

Attract Foreign Capital

• If trade barriers restrict the imported goods themselves

– Foreign firms who wish to sell to consumers in other countries will have to consider setting up producing there

Let’s Not Forget Our Economic Way of Thinking

The Dismal Science!

There’s no such thing as a free lunch!

Key Concept

• Every choice has a cost» opportunity cost

Benefit Cost

Protectionism in Country of “Mary”

Protect the potato industry Consumers pay more for potatoes

Lost jobs in the orange industry

Protectionism Reduces the Size of the Pie

With Barriers to Trade (& less specialization)

Protectionism

Round 1 result in Mary – John activity

With Free Trade

(& specialization)

Round 2 result in Mary – John activity

THE IMPACT OF TRADE BARRIERS ON BUSINESS AND CONSUMERS

Directions: Read the information below and answer the questions that follow. Imagine you are an investigator hired by the United Nations to monitor trade

relations between nations. You are asked to investigate the "Bad Tomato Law" that is upsetting relations between two neighboring countries, Morda and Fexico. Morda’s Parliament just passed a new environmental law outlawing the sale of Fexico's tomatoes in Morda. The bill's supporters claimed the Fexico's tomatoes were not grown organically, that too many chemical fertilizers and herbicides were used in their production, and that tomato pickers were exposed to dangerous levels of the herbicides and pesticides while working in the fields. Opponents of the bill, who were small number, claimed that Fexico's tomatoes and working conditions were no different than Morda's. They claimed the environmental issue was just an excuse so Morda's tomato farmers would not have to compete with Fexico's tomato farmers. While doing your research, you discover the following facts about Morda tomato industry as it operated before the new law was passed.

1. There are 100 tomato producers in Morda.

2. They produce 500,000 cases of tomatoes each year (one case = 25 lbs.)

3. At this time, the Morda tomato producers cannot increase their production.

4. Fexico tomato producers sold 500,000 cases of tomatoes each year in Morda.

5. There are 10 million tomato consumers in Morda.

6. Morda consumers bought 1 million cases of tomatoes per year at $25 per case.

You also discover these facts about consequences that followed after the new law was passed:

1. Fexico tomatoes were no longer sold in Morda.

2. Tomato prices rose from $25 to $40 per case. Local economists explained that supply declined while demand for tomatoes remained stable, so market prices rose to a new equilibrium level.

3. Morda tomato producers continued to produce and sell 500,000 cases of tomatoes per year, but they now charged $40 per case.

You think you may have a story to write, but you need to think it through. Answer the following questions to decide how much the "Bad Tomato Law" has hurt Morda consumers.

1. How many cases of tomatoes were sold per year in Morda before the "Bad Tomato Law' was passed?

One million cases2. How many cases of tomatoes were sold per year in Morda after the "Bad Tomato Law" was passed?

500,000 cases3. What happened to the price of tomatoes after the law was passed?

The price increased from $25 to $404. How much total revenue did the Morda tomato producers receive before the "Bad Tomato Law" was

passed?

500,000 cases times $25 = $12,500,0005. How much total revenue did the Morda tomato producers receive after the "Bad Tomato

Law" was passed? 500,000 cases time $40 = $20,000,000

6. How much additional revenue did the Morda tomato producers receive as a result of the "Bad Tomato Law"?

$20 million minus $12,5 million = $7.5 million7. What is the average amount of extra income that each Morda tomato

producer receives as a result of the "Bad Tomato Law"?

$7.5 million divided by 100 producers = $75,0008. How much extra money must Morda consumers pay for Morda-grown

tomatoes as a result of the "Bad Tomato Law"?

$7.5 million, the same as the amount producers receive as extra income

9. For their purchases of Morda-grown tomatoes, what is the average additional cost to each Morda tomato consumer per year as a result of the "Bad Tomato Law"?

$7.5 million divided by 10 million consumers = 75 cents each

10. If you were a Morda tomato producer, would you be willing to pay $5,000 a year to help pay a government lobbyist to work with political leaders to keep Fexico tomatoes out of Morda?

Yes. The cost is $5,000 and the potential gain is $75,00011. If you were a Morda consumer, would you be willing to pay$5,000 a

year to help pay a government lobbyist to work with political leaders to repeal the "Bad Tomato Law"?

No. The cost is $5,000 and the potential gain is only 75 cents

12.Given the information, do you think this law will be repealed soon in Morda?Probably not. The incentives are very strong for businesses to work hard to maintain this tomato ban. While consumers pay more for the tomatoes, the additional cost per consumer is so low that individual consumers have little incentive to be interested in the issue or to fight this political cause.

