1. Development & commodity chains

2. Travels of a T-Shirt illustrates various aspects of the development dilemma: where do t-shirts come from?
First stop: subsidized cotton growing in Texan Panhandle
Second stop: weaving fabric & cutting pieces in Shanghai
Third stop: sewing pieces together in a Mexican maquiladora
Fourth stop: final assembly in New York City (“Made in USA”)
Fifth stop: purchase from a retail outlet in Florida
Sixth stop: second-hand donation to Goodwill where it is sorted
Seventh stop: low value t-shirts sold in markets in Africa
Eight stop: rag makers where turned into cleaning rags

3. What is the difference between a $5 & $90 t-shirt?
How revenue from a $40 sweatshirt is distributed
What is the difference between a $5 & $90 t-shirt?

4. Money!

5. What is “money?” Medium of exchange Store of value
More efficient than barter
Easy to move
Widely accepted
Store of value
Useful today or tomorrow
Can be accumulated
Can increase via interest
What is money worth (for what can it be exchanged)?
What is the value of money (what prevents its decay or depreciation)?

6. What is money worth? Whatever it can buy
“Exchange value” quantity of money for goods
“Use value” is utility of specific goods
“Fungibility” in range of goods for which it can be exchanged
We assume money’s worth remains constant
Increase in supply of money needed for growth
As supply grows, value of money decreases
But too much decpreciates its worth & value

7. What is the value of money?
Wealth is accumulated as money or things with exchange value
How can wealth be maintained or increased?
Precious metals or jewels have been one store of value
But value increases only in relation to demand & inflation
Money can be invested to make more money—”rate of return”
“Interest rate” is the return on money for deferring use today
Investors seek high rates of return—higher than bank rate
They are always looking for such speculative investments
More on this Monday

8. Growth in the money supply facilitates economic growth
Constant money supply limits economic growth
High interest rates, low investment, fewer jobs
Some inflation fosters economic growth
Too much money chasing too few goods inflation
Then value of debts & money decrease
Saving too much leads to less money, deflation & recession
Borrow & spend today rather than saving for the future
This means borrowing against future income & resources

9. Growth in wealth is said to be good…
Adam Smith: production & exchange generates wealth—better than mining or theft
Goods are made at one cost & sold at a higher price--profit
Remember that buyers must have money to buy goods & transfer it to sellers.
Therefore, buyer needs reliable supply of funds to acquire goods
Labor sold for wages in the most common way this happens
Labor receives less in wages than it pays for the goods it buys
The difference is profit, which is reinvested in production of goods
And such circulation of money fosters growth in the economy

10. All of this takes place within countries What about exchange among countries
There must be a common unit or medium of exchange, valued in terms of domestic currencies
Medium of exchange is also used as a unit of account
Trade & exchange undertaken on basis of this unit
Gold played this role for much of recorded history
Trade took place in gold or gold-backed currencies or in silver
World supply of gold is limited, and silver is cheap
Global money supply was limited by quantity of gold
Bretton Woods currency system sought to increase global money supply
U.S. dollar backed by gold became medium of global exchange
US has “seigniorage”: it can create $$

11. To trade, countries need dollars
After WWII, U.S. injected gold-backed dollars into international circulation
Global economic growth depended on growing supply of dollars
But too little gold in Fort Knox to sustain dollar supply
In early 70s, dollar “went off gold,” with market setting exchange value
Since then, exchange value of dollar has depreciated
But dollar remains unit of exchange, value & account

13. Int’l commodity prices mostly set in dollars
“Hard currency” countries exchange for dollars
“Soft currency” countries must earn dollars via trade
Earnings are related to world price for their goods
Dollars are used to buy hard currency goods & commodities
Shortage of dollars means fewer such goods are available
If prices rise, producers earn more; if they fallearn less
This can cause domestic recession
What if countries earn more dollars than they need?
Tend to put them in Northern banks or “sovereign wealth funds” to invest outside of home country

14. This is where finance & speculation come in
Money should earn as much money as possible
Any surplus is put into high-return instruments
These return regular interest payments
Higher interest implies greater risk speculation
Related bonds & securities may rise in price if investors seek high returns
Both underlying assets and paper rise in value
But this creates “asset bubbles,” which can burst & vaporize funds

15. “Real” economy vs. “speculative” economy
“Real” economy involves exchange in goods & services
“Speculative” economy involves investment in stocks, securities, bonds, paper
“Paper” is linked to future earnings of underlying “real” assets
As real economy grows, so should future earnings, and value of paper should also increase
This is much like a Ponzi Scheme
But it may also divert excess money away from real economy & limit inflationary tendencies
If economy stops growing, this implies static future earnings and lower returns
Then, holders of paper may seek to exit speculative markets, causing value of both assets & paper to collapse
So, why is the stock market doing so well?

16. Relationship of “real” to “speculative” economy