Transcript Sit at the indicated table. Move/turn chairs where necessary. Name Abdimajid Abdirahman Adriano Gianturco Gulisano Aida Ibricevic Alejandro Komai Allen Mendenhall Anamaria Boioglu Andrew Seremetis Ariel Goldring Arya Morshed Babatunde Rosanwo Benjamin.

Sit at the indicated table. Move/turn chairs where necessary.
Name
Abdimajid Abdirahman
Adriano Gianturco Gulisano
Aida Ibricevic
Alejandro Komai
Allen Mendenhall
Anamaria Boioglu
Andrew Seremetis
Ariel Goldring
Arya Morshed
Babatunde Rosanwo
Benjamin Eisen
Brandon Peterson
Brian Stacy
Bridgette Richey
Caitlin McLean
Candice Malcolm
Carlos Ormachea
Charlotte Rommerskirchen
Chris Knudsen
Claire Litherland
Coleman Drake
Colin Keesee
Crane Sorensen
Daniel Piedra
Daniel Suddes
Daniel Sockwell
Denis Clijsters
Dominic Foppoli
Dustin Robinson
Eleanor Smith
Role
World #1 East
World #1 East
World #1 East
World #1 East
World #1 East
World #1 West
World #1 West
World #1 West
World #1 West
World #1 West
World #2 East
World #2 East
World #2 East
World #2 East
World #2 East
World #2 West
World #2 West
World #2 West
World #2 West
World #2 West
World #3 East
World #3 East
World #3 East
World #3 East
World #3 East
World #3 West
World #3 West
World #3 West
World #3 West
World #3 West
Name
Emilie Maes
Yashua Bhatti
Enrique Angulo
Eric Sosnoff
Jens Moens
Joseph Corey
Joseph Foutch
Julia Novitskaia
Julio Padilla
Kareem Khalaf
Kathryn Isaacson
Lai Xu
Larisa Burakova
Liliya Leontyeva
Margaret Gales
Theodore Dasher
Mark Yager
David Hendricks
Michal Kuz
Mike Tellier
Milko Markov
Nicholas Dunn
Oliver Cooper
Patricio Echagüe
Philippe Caeymaex
Rossen Valchev
Ryan Biese
Ryan Lynch
Role
World #4 East
World #4 East
World #4 East
World #4 East
World #4 East
World #4 West
World #4 West
World #4 West
World #4 West
World #4 West
World #5 East
World #5 East
World #5 East
World #5 East
World #5 East
World #5 West
World #5 West
World #5 West
World #5 West
World #5 West
World #6 East
World #6 East
World #6 East
World #6 East
World #6 West
World #6 West
World #6 West
World #6 West
There are two countries.
West
East
In each country, there are 20 workers.
West
East
The workers make RED stuff and BLUE stuff.
West
East
The workers eat the RED stuff and BLUE stuff.
West
East
Happiness = (RED stuff eaten) (BLUE stuff eaten)
1
2
6
In West, a single worker can produce 2 RED stuff
or
1 BLUE stuff
West
In East, a single worker can produce 1 RED stuff
or
2 BLUE stuff
East
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.
Example (using West):
Suppose you choose to
assign 2 Workers to RED
production and 18 Workers
to BLUE production
Labor Allocation (must total 20)
Production of Red Production of Blue
2
18
Production
Units of Red Units of Blue
4
Consumption (production plus imports)
Units of Red
Units of Blue
4
18
Imports (negative = exports)
Units of Red
Units of Blue
18
Happiness (red consumed x blue consumed)
72
Example (using East):
Suppose you choose to
assign 3 Workers to RED
production and 17 Workers
to BLUE production
Labor Allocation (must total 20)
Production of Red Production of Blue
3
Production
Units of Red Units of Blue
17
3
Consumption (production plus imports)
Units of Red
Units of Blue
3
34
Imports (negative = exports)
Units of Red
Units of Blue
34
Happiness (red consumed x blue consumed)
102
Round 1: Autarky
Allocate 20 workers to
maximize happiness.
Now, you may produce, exchange, then consume.
West
East
Example (using East):
Suppose you choose to
assign 3 Workers to RED
production and 17 Workers
to BLUE production.
Then, West agrees to trade
you 10 RED for 8 BLUE.
