The Fundamentals of Trade Capitol Hill Campus May 21, 2010

1

The Fundamentals of TradeCapitol Hill Campus

May 21, 2010

copies of this presentation can be found atwww.antolin-davies.com

2

There are two countries.West East

3

In each country, there are 10 workers.West East

4

The workers make RED stuff and BLUE stuff.West East

5

The workers eat the RED stuff and BLUE stuff.West East

6

Happiness = (RED stuff eaten) (BLUE stuff eaten) 1

2

6

7

Happiness = (RED stuff eaten) (BLUE stuff eaten)

0

0

8

In West, a single worker can produce2 RED stuff or 1 BLUE stuff

West

or

9

In East, a single worker can produce1 RED stuff or 2 BLUE stuff

East

or

10

You must decide how many workers to allocate to the production of RED stuff and how many to allocate to the production of BLUE stuff.

Your goal is to attain the most happiness for your country.

11

Example (using West):Suppose you choose to assign2 Workers to RED production and 8 Workers to BLUE production

2 8 4 8

4 8 32

Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of BlueLabor Allocation (must total 10) Production Imports (negative = exports)

Units of Red Units of BlueConsumption (production plus imports) Happiness (red consumed x blue consumed)

or

12

Example (using West):

3 7 6 7

6 7 42



Suppose you choose to assign3 Workers to RED production and 7 Workers to BLUE productionor

13

Example (using East):

3 7 3 14

3 14

42



Suppose you choose to assign3 Workers to RED production and 7 Workers to BLUE productionor

14

Round 1: AutarkyAllocate 10 workers to maximize your country’s happiness.

or

or

15

Round 1: Autarky

Red Blue Red Blue Red Blue Red BlueWest 5 5 10 5 0 0 10 5 50East 5 5 5 10 0 0 5 10 50

Labor Allocation Production Imports Consumption Happiness

Autarky

16

Now, you may produce, exchange, then consume.

West East

17

Example (using East):

3 7 3 14

13

6 78



10

-8

Suppose you choose to assign3 Workers to RED production and 7 Workers to BLUE production.orThen, West agrees to trade you10 RED in exchange for 8 BLUE.

18

Round 2: TradeAllocate 10 workers then trade (if you want) to maximize your country’s happiness.

or

or

19

Round 2: Trade


West 10 0 20 0 -10 10 10 10 100East 0 10 0 20 10 -10 10 10 100

Trade

Labor Allocation Production Imports Consumption Happiness

Autarky

20

West has an absolute advantage in the production of RED stuff. In West, 1 unit of RED costs 1/2 worker. In East, 1 unit of RED costs 1 worker.East has an absolute advantage in the production of BLUE stuff. In West, 1 unit of BLUE costs 1 worker. In East, 1 unit of BLUE costs 1/2 worker.

21

What if West is a lesser developed countrysuch that East has an absolute advantagein the production of both RED and BLUE?

22

In West, a single worker can produce2 RED stuff or 1 BLUE stuff

West

or

23

In East, a single worker can produce3 RED stuff or 6 BLUE stuff

East

or

24

Round 3: Autarky (two worlds)Allocate 10 workers to maximize your country’s happiness.

or

or

25

Round 3: Autarky (two worlds)


Happiness

Autarky

Labor Allocation Production Imports Consumption

26

East has an absolute advantage in the production of RED stuff. In West, 1 unit of RED costs 1/2 worker. In East, 1 unit of RED costs 1/3 worker.East has an absolute advantage in the production of BLUE stuff. In West, 1 unit of BLUE costs 1 worker. In East, 1 unit of BLUE costs 1/6 worker.

27

Round 4: Trade (two worlds)Allocate 10 workers then trade (if you want) to maximize your country’s happiness.

or

or

28

Round 4: Trade (two worlds)


West 10 0 20 0 -10 10 10 10 100East 0 10 0 60 10 -10 10 50 500

Happiness

Autarky

Trade


29

Round 4: Trade (two worlds)


West 10 0 20 0 -10 5 10 5 50East 0 10 0 60 10 -5 10 55 550West 10 0 20 0 -10 10 10 10 100East 0 10 0 60 10 -10 10 50 500West 10 0 20 0 -10 15 10 15 150East 0 10 0 60 10 -15 10 45 450

Happiness

Autarky

Trade 1

Trade 2

Trade 3


30

Are we thinking about the problem correctly?

