the fundamentals of trade chief of staff retreat february 22-24, 2008 copies of this presentation...

The Fundamentals of Trade

Chief of Staff RetreatFebruary 22-24, 2008

copies of this presentation can be found atwww.business.duq.edu/faculty/davies

The Players and the Goals

In this experiment, there are CONSUMERS and FIRMS.

CONSUMERS buy stuff from the FIRMS.

FIRMS make and sell blue stuff and red stuff.

Players Are Divided Into Two Countries

WEST

EAST

The Players and the Goals

Consumers start the simulation with .

The Players and the Goals

Firms start the simulation with resources.

The Players and the Goals

Firms use resources to produce red stuff and blue stuff.

The Players and the Goals

Consumers use to buy red stuff and blue stuff from firms.

The Players and the Goals

Consumers get happiness from red stuff and blue stuff .

Each consumer’s goal: Maximize happiness

Each firm’s goal: Maximize profit

The Players and the Goals

The the firm receives from consumers is its profit.

The Objects

= 1 unit of blue stuff

= 1 unit of red stuff

= 1

= Each is 1 unit of resource

Happiness

0 1 2 3 4 5 6 7 8 9 10

0 0 1 2 3 4 5 6 7 8 9 10

1 1 3 5 7 9 11 13 15 17 19 21

2 2 5 8 11 14 17 20 23 26 29 32

3 3 7 11 15 19 23 27 31 35 39 43

4 4 9 14 19 24 29 34 39 44 49 54

5 5 11 17 23 29 35 41 47 53 59 65

6 6 13 20 27 34 41 48 55 62 69 76

7 7 15 23 31 39 47 55 63 71 79 87

8 8 17 26 35 44 53 62 71 80 89 98

9 9 19 29 39 49 59 69 79 89 99 109

10 10 21 32 43 54 65 76 87 98 109 120

Suppose the consumer has 5 units of red stuff and 7 units of blue stuff.

This gives the consumer a happiness of 47.

Suppose the consumer has $6 left to spend. Red cost $3 each. Blue cost $2 each. What should the consumer buy?

Happiness

0 1 2 3 4 5 6 7 8 9 10

0 0 1 2 3 4 5 6 7 8 9 10

1 1 3 5 7 9 11 13 15 17 19 21

2 2 5 8 11 14 17 20 23 26 29 32

3 3 7 11 15 19 23 27 31 35 39 43

4 4 9 14 19 24 29 34 39 44 49 54

5 5 11 17 23 29 35 41 47 53 59 65

6 6 13 20 27 34 41 48 55 62 69 76

7 7 15 23 31 39 47 55 63 71 79 87

8 8 17 26 35 44 53 62 71 80 89 98

9 9 19 29 39 49 59 69 79 89 99 109

10 10 21 32 43 54 65 76 87 98 109 120

What can the consumer buy for $6?

The consumer should buy 0 Red and 3 Blue.

2 Red and 0 Blue

1 Red and 1 Blue (with $1 left over)0 Red and 3 Blue

Suppose the consumer has 5 units of red stuff and 7 units of blue stuff.

Profit

EAST COUNTRY

Units of red stuff produced by 1 unit of resource

1

Units of blue stuff produced by 1 unit of resource

1

WEST COUNTRY

Units of red stuff produced by 1 unit of resource

2

Units of blue stuff produced by 1 unit of resource

4

Profit

How much should firms charge for red stuff and blue stuff?

The higher the price, the more profit you make.

But, don’t charge so much that you are left with unused resources and unsold stuff.

The only thing that counts is how much money you have at the end of the simulation.

Units Total Revenue Units Total Revenue Units Total Revenue Units Total Revenue

Totals:

Red Sales Blue Sales Red Sales (continued) Blue Sales (continued)

For each transaction, record the number of units sold and the total received for the units.

Make sure to enter the figures under the correct color.

Trading Rules

Firms must remain in their seats at all times.

Consumers may only purchase 1 unit of stuff at a time.

No cross-country transactions are allowed.

No collusion.

Ready to begin…

EAST COUNTRY

Units of red stuff produced by 1 unit of resource

1

Units of blue stuff produced by 1 unit of resource

1

WEST COUNTRY

Units of red stuff produced by 1 unit of resource

2

Units of blue stuff produced by 1 unit of resource

4

Accounting

Consumers report red purchased and blue purchased.

