Table of Contents INTRODUCTION THE BASICS OF TRADE  LESSON 1: THE BASICS STILL APPLY: DOMESTIC OR INTERNATIONAL, A MARKET IS A MARKET Addendum: Overview of U.S. Involvement in International Trade Activity: The Magic of Markets Activity: Tag Check  LESSON 2: BRIDGES AND BARRIERS TO TRADE Activity: The Euro: Currency Exchange and Transaction Costs Activity: U.S. Sugar Policy – A Sweet Deal?

Table of Contents TRADE ISSUES  LESSON 3: TRADE AND LABOR: SWEATSHOPS Activity: Standing Up for Sweatshops?  LESSON 4: TRADE AND JOBS Activity: The “Giant Sucking Sound” – Job Woes or Labor Flows?  LESSON 5: TRADE AND THE ENVIRONMENT Activity: Trash THE MECHANICS OF TRADE  LESSON 6: THE BALANCE OF PAYMENTS ALWAYS BALANCES Activity: Balance of Trade Among States  LESSON 7: INTERNATIONAL MONETARY EXCHANGE Activity: Foreign Currency and Foreign Exchange RESOURCE LIST

“The Shopping Game” Classroom Activity:

To Convert Pinks, Blues, and Yellows For 5 Yellows, You Can Buy For 2 Blues, You Can Buy For 1 Pink, You Can Buy 2 Blue 1 Pink 5 Yellow 1 Pink 5 Yellow 2 Blue

Conversion Table For 5 Yellows, You Can Buy For 2 Blues, You Can Buy For 1 Pink, You Can Buy 3 € 2 Blue 1 Pink 5 Yellow 1 Pink 5 Yellow 2 Blue

The “Giant Sucking Sound” Classroom Activity:

Checklist:  The demand for labor is derived demand.  Market prices of products and labor shape employers’ hiring decisions. labor is a cost of production profit = price – cost  Hiring decisions are made at the margin. “What is your marginal revenue product?”  Wages are a function of productivity. labor productivity = output per man-hour

Productivity  Labor productivity is determined by a number of factors, some under control of the worker himself and some the result of the conditions of employment. the worker's physical abilities; the worker's level of education; the type and amount of equipment (capital) available;  including infrastructure other factors and conditions specific to the job location  regulations  unions

 Adding workers affects productivity at the margin specialization increases productivity diminishing marginal returns = reduction in productivity

1 Kitchen - How Many Cooks? # cooks #pizzas made # additional pizzas from hiring this cook? What happened? No Cook – No Pizza ! Get her out of the way ! Things aren’t so hectic Extra guy – helps who ever is behind 1 baker+1 prep+1 waiter – what a system! 1 baker, 1 prep and waiter Good cook – does everything himself

Scenario  In college, Maria and Mario started a t-shirt business out of their parents' garage. Now they've graduated, and would like to expand the business and become the bosses instead of the "do-everything" people.  They've made a list of the different tasks involved in the business - most of which they now do themselves. They figure there are 2 kinds of tasks in the t-shirt business:

Skilled Bookkeeping Marketing T-shirt Design Advertising Shipping & Ordering Unskilled or low-skill Taking orders Cutting Patterns Sewing Printing Labeling Packing Delivery

 Every person they hire means one less thing they have to do themselves - and they can choose to do the things they enjoy most - like the design and marketing, for example.  The question is how many people to hire. Mario & Maria’s dilemma

Output, Additional (Marginal) Product, and Additional (Marginal) Revenue T-shirt price (P) = $_________ YELLOW CARD WORKERS PINK CARD WORKERS # Hired T shirts Made Added Product (MP) P xMP # Hired T shirts Made Added Product (MP) P x MP 1 st nd rd 103 rd 19 4 th 114 th 22 5 th 125 th 24 6 th 126 th 25 $ $20 $10 $0 $30 $20 $30 $60 $50 $10 $80 $10

Round #2 – Wages PaidRound #2 – Profit Calculation Yellow CardPink Card # t-shirts produced (pink+yellow) (from chart) WorkerWageWorkerWage HiredPaidHiredPaidX Price of t-shirtsX $ 10 1 st = $ 2 nd = TOTAL REVENUE 3 rd 4 th — $ 5 th — TOTAL COST 6 th $ = PROFIT Round #2 Sub-total + Sub-total = Total cost

Part 2: Make It Work Circles Composition:  Create discussion groups: go to your last employer  All roles represented Problem:  Market growth  Difficulty hiring yellow-card workers

Apparel Sourcing, Cutting, Sewing, Distribution "A Relationship of Trust and Profitability"  The North America Free Trade Agreement has opened new opportunities for trade in the apparel industry between Mexico and the United States.  Peñyasa was incorporated in 1997 as a garment manufacturing company to service the U.S. market.  Peñyasa's cutting and sewing plant is a world class facility with an output capacity of 60,000 dozens per month with 450 operators.  Peñyasa's management team is a blend of experienced professionals from different fields that fully understand the concept of global sourcing.  Our labor costs are low - average 50% - 75% below comparable US rates. Work quality is high. We guarantee to cut your costs by 30-50%!  Sourcing with Peñyasa will significantly reduce costs and add value to your entire operation, allowing you to concentrate on sales, marketing, and management.

