ECONOMICS AND PEOPLE

1. ECONOMICS AND PEOPLE Antony Davies, Ph.D. Duquesne University Part 3 UNIT 7 Click here for instructions.

2. INSTRUCTIONS • Navigation through the course will occur by clicking on the following action buttons located in the lower right corner of each screen: The HOME button will be placed in the center of each slide and will bring you to the Table of Contents for further navigation. The NEXT and BACK buttons will move you through the course content. The EXIT button will be placed at the end of each unit and will exit the unit and return you to the course menu.

3. INSTRUCTIONS • This course is meant to be self-paced, though there will be opportunities to interact with your local and global JPIC groups. • Course content and activities should be completed in the order that they are presented to maximize student success. • The Table of Contents will be your starting point for each Unit

4. ACTIVITY ICONS • Each type of course activity has a unique icon located in the upper right corner of the screen. • In this course you will: Online journal Local discussion Read online Create doc Reflect Global discussion Watch video Quiz/test

5. PART3:ECONOMICS AND SOCIETYUNIT 7:SPECIALIZATION, EXCHANGE, AND TRADE

6. UNIT 7: SPECIALIZATION, EXCHANGE,AND TRADE This unit is divided into several sections. Start with Section 1: Introduction.Then proceed onto each section. You can click on a link below to navigate to the section where you had recently left off. Section 1: Introduction Section 2: Impact on Per-Capita Income Section 3: Impact on Income Distribution Section 4: Impact on Social Equality Section 5: Impact on Employment Section 6: Implications of Trade Unit Summary & Assignment

7. Section 1 INTRODUCTION

8. MICRO-LECTURE View the Lecture (01:14) Read the Text of the Lecture

9. SPECIALIZATION, EXCHANGE,AND TRADE • Specialization occurs when markets within a country divert the country’s resources toward the production of goods in which the country has a comparative advantage. • A country has a comparative advantage in the production of a good when the amount of other goods the country must give up in order to produce more of this good is less than the amount of other goods other countries must give up in order to produce more of this good.

10. SPECIALIZATION, EXCHANGE,AND TRADE • Specialization occurs when markets within a country divert the country’s resources toward the production of goods in which the country has a comparative advantage. • For example, suppose Brazil can divert resources from the production of wheat to the production of sugar and, in so doing, give up 1 bushel of wheat for every 1 pound of sugar it gains. Meanwhile, the US can divert resources from the production of wheat to the production of sugar and, in so doing, give up 5 bushels of wheat for every 1 pound of sugar it gains. We say that Brazil has a comparative advantage in the production of sugar.

11. SPECIALIZATION, EXCHANGE,AND TRADE • Specialization occurs when markets within a country divert the country’s resources toward the production of goods in which the country has a comparative advantage. • 2. Exchange occurs when buyers and sellers in one country exchange goods with buyers and sellers in another country. • 3. Trade is the combination of specialization and exchange.

12. There are two opposed attitudes toward trade, each based on opposing assumptions as to the nature 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.

13. Protectionist Assumption: The protectionist assumption arises from the belief that trade enables those who would exploit the weak and the poor to do so more easily. As a result, protectionists anticipate that trade will lead to more wealth and power being concentrated in hands of those who are already wealthy and powerful. Globalist Assumption: The globalist assumption arises from the belief that trade presents the weak and the poor with opportunities to become stronger and richer. As a result, globalists anticipate that trade will lead to a dissemination of wealth and power into the hands of many.

14. Section 2 IMPACT ON PER-CAPITA INCOME

15. WHAT IS THE IMPACT ONPER-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.

16. In the following slides, you will see data on the economies of the world’s countries. In each graph that you see, each dot represents a country and shows the amount of trade the country experiences along with some other economic or social measure of well-being.

