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) 126 5

0 0 6 F A I L

West 7 In West, workers can produce various quantities of RED stuff…

…or various quantities of BLUE stuff. 1 worker to Red and 9 workers to Blue 8 Production: 20 Red and 60 Blue West

9 East In East, worker can also produce various quantities of RED stuff and BLUE stuff.

10 West is a lesser developed country compared to 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 for your country. 11

Example (using West): Suppose West chooses to assign 2 Workers to RED production and 8 Workers to BLUE production ,596 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) = 10

Example (using West): ,200 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) = 10 Suppose West chooses to assign 9 Workers to RED production and 1 Worker to BLUE production.

Round 1: Autarky Allocate 10 workers to maximize your country’s happiness ,200 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) = 10

Round 1: Autarky Solution for East Solution for West 15

West East 16 Round 2: You may trade (if you want).

Example (using West): ,650 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 10-5 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.

Round 2: Trade Allocate 10 workers then trade (if you want) to maximize your country’s happiness ,650 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) =

Round 2: Trade Solution for East Solution for West 19 Price of Red 1 Red = 1.5 Blue

West East 20 Round 3: West receives foreign aid.

____ = ______ Example (using West): ,600 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 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.

Round 3: Foreign Aid Allocate 10 workers then trade (if you want) to maximize your country’s happiness. Only West receives foreign aid ,650 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) =

Round 3: Foreign Aid Solution for East Solution for West 23 Price of Red 1 Red = 1 Blue

Comparison 24

Round 3: Foreign Aid (Blue Aid) Solution for East Solution for West 25 Price of Red 1 Red = 2 Blue

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 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. 28

Per-Capita Income Luxembourg Belgium Ireland Netherlands Japan US Bahrain Source: International Financial Statistics, International Monetary Fund, December

Per-Capita Income (Lower Middle and Low Income) Suriname Lithuania Samoa Russia Colombia Peru Guyana Source: International Financial Statistics, International Monetary Fund, December

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

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 US Switzerland Ireland Finland Cyprus Netherlands Singapore Hong Kong Norway Denmark Sweden Austria Canada Germany Israel France Slovenia Gabon South Africa Malaysia Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank,

Income Distribution (Lower Middle and Low Income) Thailand Lithuania Fiji Ukraine Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank,

What Is the Impact on Social Equality? Protectionist Assumption: Trade exploits the weak. Globalist Assumption: Trade empowers the weak. 35

Gender Related Development Index US Myanmar Oman Botswana Ivory Coast Azerbaijan and Albania GDI measures equality of quality of life (longevity, education, literacy, income). Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank,

Gender Empowerment Measure 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) Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank,

Child Labor US Hong Kong Sierra Leone Burundi Gabon Botswana 38 Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

Child Labor (Lower Middle and Low Income) Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank,

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 Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 41

Unemployment vs. Trade Over Time 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

Source: Balance of Payment Statistics Yearbook, IMF 46

Source: Balance of Payment Statistics Yearbook, IMF 47

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

Source: United Nations International Financial Statistics and Heritage Foundation

Source: United Nations International Financial Statistics and Heritage Foundation 55