Who? Helped or hurt by "exporting" unskilled jobs to Mexico? How? Employer US Skilled worker t-shirt consumer Mexican unskilled worker US Unskilled worker helped Lower production cost means better able to compete and more profit As company grows, more skilled positions available. More profit = higher incomes for workers Unskilled worker may lose job, but more jobs because of growth. Worker needs education and training to take advantage of growth More opportunities for employment and income – and accumulation of skills, too Lower t-shirt prices Short run – hurt Long run - ???

The Economist, special report: “Here, There, and Everywhere” January 19, 2013 Outsourcing, Offshoring, and Re-shoring

Comparative Advantage is Dynamic

Re-shoring

Career Education Questions: College or Training?

NAFTA at 20 flying-start-then-it

Mixed Results: “Did NAFTA Help Mexico?” Center for Economic & Policy Research, February,

“Table 1 shows Mexico’s annual per capita GDP growth rate compared to the rest of Latin America (South America and Central America). Mexico’s growth ranks 18th of 20 countries. From these numbers, and in the absence of any natural disaster or war in Mexico during the past 20 years that could account for such poor economic performance, it would be difficult to argue that Mexico would have done even worse in the absence of NAFTA.”

 Mexico ranks 18th of 20 Latin American countries in growth of real GDP per person, the most basic economic measure of living standards.  From , Mexican real GDP per person almost doubled, growing by 98.7 percent. By comparison, in the past 20 years it has grown by just 18.6 percent.  Mexico’s per capita GDP growth of just 18.6 percent over the past 20 years is about half of the rate of growth achieved by the rest of Latin America.  If NAFTA had been successful in restoring Mexico’s pre-1980 growth rate – when developmentalist economic policies were the norm – Mexico today would be a relatively high income country, with income per person significantly higher than that of Portugal or Greece. It is unlikely that immigration reform would be a major political issue in the United States, since relatively few Mexicans would seek to cross the border.

“NAFTA also increasingly tied Mexico to the U.S. economy. Figure 11 shows how the Mexican economy has moved with the U.S. economy over the past 20 years. Much of this synchronization is because 71 percent of Mexico’s exports now go to the United States. Unfortunately, 1994 was a particularly bad time for Mexico to hitch its wagon to the United States. First came the peso crisis, which was brought on by the U.S. Federal Reserve’s increases in U.S. short-term (policy) rates beginning in Mexico lost 9.5 percent of GDP in two quarters during the resulting crisis and recession, which started in December of 1994 and continued into the first half of 1995.”... Perhaps more importantly over the longer run, the U.S. economy was just beginning a period in which its growth would be driven by enormous asset bubbles.... Mexico’s loss of output from the U.S. Great Recession was the worst in Latin America... “

“It is also worth examining where Mexico would be today if its income per person had continued to grow at the rate that it did over the two decades prior to This is shown in Figure 3. This result was not impossible, as can be seen by the comparison with South Korea, which grew at a similar rate as did Mexico (although from a lower starting point) from , and did not suffer from Mexico’s growth collapse thereafter. “

NAFTA fostered a growing US trade deficit. Short response: Not perceptible. Trade with Mexico raised US unemployment. Short response: Not perceptible. Job loss depressed US wages, especially in manufacturing. Short response: In some cases, but not across the board. The boom in US agricultural exports turned rural Mexicans into illegal emigrants. Short response: No connection. Apart from agriculture, NAFTA abetted illegal immigration. Short response: The opposite. Mexican growth has not achieved the rate anticipated by NAFTA proponents. Short response: A fair criticism. “NAFTA at 20: Misleading Charges and Positive Achievements” Peterson Institute for International Economics, May

Recent Studies of NAFTA: NAFTA at 20: Misleading Charges and Positive Achievements Peterson Institute for International Economics, May International Trade Statistics Overview 2013 – World Trade Organization “Did NAFTA Help Mexico?” CEPR – Center for Economic and Policy Research, February,