17. On average, countries with higher levels of trade also have higher levels of per-capita income. Luxembourg Belgium Ireland Netherlands Bahrain US Japan Source: International Financial Statistics, International Monetary Fund, December 2001

18. WHAT IS THE IMPACT ONPER-CAPITA INCOME? On average, countries with higher levels of trade also have higher levels of per-capita income. Counterargument: What we are seeing is the “large country phenomenon.” Large countries both engage in more trade and have higher per-capita incomes. Therefore, we would expect to observe greater trade accompanying greater income – not because the two are related, but because they both arise when a country is large.

19. Suriname If we restrict our vision to the poorest countries, we see the same phenomenon. Countries that engage in more trade enjoy higher levels of income. Lithuania Samoa Guyana Russia Peru Colombia Source: International Financial Statistics, International Monetary Fund, December 2001

20. WHAT IS THE IMPACT ONPER-CAPITA INCOME? On average, countries with higher levels of trade also have higher levels of 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.

21. WHAT IS THE IMPACT ONPER-CAPITA INCOME? On average, countries with higher levels of trade also have higher levels of per-capita income. Counterargument: Per-capita income is an average measure. A country can have one very rich person and many very poor people and still have a high per-capita income. How is trade related to the distribution of income?

22. Section 3 IMPACT ON INCOME DISTRIBUTION

23. WHAT IS THE IMPACT ON THEDISTRIBUTION OF INCOME? Protectionist Assumption: Trade profits large firms and rich people at the expense of small firms and poor people, therefore countries that trade more will have a less equitable income distribution. Globalist Assumption: Trade provides opportunities for the poor to generate income, therefore countries that trade more will have a more equitable income distribution.

24. WHAT IS THE IMPACT ON THEDISTRIBUTION OF INCOME? Income Distribution Economists use the Gini coefficient to measure income distribution. The coefficient is a number on the scale of 0 to 100. In a country with a low Gini coefficient, people’s incomes are similar. In a country with a high Gini coefficient, there is a great disparity among people’s incomes. For example, if every person earned the same income, a country’s Gini coefficient would be 0. If one person earned a large income and everyone else earned nothing, a country’s Gini coefficient would be 100.

25. WHAT IS THE IMPACT ON THEDISTRIBUTION OF INCOME? Income Distribution On the next graph, you will see countries arranged according to their Gini coefficients and trade. Countries to the left of the graph have more equitable income distributions. Countries to the right of the graph have less equitable income distributions. Countries positioned further up on the graph engage in more trade. Countries positioned further down on the graph engage in less trade.

26. Singapore Hong Kong Ireland Netherlands Switzerland Norway Denmark Austria Sweden Canada Finland Germany France Israel Slovenia Malaysia US Cyprus South Africa Gabon Not all countries with more equitable income distributions engage in a lot of trade, but all countries that engage in more trade have more equitable income distributions. Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002

27. WHAT IS THE IMPACT ON THEDISTRIBUTION OF INCOME? Countries that engage in more trade have more equitable income distributions. Counterargument: Again, what we are seeing is the “large country phenomenon.” Large countries both engage in more trade and have more equitable income distributions. Therefore, we would expect to observe greater trade accompanying more equitable income distributions – not because the two are related, but because they both arise when a country is large.

28. If we restrict our vision to the poorest countries, we see the same phenomenon. Countries that engage in more trade experience more equitable income distributions. 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

29. WHAT IS THE IMPACT ON THEDISTRIBUTION OF INCOME? Countries that engage in more trade have more equitable income distributions. Counterargument: Income is only one measure of well-being. Having high per-capita incomes and more equitable income distributions is irrelevant if the people are being exploited.

30. Section 4 IMPACT ON SOCIAL EQUALITY

31. WHAT IS THE IMPACT ONSOCIAL EQUALITY? Protectionist Assumption: Trade exploits the weak. Globalist Assumption: Trade empowers the weak.

