Post on 23-Feb-2016
description
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
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)
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
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)
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
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)
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
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
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)
Red Blue Red Blue Red Blue Red BlueWest 5 5 10 5 0 0 10 5 50East 5 5 15 30 0 0 15 30 450
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)
Red Blue Red Blue Red Blue Red BlueWest 5 5 10 5 0 0 10 5 50East 5 5 15 30 0 0 15 30 450
West 10 0 20 0 -10 10 10 10 100East 0 10 0 60 10 -10 10 50 500
Happiness
Autarky
Trade
Labor Allocation Production Imports Consumption
29
Round 4: Trade (two worlds)
Red Blue Red Blue Red Blue Red BlueWest 5 5 10 5 0 0 10 5 50East 5 5 15 30 0 0 15 30 450
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
Labor Allocation Production Imports Consumption
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
Protectionist argument:
Trade results in an inequitable distribution of income.
Free Trade argument:
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
Protectionist argument:
Trade results in an exploitation of subsistence-level economies by technologically advanced economies.
Free Trade argument:
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
Protectionist argument:
Trade results in the exploitation of the less powerful by the more powerful.
Free Trade argument:
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
)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
Greater per-capita trade is associated with reduced child labor.
50
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
$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.
Protectionist argument:
Trade costs America jobs.
Free Trade argument:
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.
Protectionist argument:
Trade reduces American wages.
Free Trade argument:
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?
5858
59
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
> $1
00,0
00
% o
f Hou
seho
lds
1980 2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.
Income Distribution for 2003 (in 2003$)