Units Total Revenue Units Total Revenue

Red Sales (continued) Blue Sales (continued)

Red _________________

Blue _________________

Firms report red sold, blue sold, and revenue.

Make sure to calculate totals.

Round 1

New Rules

Globalization opens both countries to free trade.

Consumers can now buy from firms in either country.

Ready to begin…

EAST COUNTRY

Units of red stuff produced by 1 unit of resource

1

Units of blue stuff produced by 1 unit of resource

1

WEST COUNTRY

Units of red stuff produced by 1 unit of resource

2

Units of blue stuff produced by 1 unit of resource

4

Accounting

Consumers report red purchased and blue purchased.

Units Total Revenue Units Total Revenue

Red Sales (continued) Blue Sales (continued)

Red _________________

Blue _________________

Firms report red sold, blue sold, and revenue.

Make sure to calculate totals.

Round 2

Results…

0

50

100

150

200

250

300

350

400

Round 1 Round 2

East Consumption

0

50

100

150

200

250

300

350

400

Round 1 Round 2

West Consumption

0

100

200

300

400

500

600

Round 1 Round 2

East Production

0

100

200

300

400

500

600

700

800

Round 1 Round 2

West Production

Comparative vs. Absolute Advantage

West had the absolute advantage in the production of both goods.

West could produce both red and blue at lower cost than East.

West had comparative advantage in the production of blue.

For East to produce 1 blue cost East 1 red.

For West to produce 1 blue cost West ½ red.

East had comparative advantage in the production of red.

For West to produce 1 red cost West 2 blue.

For East to produce 1 red cost East 1 blue.

Protectionist Assumption:

Trade leads to a centralization of political power, decreased competition, and the concentration of wealth.

Free Trade Assumption:

Trade leads to a decentralization of political power, increased competition, and the dissemination of wealth.

31

R2 = 0.56

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Per-capita Income (US$)

Per

-cap

ita

Tra

de

(US

$)

Source: International Financial Statistics, International Monetary Fund, December 2001

Greater per-capita trade is associated with greater per-capita income.

32

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

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)

Per

-cap

ita

Tra

de

(US

$)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002

Greater per-capita trade is associated with more equitable income distributions.

33

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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)

Per

-cap

ita

Tra

de

(US

$)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002

Greater per-capita trade is also associated with more equitable income distributions among the poorest countries.

Thailand

Lithuania

Fiji

Ukraine

$1

$10

$100

$1,000

$10,000

$100,000

1,500 2,000 2,500 3,000 3,500 4,000

Daily per capita Supply of Calories

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

34

Greater per-capita trade is associated with greater caloric intake.

recommended

Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

35

R2 = 0.80

$1

$10

$100

$1,000

$10,000

$100,000

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)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002

GDI measures quality of life (longevity, education, literacy, income) for women relative to men.

Greater per-capita trade is associated with greater gender equality.

36

R2 = 0.54

$1

$10

$100

$1,000

$10,000

$100,000

0 10 20 30 40 50

Children 10 to 14 in the Labor Force (as % of age group)

Per

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Greater per-capita trade is associated with reduced child labor.

37

Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

$1

$10

$100

$1,000

$10,000

0 10 20 30 40 50 60

Children 10 to 14 in the Labor Force (as % of age group)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le)

Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor.

38

Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

January 1975 to June 2006

0%

2%

4%

6%

8%

10%

12%

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Un

emp

loym

ent

Rat

e

Greater per-capita trade is associated with reduced unemployment.

39

January 1975 to June 2006

$12.00

$12.50

$13.00

$13.50

$14.00

$14.50

$15.00

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Av

era

ge

Re

al H

ou

rly

Ea

rnin

gs

(2

00

0$

)

Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

Greater per-capita trade is associated with increased real wages.

40

If trade is such a good thing, why are some countries still poor

despite ever expanding globalization?

41

Name two metrics that distinguish the first world from

the third world.

42

If you hit a light bulb with a hammer, will you make a

mess?

43

44

The Fundamentals of Trade

Chief of Staff RetreatFebruary 22-24, 2008

copies of this presentation can be found atwww.business.duq.edu/faculty/davies