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
Happiness = (RED stuff eaten) (BLUE stuff eaten)
1
2
6
5
Happiness = (RED stuff eaten) (BLUE stuff eaten)
0
0
6
In West, workers can produce various quantities
of RED stuff…
West
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
7
…or various quantities of BLUE stuff.
West
1 worker to Red
and
9 workers to Blue
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Production: 20 Red and 60 Blue
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
8
In East, worker can also produce various
quantities of RED stuff and BLUE stuff.
East
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
25
35
43
50
56
61
66
71
75
79
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Units of Blue
Produced
0
50
71
87
100
112
122
132
141
150
158
9
West is a lesser developed country compared to East.
West
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
East
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
25
35
43
50
56
61
66
71
75
79
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Units of Blue
Produced
0
50
71
87
100
112
122
132
141
150
158
10
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
Example (using West):
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
Suppose West chooses to
assign 2 Workers to RED
production and 8 Workers
to BLUE production.
2 + 8 = 10
Labor Allocation (must total 10)
Production of Red Production of Blue
2
Production
Units of Red Units of Blue
8
28
Consumption (production plus imports)
Units of Red
Units of Blue
28
57
Imports (negative = exports)
Units of Red
Units of Blue
57
Happiness (red consumed x blue consumed)
1,596
Example (using West):
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
Suppose West chooses to
assign 9 Workers to RED
production and 1 Worker to
BLUE production.
9 + 1 = 10
Labor Allocation (must total 10)
Production of Red Production of Blue
9
1
Production
Units of Red Units of Blue
60
Consumption (production plus imports)
Units of Red
Units of Blue
60
20
Imports (negative = exports)
Units of Red
Units of Blue
20
Happiness (red consumed x blue consumed)
1,200
Round 1: Autarky
Allocate 10 workers to maximize your country’s happiness.
9 + 1 = 10
Labor Allocation (must total 10)
Production of Red Production of Blue
9
1
Production
Units of Red Units of Blue
60
Consumption (production plus imports)
Units of Red
Units of Blue
60
20
Imports (negative = exports)
Units of Red
Units of Blue
20
Happiness (red consumed x blue consumed)
1,200
14
Round 1: Autarky
Solution for West
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
5
5
45
Consumption (production plus imports)
Units of Red
Units of Blue
45
Imports (negative = exports)
Units of Red
Units of Blue
45
Happiness (red consumed x blue consumed)
45
2,025
Solution for East
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
5
5
56 112
Consumption (production plus imports)
Units of Red
Units of Blue
56
Imports (negative = exports)
Units of Red
Units of Blue
112
Happiness (red consumed x blue consumed)
6,272
15
Round 2: You may trade (if you want).
West
East
16
Example (using West):
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
Labor Allocation (must total 10)
Production of Red Production of Blue
1
9
20
55
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.
Production
Units of Red Units of Blue
Consumption (production plus imports)
Units of Red
Units of Blue
30
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
60
Imports (negative = exports)
Units of Red
Units of Blue
10
-5
Happiness (red consumed x blue consumed)
1,650
Round 2: Trade
Allocate 10 workers then trade (if you want) to maximize your
country’s happiness.
1 + 9 = 10
Labor Allocation (must total 10)
Production of Red Production of Blue
1
9
Production
Units of Red Units of Blue
20
Consumption (production plus imports)
Units of Red
Units of Blue
30
55
60
Imports (negative = exports)
Units of Red
Units of Blue
10
-5
Happiness (red consumed x blue consumed)
1,650
18
Round 2: Trade
Solution for West
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
7
3
53
Consumption (production plus imports)
Units of Red
Units of Blue
37
35
Imports (negative = exports)
Units of Red
Units of Blue
-16
24
Price of Red
1 Red = 1.5 Blue
Happiness (red consumed x blue consumed)
59
2,183
Solution for East
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
4
6
50 122
Consumption (production plus imports)
Units of Red
Units of Blue
66
98
Imports (negative = exports)
Units of Red
Units of Blue
16
-24
Happiness (red consumed x blue consumed)
6,468
19
Round 3: West receives foreign aid.
West
East
20
Example (using West):
Labor Allocated to
Production of Red
0
1
2
3
4
5
6
7
8
9
10
Units of Red
Produced
0
20
28
35
40
45
49
53
57
60
63
Labor Allocation (must total 10)
Production of Red Production of Blue
1
9
Labor Allocated to
Production of Blue
0
1
2
3
4
5
6
7
8
9
10
60+ 100
____
= 160
______
60
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.
