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In each world, there are two countries.

In each world, there are two countries. West. East. 1. In each country, there are 10 workers. West. East. 2. The workers make RED stuff and BLUE stuff. West. East. 3. The workers eat the RED stuff and BLUE stuff. West. East. 4. 1. 2. 6.

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In each world, there are two countries.

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  1. In each world, there are two countries. West East 1

  2. In each country, there are 10 workers. West East 2

  3. The workers make RED stuff and BLUE stuff. West East 3

  4. The workers eat the RED stuff and BLUE stuff. West East 4

  5. 1 2 6 Happiness = (RED stuff eaten) (BLUE stuff eaten) 5

  6. Happiness = (RED stuff eaten) (BLUE stuff eaten) 0 F A I L 0 F A I L 6

  7. In West, workers can produce various quantities of RED stuff… West 7

  8. …or various quantities of BLUE stuff. West 1 worker to Red and 9 workers to Blue Production: 20 Red and 60 Blue 8

  9. In East, worker can also produce various quantities of RED stuff and BLUE stuff. East 9

  10. West is a lesser developed country compared to East. 10

  11. You must decide how many workers to allocate to the production of RED stuff and how many to allocate to the production of BLUE stuff. Your goal is to attain the most happiness possible for your country. 11

  12. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Example (using West): Suppose West chooses to assign 2 Workers to RED production and 8 Workers to BLUE production. 2 8 2 + 8 = 10 28 57 28 57 1,596

  13. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Example (using West): Suppose West chooses to assign 9 Workers to RED production and 1 Worker to BLUE production. 60 20 9 1 9 + 1 = 10 60 20 1,200

  14. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Round 1: Autarky Allocate 10 workers to maximize your country’s happiness. 60 20 9 1 9 + 1 = 10 60 20 1,200 14

  15. Round 1: Autarky Solution for West Solution for East 15

  16. Round 2: You may trade (if you want). West East 16

  17. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Example (using West): Suppose West chooses to assign 1 Worker to RED production and 9 Workers to BLUE production. East agrees to trade West 10 RED for 5 BLUE. 20 60 1 9 10 -5 30 55 1,650

  18. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Round 2: Trade Allocate 10 workers then trade (if you want) to maximize your country’s happiness. 20 60 1 9 10 -5 1 + 9 = 10 30 55 1,650 18

  19. Round 2: Trade Solution for West Price of Red 1 Red = 1.5 Blue Solution for East 19

  20. Round 3: West receives foreign aid. West East 20

  21. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Example (using West): Suppose West chooses to assign 1 Worker to RED production and 9 Workers to BLUE production. East agrees to trade West 50 RED for 40 BLUE. 1 9 -50 40 60 ____ + 100 = ______ 20 160 110 60 6,600

  22. Labor Allocation (must total 10) Production Imports (negative = exports) Production of Red Production of Blue Units of Red Units of Blue Units of Red Units of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) Units of Red Units of Blue Round 3: Foreign Aid Allocate 10 workers then trade (if you want) to maximize your country’s happiness. Only West receives foreign aid. 20 60 1 9 10 -5 1 + 9 = 10 30 55 1,650 22

  23. Round 3: Foreign Aid Solution for West Price of Red 1 Red = 1 Blue Solution for East 23

  24. Comparison 24

  25. Round 3: Foreign Aid (Blue Aid) Solution for West Price of Red 1 Red = 2 Blue Solution for East 25

  26. Conclusions: • Trade is a positive sum relationship. • Trade is a positive sum relationship even when one party is better than the other in the production of everything. • 3. Exchanging goods is what’s important. Money is only a tool that facilitates the exchanging. • 4. Foreign aid can stifle trade by encouraging a country to shift resources toward production of goods in which it does not have a comparative advantage. 26

  27. What Are the Consequences of Trade? Protectionist Assumption: Trade leads to a centralization of political power, decreased competition, and the transfer of wealth. Globalist Assumption: Trade leads to a decentralization of political power, increased competition, and the creation of wealth. 27

  28. 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. 28

  29. Per-Capita Income Luxembourg Belgium Ireland Netherlands Bahrain Japan US Source: International Financial Statistics, International Monetary Fund, December 2001 29

  30. Per-Capita Income (Lower Middle and Low Income) Suriname Lithuania Samoa Guyana Russia Peru Colombia Source: International Financial Statistics, International Monetary Fund, December 2001 30

  31. 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. 31

  32. 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 creates income across trading partners, therefore countries that trade more will have a more equitable income distribution. 32

  33. Income Distribution 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 33

  34. 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 34

  35. What Is the Impact on Social Equality? Protectionist Assumption: Trade exploits the weak. Globalist Assumption: Trade empowers the weak. 35

  36. 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 36

  37. 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 37

  38. 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 38

  39. Child Labor (Lower Middle and Low Income) Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 39

  40. What Is the Impact on Unemployment? Protectionist Assumption: Trade destroys jobs. Globalist Assumption: Trade creates jobs. (beware of observation bias) 40

  41. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 41

  42. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 42

  43. What About Fair Trade? 43

  44. 44

  45. What About Outsourcing? Protectionist Assumption: Outsourcing puts Americans out of work. Globalist Assumption: Outsourcing is trade (of labor), and trade is beneficial. 45

  46. Source: Balance of Payment Statistics Yearbook, IMF 46

  47. Source: Balance of Payment Statistics Yearbook, IMF 47

  48. Source: Balance of Payment Statistics Yearbook, IMF 48

  49. Name two metrics that distinguish the first world from the third world. 49

  50. If you hit a light bulb with a hammer, will you make a mess? 50

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