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

Very DissatisfiedDissatisfiedNeutralSatisfiedVery Satisfied 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 Food40 Hours 1 Cloth10 Hours Cost of 1 Food$40 Cost of 1 Cloth$10 Country B Hourly Wage$20 1 Food8 Hours 1 Cloth4 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

– 10 Cloth + 5 Food In country B, move 40 hours from Cloth production to Food production

– 2 Cloth + 1 Food To produce 1 more food, country A must give up 4 cloth. – 4 Cloth+ 1 Food 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

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

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 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 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 Japan US Bahrain Source: International Financial Statistics, International Monetary Fund, December 2001

Per-Capita Income (Lower Middle, and Low Income) Suriname Lithuania Samoa Russia Colombia Peru 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? 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 US Switzerland Ireland Finland Cyprus Netherlands Singapore Hong Kong Norway Denmark Sweden Austria Canada Germany Israel France Slovenia Gabon South 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) 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? 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 US Botswana India Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Life Expectancy (Low Middle, and Low Income) India Sierra Leone Congo Lesotho Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Infant Mortality US Gabon Botswana South Africa Ivory Coast Azerbaijan Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Caloric Intake Myanmar US Hong Kong recommended Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Protein Intake US recommended 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 US Ireland Armenia Lebanon Jamaica Malaysia Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, % of countries with above median trade have rates of deforestation below the median.

What Is the Impact on Social Equality? Protectionist Assumption: Trade exploits the weak. Globalist Assumption: Trade empowers all.

Female Adult Literacy (relative to male) Yemen Oman Morocco Libya Myanmar Haiti Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Gender Related Development Index US Myanmar Oman Botswana Ivory Coast Azerbaijan and Albania 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 US Hong Kong Sierra Leone Burundi Gabon Botswana 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

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, Fear of service outsourcing: Is it justified. IMF Working Paper WP/04/186