Do not look in the bag until you are asked to do so.

Do not look in the bag until you are asked to

do so.

Very Dissatisfied Dissatisfied Neutral Satisfied Very Satisfied

1 3 52 4

How do you feel about your collection of candy?

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

Country A

Hourly Wage $1

1 Food 40 Hours

1 Cloth 10 Hours

Cost of 1 Food $40

Cost of 1 Cloth $10

Country B

Hourly Wage

$20

1 Food

8 Hours

1 Cloth

4 Hours

Cost of 1 Food

$160

Cost of 1 Cloth

$80

Country A can produce both Food and Cloth at lower cost than can Country B.

A Tale of Two Countries

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

– 4 Cloth + 1 Food

In country A, move 40 hours from Cloth production to Food production

In country B, move 40 hours from Cloth production to Food production


To produce 1 more food, country A must give up 4 cloth.


To produce 1 more food, country B must give up 2 cloth.

Country B has a comparative advantage in the production of food.

Country A has a comparative advantage in the production of cloth.

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



2. Sell 3 Shirts on World Market for $150



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.


Country B wants more Cloth. How can Country B get more Cloth?

1. Shift Resources

2. Sell 1 Food on World Market for $150



2. Buy 3 Cloth on World Market for $150



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?


Trade is exploitive of peoples and industries, therefore per-capita income will be lower for countries that trade more.


Trade is beneficial to both parties, therefore per-capita income will be higher for countries that trade more.

Per-Capita Income

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

-cap

ita

Tra

de

(US

$)

Luxembourg

Belgium

IrelandNetherlands

JapanUS

Bahrain

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

Per-Capita Income (Lower Middle, and Low Income)

R2 = 0.59

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500

Per-capita Income (US$)

Per

-cap

ita

Tra

de

(US

$)

Suriname

Lithuania

Samoa

Russia

ColombiaPeru

Guyana

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?


Trade consolidates income in the hands of the powerful, therefore countries that trade more will have a less equitable income distribution.


Trade disseminates income across trading partners, therefore countries that trade more will have a more equitable income distribution.

Income Distribution

$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

-cap

ita

Tra

de

(US

$)

US

Switzerland

Ireland

Finland

Cyprus

Netherlands

Singapore

Hong Kong

Norway

DenmarkSwedenAustria

CanadaGermany

IsraelFrance

Slovenia

GabonSouth Africa

Malaysia

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

No carrot: A too inequitable distribution signals a lack of entrepreneurial opportunity.

No stick: A too equitable distribution signals no cost to free riders.

Income Distribution (Lower Middle, and Low Income)

$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

-cap

ita

Tra

de

(US

$)

Thailand

Lithuania

Fiji

Ukraine

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

What Is the Impact on Health?


Trade exploits labor, therefore countries that trade more will have lower health measures.


Trade empowers labor, therefore countries that trade more will have greater health measures.

Life Expectancy

R2 = 0.59

$1

$10

$100

$1,000

$10,000

$100,000

30.0 40.0 50.0 60.0 70.0 80.0 90.0

Life Expectancy (years)

Per

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

USBotswana

India

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

R2 = 0.51

$1

$10

$100

$1,000

$10,000

30 35 40 45 50 55 60 65 70 75 80

Life Expectancy (years)

Per

-cap

ita

Tra

de

(US

$)Life Expectancy (Low Middle, and Low Income)

India

Sierra Leone

Congo

Lesotho


Infant Mortality

R2 = 0.79

$1

$10

$100

$1,000

$10,000

$100,000

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)

Per

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

US Gabon

Botswana

South Africa

Ivory Coast

Azerbaijan


Caloric Intake

R2 = 0.60

$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

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

Myanmar

US

Hong Kong

recommended


Protein Intake

R2 = 0.59

$1

$10

$100

$1,000

$10,000

$100,000

30 40 50 60 70 80 90 100 110 120

Daily per capita Supply of Protein (grams)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

US

recommended


What Is the Impact on the Environment?


Trade exploits the environment.


Trade encourages protection of the environment.

Deforestation

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

-3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0%

Average Annual Rate of Deforestation (1990-1995)

Per

-cap

ita

Tra

de

(US

$)

US

Ireland

Armenia

Lebanon

Jamaica

Malaysia


73% of countries with above median trade have rates of deforestation below the median.

What Is the Impact on Social Equality?


Trade exploits the weak.


Trade empowers all.

Female Adult Literacy (relative to male)

R2 = 0.41

$1

$10

$100

$1,000

$10,000

$100,000

30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Female Adult Literacy Rate (relative to male)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

Yemen

Oman

Morocco

Libya

Myanmar

Haiti


Gender Related Development Index

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)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

US

Myanmar

OmanBotswana

Ivory Coast

Azerbaijan and Albania

GDI measures equality of quality of life (longevity, education, literacy, income).


Gender Empowerment Measure

R2 = 0.58

$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 Empowerment Measure (0 = low empowerment, 1 = high empowerment)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

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)


Child Labor

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

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

US

Hong Kong

Sierra LeoneBurundi

GabonBotswana


Human Development Index

R2 = 0.80

$1

$10

$100

$1,000

$10,000

$100,000

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Human Development Index (0 = low human development, 1 = high human development)

Per

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

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

What Is the Impact on Unemployment?


Trade destroys jobs.


Trade creates jobs.

Unemployment vs. Trade Over Time

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

Un

emp

loym

ent

Rat

e

Unemployment vs. Trade Over Time

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

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

Av

era

ge

Re

al H

ou

rly

Ea

rnin

gs

(2

00

0$

)

What About Outsourcing?


Outsourcing puts Americans out of work.


Outsourcing is trade (of labor), and trade is beneficial.

Outsourcing (2002)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Ger

man

y

US

Japa

n

Net

herla

nds

Ital

y

Fra

nce

UK

Indi

a

Chi

na

Rus

sia

Bil

lio

ns

curr

ent

$

Source: Balance of Payment Statistics Yearbook, IMF

Outsourcing as Fraction of GDP (2002)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Ang

ola

Con

go (

Rep

. of

)

Moz

ambi

que

Irel

and

Van

uatu

Indi

a

Ger

man

y

Rus

sia

Fra

nce

UK

Chi

na

Japa

n

US

Bil

lio

ns

curr

ent

$


Insourcing less Outsourcing (2002)

($15,000)

($10,000)

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

UK

US

Hon

g K

ong

Indi

a

Sin

gapo

re

Chi

na

Fra

nce

Rus

sia

Ital

y

Kor

ea

Indo

nesi

a

Japa

n

Ger

man

y

Bil

lio

ns

curr

ent

$


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?

1993-I to 2004-I

Count of articles on outsourcing from Dow Jones News Service, Financial Times, New York Times, Seattle Times, Wall Street Journal, Washington

Post

Source: Amiti, M. and S. Wei, 2004. Fear of service outsourcing: Is it justified. IMF Working Paper WP/04/186

Do not look in the bag until you are asked to do so.

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