Production
Units of Red Units of Blue
Consumption (production plus imports)
Units of Red
Units of Blue
110
Units of Blue
Produced
0
20
28
35
40
45
49
53
57
60
63
20
Imports (negative = exports)
Units of Red
Units of Blue
-50
40
Happiness (red consumed x blue consumed)
6,600
Round 3: Foreign Aid
Allocate 10 workers then trade (if you want) to maximize your
country’s happiness. Only West receives foreign aid.
1 + 9 = 10
Labor Allocation (must total 10)
Production of Red Production of Blue
1
9
Production
Units of Red Units of Blue
20
Consumption (production plus imports)
Units of Red
Units of Blue
30
55
60
Imports (negative = exports)
Units of Red
Units of Blue
10
-5
Happiness (red consumed x blue consumed)
1,650
22
Round 3: Foreign Aid
Solution for West
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
5
45+ 100
____
5
= 145
______
Consumption (production plus imports)
Units of Red
Units of Blue
94
45
Imports (negative = exports)
Units of Red
Units of Blue
Price of Red
-51
1 Red = 1 Blue
52
Happiness (red consumed x blue consumed)
97
9,118
Solution for East
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
2
8
35 141
Consumption (production plus imports)
Units of Red
Units of Blue
86
89
Imports (negative = exports)
Units of Red
Units of Blue
51
-52
Happiness (red consumed x blue consumed)
7,654
23
Comparison
Labor Allocation
Red
Blue
Production
Red
Blue
Imports
Red
Blue
Consumption
Red
Blue
Happiness
WEST
Autarky
Trade
Aid
5
7
5
5
3
5
45
53
45
45
35
45
0
-16
-51
0
24
52
45
37
94
45
59
97
2025
2183
5
4
2
5
6
8
56
50
35
112
122
141
0
16
51
0
-24
-52
56
66
86
112
98
89
6272
6468
EAST
Autarky
Trade
Aid
24
Round 3: Foreign Aid (Blue Aid)
Solution for West
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
8
2
57
Consumption (production plus imports)
Units of Red
Units of Blue
59
27+ 100
____
= 127
______
Imports (negative = exports)
Units of Red
Units of Blue
2
-4
Price of Red
1 Red = 2 Blue
Happiness (red consumed x blue consumed)
123
7,257
Solution for East
Labor Allocation (must total 10)
Production
Production of Red Production of Blue Units of Red Units of Blue
5
5
57
Consumption (production plus imports)
Units of Red
Units of Blue
55
114
110
Imports (negative = exports)
Units of Red
Units of Blue
-2
4
Happiness (red consumed x blue consumed)
6,270
25
Conclusions:
1. Trade is a positive sum relationship.
2. 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
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
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.
28
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
29
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
30
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
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
Income Distribution
$40,000
Singapore
$35,000
Hong Kong
Per-capita Trade (US$)
$30,000
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
60.0
65.0
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
33
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
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring
Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
34
What Is the Impact on Social Equality?
Protectionist Assumption:
Trade exploits the weak.
Globalist Assumption:
Trade empowers the weak.
35
Gender Related Development Index
Per-capita Trade (US$, 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).
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
36
Gender Empowerment Measure
Per-capita Trade (US$, 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
37
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
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development
Indicators, World Bank, 2002
38
Child Labor (Lower Middle and Low Income)
Per-capita Trade (US$, logarithmi c scale)
$10,000
$1,000
$100
$10
$1
0
10
20
30
40
50
60
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
39
What Is the Impact on Unemployment?
Protectionist Assumption:
Trade destroys jobs.
Globalist Assumption:
Trade creates jobs.
(beware of observation bias)
40
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
41
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
42
What About Fair Trade?
43
44
What About Outsourcing?
Protectionist Assumption:
Outsourcing puts Americans out of work.
Globalist Assumption:
Outsourcing is trade (of labor), and trade is beneficial.
45
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
46
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
47
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
48
Name two metrics that
distinguish the first world from
the third world.
49
If you hit a light bulb with a
hammer, will you make a mess?
50
There are no causes of poverty. To ask what causes
poverty is like asking what causes cold...it is the absence of
energy. Similarly poverty is the absence of wealth. We
should ask, “what are the causes of wealth?”
— Madsen Pirie
53
$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
5.0
501.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
54
$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
5.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
55