Do not look in the bag until
you are asked to do so.
How do you feel about your collection of candy?
1 2 3 4 5
Very Dissatisfied 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 Country B
Hourly Wage $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 per-
capita 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
Luxembourg
Belgium
Ireland
Netherlands
Bahrain
US Japan
Source: International Financial Statistics, International Monetary Fund, December 2001
Per-Capita Income (Lower Middle, and Low Income)
Suriname
Lithuania
Samoa
Guyana
Russia
Peru Colombia
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
Singapore
No carrot: A too inequitable distribution
signals a lack of
Hong Kong entrepreneurial opportunity.
No stick: A too equitable distribution
Ireland signals no cost to free riders.
Netherlands
Switzerland
Norway
Denmark
Austria Sweden
Finland Canada
Germany France
Israel
Slovenia
Malaysia
Cyprus
US
Gabon
South Africa
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
Income Distribution (Lower Middle, and Low Income)
Lithuania
Fiji
Thailand
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?
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
Botswana
US
India
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Life Expectancy (Low Middle, and Low Income)
Congo
Lesotho
India
Sierra Leone
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Infant Mortality
US Gabon
Botswana
South Africa
Azerbaijan
Ivory Coast
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Caloric Intake
Hong Kong
recommended
US
Myanmar
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Protein Intake
recommended
US
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
73% of countries with above median
Ireland
trade have rates of deforestation below
the median.
US
Malaysia
Lebanon
Armenia Jamaica
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)
Oman
Libya
Morocco
Yemen
Haiti
Myanmar
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Gender Related Development Index
Oman
Botswana US
Ivory Coast
Azerbaijan and Albania
Myanmar
GDI measures equality of quality of life
(longevity, education, literacy, income).
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Gender Empowerment Measure
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)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Child Labor
Hong Kong
US Botswana
Gabon
Burundi
Sierra Leone
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Human Development Index
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human
Development Report, United Nations Development Programme, 2002
What Is the Impact on Unemployment?
Protectionist Assumption:
Trade destroys jobs.
Globalist Assumption:
Trade creates jobs.
Unemployment vs. Trade Over Time
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
Unemployment vs. Trade Over Time
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.
Source: Balance of Payment Statistics Yearbook, IMF
Source: Balance of Payment Statistics Yearbook, IMF
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