When you choose to produce more RED stuff, what do you give up?

When you choose to produce more BLUE stuff, what do you give up?A country doesn’t give up workers when it produces stuff.It gives up the other stuff it could be producing instead.

The opportunity cost of BLUE stuff isn’t a worker.

The opportunity cost of BLUE stuff is RED stuff!

31

How many RED stuff does West have to give up to produce 1 more unit of BLUE stuff? In West, the cost of 1 BLUE stuff is 2 RED stuff.

or

32

How many RED stuff does West have to give up to produce 1 more unit of BLUE stuff? In West, the cost of 1 BLUE stuff is 2 RED stuff.

How many BLUE stuff does West have to give up to produce 1 more unit of RED stuff? In West, the cost of 1 RED stuff is 1/2 of a BLUE stuff.

or

33

How many RED stuff does East have to give up to produce 1 more unit of BLUE stuff?

or

In East, the cost of 1 BLUE stuff is 1/2 RED stuff.

In East, the cost of 1 RED stuff is 2 BLUE stuff.

34

West has a relative advantage in the production of RED stuff.

In West, 1 unit of RED costs ½ unit of BLUE.

In East, 1 unit of RED costs 2 units of BLUE.

=

=

East has a relative advantage in the production of BLUE stuff.

In West, 1 unit of BLUE costs 2 units of RED.

In East, 1 unit of BLUE costs ½ unit of RED.

=

=

35

What does RED stuff cost?

In West, 1 unit of RED equals ½ unit of BLUE.

In East, 1 unit of RED equals 2 units of BLUE.

=

=

West will export RED if West can get more than ½ BLUE.

East will import RED if East can pay less than 2 BLUE.

36

What does BLUE stuff cost?

In West, 1 unit of BLUE equals 2 units of RED.

In East, 1 unit of BLUE equals ½ unit of BLUE.

=

=

West will import BLUE if West can pay less than 2 RED.

East will export BLUE if East can get more than ½ RED.

37

Conclusions:

1. Trade is a positive sum relationship.

2. Exchanging goods and services is what’s important. Money is only a tool that facilitates the exchanging.

3. By definition, every country has a relative advantage in something.

4. Trade is the combination of exchange and specialization. Specialization is the directing of resources toward a country’s relative advantage.

38

Why is trade controversial?

Practical

On the whole, societies are better off with trade though some individuals are not.

Philosophical

There are differences of opinion as to the nature of trade.

39

Protectionist Assumption:

Trade leads to a centralization of political power, decreased competition, exploitation, and the concentration of wealth.

Free Trade Assumption:

Trade leads to a decentralization of political power, increased competition, empowerment, and the dissemination of wealth.

40

Income

Protectionist argument:

Trade results in increased income for one country at the expense of reduced income for the other country.

Free Trade argument:

Trade results in increased incomes for both trading partners.

41

R2 = 0.56

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Per-capita Income (US$)

Per-c

apita

Tra

de (U

S$)

Source: International Financial Statistics, International Monetary Fund, December 2001

Greater per-capita trade is associated with greater per-capita income.

42

Income Distribution


Trade results in an inequitable distribution of income.


Trade is necessary for an equitable income distribution.

43

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0

Gini Coefficient (0 = equitable, 100 = inequitable)

Per-c

apita

Tra

de (U

S$)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002

Countries that engage in more trade have more equitable income distributions.

44

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0

Gini Coefficient (0 = equitable, 100 = inequitable)

Per-c

apita

Tra

de (U

S$)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002

Thailand

Lithuania

Fiji

Ukraine

Among the poorest countries, those that engage in more trade have more equitable income distributions.

45

Life Necessities


Trade results in an exploitation of subsistence-level economies by technologically advanced economies.


Trade benefits both technologically advanced and subsistence-level economies.