Labor Allocation (must total 20)
Production of Red Production of Blue
3
Production
Units of Red Units of Blue
17
3
Consumption (production plus imports)
Units of Red
Units of Blue
13
26
34
Imports (negative = exports)
Units of Red
Units of Blue
10
-8
Happiness (red consumed x blue consumed)
338
Round 2: Trade
Allocate 20 workers
then trade (if you want)
to maximize happiness.
West has an absolute advantage in the production of RED stuff.
 In West, 1 unit of RED costs 1/2 worker.
 In East, 1 unit of RED costs 1 worker.
East has an absolute advantage in the production of BLUE stuff.
 In West, 1 unit of BLUE costs 1 worker.
 In East, 1 unit of BLUE costs 1/2 worker.
What if West is a lesser developed country such
that East has an absolute advantage in the
production of both RED and BLUE?
In West, a single worker can produce 2 RED stuff
or
1 BLUE stuff
West
In East, a single worker can produce 3 RED stuff
or
2 BLUE stuff
East
Round 3: Autarky
Allocate 20 workers to
maximize happiness.
East has an absolute advantage in the production of RED stuff.
 In West, 1 unit of RED costs 1/2 worker.
 In East, 1 unit of RED costs 1/3 worker.
East has an absolute advantage in the production of BLUE stuff.
 In West, 1 unit of BLUE costs 1 worker.
 In East, 1 unit of BLUE costs 1/2 worker.
Round 4: Trade
Allocate 20 workers
then trade (if you want)
to maximize happiness.
Are we thinking about the problem correctly?
When you choose to produce more RED stuff, what do you
give up?
When you choose to produce more BLUE stuff, what do you
give up?
A country doesn’t give up workers when it produces stuff.
It gives up the other stuff it could be producing instead.
 The opportunity cost of BLUE stuff isn’t a worker.
 The opportunity cost of BLUE stuff is RED stuff!
How many RED stuff does West have to give up to produce 1
more unit of BLUE stuff?
 In West, the cost of 1 BLUE stuff is 2 RED stuff.
How many BLUE stuff does West have to give up to produce 1
more unit of RED stuff?
 In West, the cost of 1 RED stuff is 1/2 of a BLUE stuff.
How many RED stuff does East have to give up to produce 1
more unit of BLUE stuff?
 In East, the cost of 1 BLUE stuff is 3/2 RED stuff.
How many BLUE stuff does East have to give up to produce 1
more unit of RED stuff?
 In East, the cost of 1 RED stuff is 2/3 of a BLUE stuff.
West
East
West has a relative advantage in the production of RED stuff.
 In West, 1 unit of RED costs 1/2 units of BLUE.
 In East, 1 unit of RED costs 2/3 units of BLUE.
West
East
East has a relative advantage in the production of BLUE stuff.
 In West, 1 unit of BLUE costs 2 units of RED.
 In East, 1 unit of BLUE costs 3/2 units of RED.
West
East
West has a relative advantage in the production of RED stuff.
 In West, 1 unit of RED costs 1/2 units of BLUE.
 In East, 1 unit of RED costs 2/3 units of BLUE.
West will trade if West can sell 1 RED for more than 1/2 BLUE.
East will trade if East can buy 1 RED for less than 2/3 BLUE.
West
East
East has a relative advantage in the production of BLUE stuff.
 In West, 1 unit of BLUE costs 2 units of RED.
 In East, 1 unit of BLUE costs 3/2 units of RED.
West will trade if West can buy 1 BLUE for less than 2 RED.
East will trade if East can sell 1 BLUE for more than 3/2 RED.
Labor Allocation
Red
Blue
10
10
10
10
Production
Red
Blue
20
10
10
20
Import
Red
Blue
0
0
0
0
Consumption
Red
Blue
20
10
10
20
Utility
Autarky
West
East
200
200
Trade
West
East
20
0
0
20
40
0
0
40
-20
20
20
-20
20
20
20
20
400
400
Autarky
West
East
10
10
10
10
20
30
10
20
0
0
0
0
20
30
10
20
200
600
Trade
West
East
20
0
0
20
40
0
0
40
-25
25
15
-15
15
25
15
25
225
625
Conclusions:
1. Trade is a positive sum relationship.
2. Exchanging goods is what’s important. Money is only a tool
that facilitates the exchanging.
