Transcript WHAT IS THE IMPACT ON PER-CAPITA INCOME?

Antony Davies, Ph.D.
Duquesne University
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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
INTRODUCTION
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1.
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.
1.
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.
1.
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.
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.
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.
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.
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.
$40,000
On average, countries with higher levels of trade
also have higher levels of per-capita income.
$35,000
Luxembourg
Belgium
Per-capita Trade (US$)
$30,000
R2 = 0.56
Ireland
$25,000
Netherlands
$20,000
$15,000
Bahrain
$10,000
US
Japan
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
$40,000
$45,000
On average, countries with higher levels of trade also have higher levels of percapita 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.
$3,500
Suriname
$3,000
If we restrict our vision to the poorest countries, we see the same phenomenon.
Countries that engage in more trade enjoy higher levels of income.
Per-capita Trade (US$)
$2,500
Lithuania
R2 = 0.59
$2,000
Samoa
Guyana
$1,500
Russia
$1,000
Peru
Colombia
$500
$0
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
$3,500
$4,000
$4,500
On average, countries with higher levels of trade also have higher levels of percapita 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.
On average, countries with higher levels of trade also have higher levels of percapita 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?
IMPACT ON INCOME
DISTRIBUTION
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.
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.
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.
$40,000
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.
Singapore
$35,000
Hong Kong
Per-capita Trade (US$)
$30,000
Ireland
$25,000
Netherlands
Switzerland
$20,000
Norway
Denmark
Sweden
Austria
$15,000
Canada
Finland
Germany
Israel
Slovenia
$10,000
France
Malaysia
US
Cyprus
$5,000
$0
15.0
South Africa
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Gabon
60.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
65.0
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.
$3,000
If we restrict our vision to the poorest countries, we see the same phenomenon.
Countries that engage in more trade experience more equitable income distributions.
Lithuania
Per-capita Trade (US$)
$2,500
$2,000
Fiji
Thailand
$1,500
$1,000
Ukraine
$500
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
60.0
65.0
Countries that engage in more trade have more equitable income distributions.
Counterargument:
Income is only one measure of well-being. Having high per-capita
incomes and more equitable income distributions is irrelevant if the
people are being exploited.
IMPACT ON SOCIAL EQUALITY
Protectionist Assumption:
Trade exploits the weak.
Globalist Assumption:
Trade empowers the weak.
Per-capita Trade (US$, logarithmic scale)
$100,000
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.
$10,000
Botswana
Oman
US
R2 = 0.80
$1,000
Ivory Coast
Azerbaijan and Albania
$100
Myanmar
$10
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Gender
Related Development
(0 = low gender adjusted HDI, 1 = high gender
Gender Related
Development
Index (0 = low,Index
1 = high)
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World
Development Indicators, World Bank, 2002
1.00
$100,000
Singapore
Belgium
Per-capita Trade (US$, logarithmic scale)
Ireland
Norway
Slovak Republic
$10,000
South Korea
United States
2
R = 0.58
Equatorial Guinea
$1,000
South Africa
Jordan
Togo
China
Pakistan
$100
Niger
Sudan
Burkina Faso
Mozambique
$10
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.
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Gender Empowerment Measure (0 = low empowerment, 1 = high empowerment)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World
Development Indicators, World Bank, 2002
1.00
$100,000
Per-capita Trade (US$, logarithmic scale)
Hong Kong
$10,000
US
Botswana
Gabon
$1,000
R2 = 0.54
$100
Burundi
Sierra Leone
$10
Child labor rates are lower among countries that engage in more trade.
$1
0
10
20
30
40
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World
Development Indicators, World Bank, 2002
50
IMPACT ON EMPLOYMENT
Protectionist Assumption:
Trade destroys jobs.
Globalist Assumption:
Trade creates jobs.
In the following slides, you will see data for the United States. Each dot
represents one month.
J a n u a ry 1 9 7 5 to J u n e 2 0 0 6
12%
U n em p lo ym en t R ate
10%
8%
6%
4%
2%
In the U.S., unemployment is lower when the country engages in more
trade and higher when the country engages in less trade.
0%
12%
14%
16%
18%
20%
22%
24%
T ra d e (im p o rts p lu s e x p o rts) a s % o f G D P
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
26%
28%
30%
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.
J a n u a r y 1 9 7 5 to J u n e 2 0 0 6
A v e ra ge R e a l H ourly E a rnings (2 0 0 0 $ )
$ 1 5 .0 0
$ 1 4 .5 0
$ 1 4 .0 0
$ 1 3 .5 0
$ 1 3 .0 0
$ 1 2 .5 0
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.
$ 1 2 .0 0
12%
14%
16%
18%
20%
22%
24%
26%
Tr a de (im por ts plus e x por ts ) a s % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
28%
30%
IMPLICATIONS OF TRADE
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.
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.
$45,000
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
$40,000
Switzerland
Norway
$35,000
Japan
Per-capita GDP (US$)
Denmark
$30,000
Sweden
Singapore
$25,000
Italy
$20,000
Israel
New Zealand
Kuwait
$15,000
Portugal
Greece
$10,000
Slovenia
Bahrain
Brazil
$5,000
Belarus
Thailand
El Salvador
$0
1.0
2.0
Croatia
Rwanda Azerbaijan
3.0
4.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
5.0
Political freedom makes economic freedom possible.
Economic freedom makes political freedom meaningful.
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-oflife.
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.
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.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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
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.
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.
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
This unemployment
rate measures the
fraction of the labor
force that is
unemployed in the
current year.
The Gini Index
measures the
distribution of income.
An index of 0 means
that everyone has the
same income. An index
of 100 means that one
person has all the
income and everyone
else has no income.
Infant mortality
measures the
number of children
who die between
birth and 6 months
of age.
Life expectancy
measures the
number of years the
average person lives
The literacy rate
measures the
fraction of the
population who can
read and write.
After you have collected the data for each of the ten countries, create
six charts. Each chart will have one of the following measures on the
horizontal axis and Trade per GDP on the vertical axis. On each chart,
plot the data you have collected.
1.
2.
3.
4.
5.
6.
GDP per capita
Gini Index
Unemployment rate
Infant mortality rate
Life expectancy
Literacy rate
After analyzing the data you have collected and in light of what you have
learned in this unit, post one thing you were surprised by and one thing
you had expected to the JPIC 220 Google Groups discussion page. These
can be trends, growths/declines, relationships, etc.
HOW TO POST ONTO GOOGLE GROUPS
1. Click on the Google Groups discussion link above.
2. Sign in into Google Groups so that you are able to post via the “Sign In” link on
the top right of the page.
3. Click “Reply” to add your response.
Per-capita income is the average income per person. It is measured by
dividing the total income generated in a country by the country's
population.