46

$1

$10

$100

$1,000

$10,000

$100,000

1,500 2,000 2,500 3,000 3,500 4,000

Daily per capita Supply of Calories

Per-

capi

ta T

rade

(US$

, log

arith

mic

sca

le)

Greater per-capita trade is associated with greater caloric intake.

recommended

Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

47

Exploitation of the Powerless


Trade results in the exploitation of the less powerful by the more powerful.


Trade empowers the less powerful.

48

R2 = 0.80

$1

$10

$100

$1,000

$10,000

$100,000

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)

Per-

capi

ta T

rade

(US$

, log

arith

mic

sca

le)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002

GDI measures quality of life (longevity, education, literacy, income) for women relative to men.

Greater per-capita trade is associated with greater gender equality.

49

R2 = 0.54

$1

$10

$100

$1,000

$10,000

$100,000

0 10 20 30 40 50

Children 10 to 14 in the Labor Force (as % of age group)

Per-c

apita

Tra

de (U

S$, l

ogar

ithm

ic s

cale

)


Greater per-capita trade is associated with reduced child labor.

50


$1

$10

$100

$1,000

$10,000

0 10 20 30 40 50 60

Children 10 to 14 in the Labor Force (as % of age group)

Per-c

apita

Tra

de (U

S$, l

ogar

ithm

ic s

cale

)

Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor.

51

Unemployment in the U.S.


Trade costs America jobs.


Trade creates jobs in the U.S. and abroad.

52

Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

January 1975 to June 2006

0%

2%

4%

6%

8%

10%

12%

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Unem

ploy

men

t Rat

e

Greater per-capita trade is associated with reduced unemployment.

U.S

. Une

mpl

oym

ent

Rate

U.S. Trade

On average, a 1 percentage point increase in trade is associated with a ½ percentage point reduction in unemployment.

53

Wages in the U.S.


Trade reduces American wages.


Trade improves real wages.

54

January 1975 to June 2006

$12.00

$12.50

$13.00

$13.50

$14.00

$14.50

$15.00

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Aver

age

Rea

l Hou

rly E

arni

ngs

(200

0$)

Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

Greater per-capita trade is associated with increased real wages.

U.S. Trade

U.S

. Ave

rage

Rea

l Hou

rly

Earn

ings

(2

000$

)

On average, a 1 percentage point increase in trade is associated with a $0.25 per hour increase in real wages.

55

If trade is such a good thing, why are some countries still poor

despite ever expanding global trade?

56

Name two metrics that distinguish the first world from

the third world.

57

If you hit a light bulb with a hammer, will you make a

mess?

60

The Fundamentals of TradeCapitol Hill Campus

May 21, 2010

copies of this presentation can be found atwww.antolin-davies.com

61

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Empl

oym

ent a

s %

of C

ivili

an L

abor

For

ce

Manufacturing, Mining, and Natural Resources Services Government

Since 1948, employment in Services industries has grown by 50% while employment in Manufacturing industries has declined by 50%.

Source: Bureau of Labor Statistics (via www.economy.com)

62

0

20

40

60

80

100

120

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Indu

stria

l Pro

duct

ion

(200

2=10

0)

Source: Bureau of Labor Statistics (via www.economy.com)

While the number of American jobs in manufacturing has been declining, American production of industrial goods has been rising. This implies that American manufacturing is becoming more efficient as it produces ever more output using less labor.

63

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $1

5,00

0

$15,

000

-$2

5,00

0

$25,

000

-$3

5,00

0

$35,

000

-$5

0,00

0

$50,

000

-$7

5,00

0

$75,

000

-$1

00,0

00

> $1

00,0

00

% o

f Hou

seho

lds

1980

Income Distribution for 1980 (in 2003$)

Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.

64

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $1

5,00

0

$15,

000

-$2

5,00

0

$25,

000

-$3

5,00

0

$35,

000

-$5

0,00

0

$50,

000

-$7

5,00

0

$75,

000

-$1

00,0

00

> $1

00,0

00

% o

f Hou

seho

lds

1980 2003

Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.

Income Distribution for 2003 (in 2003$)

The Fundamentals of Trade Capitol Hill Campus May 21, 2010

Documents

Transcript of The Fundamentals of Trade Capitol Hill Campus May 21, 2010