3. Every country has a relative advantage in something.
4. Trade is the combination of exchange and specialization.
Specialization is the directing of resources toward the
countries relative advantage.
What Are the Benefits From 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.
What Is the Impact on Per-Capita Income?
Protectionist Assumption:
Trade is exploitive of peoples and industries, therefore percapita 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.
Per-Capita Income
$40,000
Luxembourg
$35,000
Belgium
Per-capita Trade (US$)
$30,000
R2 = 0.56
Ireland
$25,000
Netherlands
$20,000
Bahrain
$15,000
$10,000
US
Japan
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
Per-Capita Income (Lower Middle, and Low Income)
$3,500
Suriname
$3,000
Per-capita Trade (US$)
$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
$3,500
$4,000
$4,500
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
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.
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.
Income Distribution
$40,000
No carrot: A too inequitable distribution
signals a lack of
entrepreneurial opportunity.
Singapore
$35,000
Hong Kong
Per-capita Trade (US$)
$30,000
No stick: A too equitable distribution
signals no cost to free riders.
Ireland
$25,000
Netherlands
Switzerland
$20,000
Norway
Denmark
Sweden
Austria
$15,000
Finland
Canada
Germany
Israel
Slovenia
$10,000
France
Malaysia
Cyprus
US
Gabon
South Africa
$5,000
$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
Income Distribution (Lower Middle, and Low Income)
$3,000
Per-capita Trade (US$)
$2,500
Lithuania
$2,000
Fiji
Thailand
$1,500
$1,000
Ukraine
$500
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
60.0
65.0
What Is the Impact on Social Equality?
Protectionist Assumption:
Trade exploits the weak.
Globalist Assumption:
Trade empowers the weak.
Gender Related Development Index
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
Botswana
Oman
US
R2 = 0.80
$1,000
Ivory Coast
Azerbaijan and Albania
$100
Myanmar
$10
GDI measures equality of quality of life
(longevity, education, literacy, income).
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
Gender Empowerment Measure
Per-capita Trade (US$, logarithmic scale)
$100,000
$10,000
R2 = 0.58
$1,000
$100
$10
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)
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
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
Child Labor
$100,000
Per-capita Trade (US$, logarithmic scale)
Hong Kong
$10,000
US
Botswana
Gabon
$1,000
R2 = 0.54
$100
Burundi
Sierra Leone
$10
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
What Is the Impact on Unemployment?
Protectionist Assumption:
Trade destroys jobs.
Globalist Assumption:
Trade creates jobs.
(beware of the “information availability” problem)
Unemployment vs. Trade Over Time
January 1975 to June 2006
12%
Unemployment Rate
10%
8%
6%
4%
2%
0%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
Unemployment vs. Trade Over Time
January 1975 to June 2006
Average Real Hourly Earnings (2000$)
$15.00
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
What About Outsourcing?
Protectionist Assumption:
Outsourcing puts Americans out of work.
Globalist Assumption:
Outsourcing is trade (of labor), and trade is beneficial.
Outsourcing (2002)
$50,000
$45,000
$40,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Russia
China
India
UK
France
Italy
Netherlands
Japan
US
$0
Germany
Millions current $
$35,000
Source: Balance of Payment Statistics Yearbook, IMF
Outsourcing as Fraction of GDP (2002)
40%
35%
30%
25%
20%
15%
10%
5%
US
Japan
China
UK
France
Russia
Germany
India
Vanuatu
Ireland
Mozambique
Congo (Rep. of)
Angola
0%
Source: Balance of Payment Statistics Yearbook, IMF
Insourcing less Outsourcing (2002)
$25,000
$20,000
$10,000
$5,000
Germany
Japan
Indonesia
Korea
Italy
Russia
France
China
Singapore
India
Hong Kong
($5,000)
US
$0
UK
Millions current $
$15,000
($10,000)
($15,000)
Source: Balance of Payment Statistics Yearbook, IMF
Name two metrics that
distinguish the first world from
the third world.
If you hit a light bulb with a
hammer, will you make a mess?
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1.0
2.0
126.0
3.0
251.0
4.0
376.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
5.0
501.0
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1.0
2.0
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.