Measuring Benefits & Costs of Tariff

Benefit Cost

Protect the potato industry Consumers pay more for potatoes

How might we measure these Benefits & Costs?

Price

S

Quantity

DPW

Q2Q1

Free Trade – Importing Nation

Imports = (Q2 – Q1)

Pd

Price

S

Quantity

D

PW

Q2Q1

Consumer Surplus at Pw?

Price

S

Quantity

D

PW

Q2Q1

Consumer Surplus at Pw

Consumer Surplus

Price

S

Quantity

D

PW

Q2Q1

Producer Surplus at Pw?

Price

S

Quantity

D

PW

Q2Q1

Producer Surplus at Pw?

Producer Surplus

Price

S

Quantity

DPW

Q2Q1

Importing Nation Applies a Tariff, T

PW + T

Q4Q3

Decrease in domestic consumption

Increase in domestic production

Price

S

Quantity

DPW

Q2Q1

Consumer Surplus Before & After Tariff

PW + T

Q3 Q4

Change in consumer surplus = - a - b - c - d

Consumer Surplus

a b c d

Price

S

Quantity

DPW

Q2Q1

Producer Surplus Before & After Tariff

PW + T

Q3 Q4

Change in consumer surplus =

Change in producer surplus =

- a - b - c - d

+ a

Change in government revenue = + c

Net change in welfare?

Net loss: b + dConsumer

Surplus

b c da

Protectionism Reduces the Size of the Pie

With Tariff

Tariff

With Free Trade

Practice – Activity

• Notes:

– TS ≡ total surplus = Producer Surplus + Consumer Surplus

– Welfare Loss ≡ “Deadweight Loss”

= Loss of Total Surplus + Tariff Revenue

= - (b + c + d) + c

= - (b + d)

Price

S

Quantity

DPW

Q2Q1

Summary of Tariff Effects

PW + T

Q3 Q4

Change in consumer surplus =

Change in producer surplus =

- a - b - c - d

+ a

Change in government revenue = + c

Net change in welfare?

Consumer Surplus

b c da

Net loss: b + d (deadweight loss)

U.N. Identified World Challenges• Control AIDS• Control malaria • Guest-worker programs for unskilled• Improve infant/child nutrition • Improve health benefits • Kyoto Protocol for environmental protection• Lower cost of starting new business• Lower barriers to migration of skilled workers• Micronutrients• New agricultural technologies• Reduce low birth weight• Small-scale water technology• Sanitation• Trade liberalization• Water productivity in food production

Copenhagen Consensus

• Danish statistician, Bjorn Lomborg

• List of global challenges identified by U.N.

• Invited 8 top economists in world• three Nobel Laureates in Economic Science

• Task: rank order in terms of benefits & costs• where should world spend $ most productively?

Copenhagen ConsensusOnly Four of UN Problems with Top Priority

1. Control the spread of AIDS $27 billion

2. Fight malnutrition $12 billion

3. ???????

4. Prevent malaria $13 billion

#3 on the List?

• Promote:

FREE TRADE(AND ECONOMIC FREEDOM)

relatively inexpensive policy reforms

Key Concept

• Free trade creates wealth

Protection Paradox• If free trade benefits both countries, then why are

protectionist policies enacted?

• Consider the U.S. sugar tariff:• Relatively small, concentrated, and visible

gains in sugar sector– Lobby hard for protection

• Very large, diffuse and invisible loss among wide user group

» Lobby effort almost nonexistent

• Thus, the inefficient, but visible choice wins.

Thus, Politicians Like Protectionism!

• …because it delivers visible benefits to the protected parties

– while imposing invisible) costs as a hidden tax on the public

On-Line Reading on Trade Negotiations

• To supplement what is found in your text, go to the World Trade Organization Website– http://www.wto.org/

• On the upper left hand side of the page, under the heading “What is the WTO?”, click “Introduction”

• Read each of the sections under “Introduction”, they are:– What is the WTO?– Principles of the Trading System– The Case for Open Trade– The GATT years– The Uruguay Round– The Doha Agenda

http://www.wto.org/

http://www.wto.org/

http://www.wto.org/

Activity

International Economics

James B. Wilcox

RESOURCES PROVIDED BY:

THE UNIVERSITY OF SOUTHERN MISSISSIPPICENTER FOR ECONOMIC AND ENTREPRENEURSHIP EDUCATION,

MISSISSIPPI STATE UNIVERSITY, & VIRTUAL ECONOMICS

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