the fundamentals of trade chief of staff retreat february 22-24, 2008 copies of this presentation...
TRANSCRIPT
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.
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$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.
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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.
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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
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The Fundamentals of Trade
Chief of Staff RetreatFebruary 22-24, 2008
copies of this presentation can be found atwww.business.duq.edu/faculty/davies