32. The GDI measures equality of quality-of-life between the genders. On average, women enjoy a quality-of-life more similar to that of men in countries that engage in more trade. Oman Botswana US Ivory Coast Azerbaijan and Albania Myanmar Gender Related Development Index (0 = low, 1 = high) Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

33. Singapore Belgium Ireland Norway Slovak Republic South Korea United States Equatorial Guinea South Africa Jordan Togo China Pakistan Niger Mozambique Sudan Burkina Faso The GEM measures equality of political and social power between the genders. On average, women enjoy political and social power more similar to that of men in countries that engage in more trade. Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

34. Hong Kong US Botswana Gabon Burundi Sierra Leone Child labor rates are lower among countries that engage in more trade. Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

35. Section 5 IMPACT ON EMPLOYMENT

36. WHAT IS THE IMPACT ONEMPLOYMENT? Protectionist Assumption: Trade destroys jobs. Globalist Assumption: Trade creates jobs.

37. In the following slides, you will see data for the United States. Each dot represents one month.

38. In the U.S., unemployment is lower when the country engages in more trade and higher when the country engages in less trade. Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

39. WHAT IS THE IMPACT ONEMPLOYMENT? Unemployment is lower when the country engages in more trade and higher when the country engages in less trade. Counterargument: Perhaps trade does create more jobs on the whole, but it creates lower paying jobs in exchange for destroying higher paying jobs.

40. In the U.S., wages (adjusted for inflation) are higher when the country engages in more trade and lower when the country engages in less trade. Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

41. Section 6 IMPLICATIONS OF TRADE

42. DOES TRADE CAUSE ALL OF THESEGOOD THINGS? You have seen evidence that, regardless of the size of the country, higher levels of trade are associated with higher income levels, a more equitable income distribution, and less exploitation. It is unlikely that trade is the cause of these improved social measures. Rather, it is likely that trade and the improved social measures are both the result of a third factor.

43. DOES TRADE CAUSEALL OF THESE GOOD THINGS? On the next graph, you will see countries arranged according to the extent to which their governments protect the people’s economic freedoms. The Index of Economic Freedom is measured by the Heritage Foundation and is based on things such as how easy it is to start a business, how much time it takes to resolve disputes through the court system, the extent to which the government protects property rights, the level of taxation, and the amount of business regulation. A score of 1 indicates that the people are perfectly free to engage in economic activities. A score of 5 indicates that the people are completely repressed.

44. Countries whose governments protect people’s economic freedoms enjoy greater economic activity. It is this improved economic activity that manifests itself as higher levels of income, less exploitation, and higher levels of trade. Luxembourg Switzerland Norway Japan Denmark Sweden Singapore Italy Israel New Zealand Kuwait Greece Portugal Slovenia Bahrain Brazil Croatia Belarus Thailand Azerbaijan Rwanda El Salvador Source: United Nations International Financial Statistics and Heritage Foundation

45. Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

46. UNIT SUMMARY In this unit, you learned that countries that engage in more trade have higher standards of living, more equitable income distributions, more gender equality, a lower incidence of child labor, and better qualities-of-life. You also learned that this positive side-effect of trade is not restricted to large countries, but that all countries – large and small, rich and poor – experience similar benefits from trade.

47. ASSIGNMENT, PART 1 Go to the CIA World Factbook and collect the following data for any ten countries of your choice. Turn to the next slide for examples. GDP (this is the measure of total economic activity in the country) GDP per capita The value of imports The value of exports Trade per GDP (you will need to calculate this) Gini Index (this is a measure of income equity) Unemployment rate Infant mortality rate Life expectancy Literacy rate

48. ASSIGNMENT (EXAMPLE) On the following slides, you will see examples of where you the data is located. The examples are for the United States. Click on these to expand the sections containing the data you need.

49. ASSIGNMENT (EXAMPLE) This measures total economic activity in the country for the year. “Purchasing power parity” means that the number has been adjusted to account for (1) differences in currency values, and (2) differences in costs of living. You can directly compare purchasing power parity adjusted numbers across countries. This measures economic activity on a per person basis.

50. ASSIGNMENT (EXAMPLE) This is the value of goods exported out of the country during the year. This is the value of goods imported into the country during the year. Calculate trade per GDP for the country where: Trade per GDP = (Value of Imports + Value of Exports) / GDP