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

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.

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

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

  2. How do you feel about your collection of candy? 1 2 3 4 5 Very Dissatisfied Dissatisfied Neutral Satisfied Very Satisfied

  3. What is trade? Exchange  Exchange goods produced for goods not produced. Specialization  Diverting resources away from a competitive disadvantage toward a competitive advantage.

  4. What drives trade?  Differences in tastes

  5. What drives trade?  Differences in productive advantage

  6. Country A can produce both Food and Cloth at lower cost than can Country B. A Tale of Two Countries Country A Hourly Wage $1 1 Food 40 Hours 1 Cloth 10 Hours Cost of 1 Food $40 Cost of 1 Cloth $10 Country B Hourly Wage $20 1 Food 8 Hours 1 Cloth 4 Hours Cost of 1 Food $160 Cost of 1 Cloth $80

  7. What does Food cost in the two countries? Recall from the first experiment: Money is illusory.

  8. In country A, move 40 hours from Cloth production to Food production

  9. In country A, move 40 hours from Cloth production to Food production + 1 Food – 4 Cloth

  10. In country B, move 40 hours from Cloth production to Food production

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

  12. 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. + 1 Food – 2 Cloth

  13. 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?

  14. 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

  15. 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

  16. 1. Shift Resources 2. Buy/Sell on world market

  17. This deal looks too good. No one is going to want to buy/sell from country A at those world prices.

  18. 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?

  19. 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

  20. 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

  21. 1. Shift Resources 2. Buy/Sell on world market

  22. 1. Shift Resources 2. Buy/Sell on world market

  23. 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.

  24. 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.

  25. Per-Capita Income Luxembourg Belgium Ireland Netherlands Bahrain Japan US Source: International Financial Statistics, International Monetary Fund, December 2001

  26. Per-Capita Income (Lower Middle, and Low Income) Suriname Lithuania Samoa Guyana Russia Peru Colombia Source: International Financial Statistics, International Monetary Fund, December 2001

  27. 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.

  28. 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.

  29. Income Distribution No carrot: A too inequitable distribution signals a lack of entrepreneurial opportunity. No stick: A too equitable distribution signals no cost to free riders. Singapore Hong Kong Ireland 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

  30. 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

  31. 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.

  32. Life Expectancy Botswana US India Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

  33. 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

  34. 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

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

  36. Protein Intake recommended US Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

  37. What Is the Impact on the Environment? Protectionist Assumption: Trade exploits the environment. Globalist Assumption: Trade encourages protection of the environment.

  38. Deforestation 73% of countries with above median trade have rates of deforestation below the median. Ireland US Malaysia Lebanon Jamaica Armenia Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

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

  40. 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

  41. 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

  42. 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

  43. 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

  44. Human Development Index Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002

  45. What Is the Impact on Unemployment? Protectionist Assumption: Trade destroys jobs. Globalist Assumption: Trade creates jobs.

  46. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

  47. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

  48. What About Outsourcing? Protectionist Assumption: Outsourcing puts Americans out of work. Globalist Assumption: Outsourcing is trade (of labor), and trade is beneficial.

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