First edition Global Economic Issues and Policies PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western/Thomson Learning. All rights reserved. Chapter 10 Can Globalization Lift All Boats?

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–2 1.What factors influence the demand for a nation’s labor resources? 2.How are market wage rates determined, and how can increased international trade affect the wages earned by a nation’s workers? 3.What are the implications of the factor proportions approach to international trade for how trade affects workers’ earnings? 4.Why do labor and capital resources often flow across national borders?

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–3 5.How does greater openness to international trade affect wages and economic growth in developing nations? 6.What are the pros and cons of increased capital flows to developing nations?

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–4 International Trade and Wages The Alleged “Trade Threat” From Developing Nations  Politicians and union leaders have blamed greater U.S. earnings inequality on international trade.  Wages of manufacturing workers residing in other nations, including developing and emerging countries, have increased relative to the earnings of U.S. manufacturing workers.  Free trade induces nations to specialize in producing goods for which they have a comparative advantage.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–5 Figure 10-1a Shares of U.S. Trade for Major Trading Partners Source: International Monetary Fund, Direction of Trade Statistics and U.S. Department of Commerce.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–6 Figure 10-1b Shares of U.S. Trade and Wages of Manufacturing Workers as a Percentage of Wages of U.S. Manufacturing Workers Source: International Monetary Fund, Direction of Trade Statistics and U.S. Department of Commerce.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–7 Wages and International Trade International Wage Differences  There has been persistence in the compensation differences.  Since 1990 manufacturing workers in seven nations, and especially in Japan, have earned higher hourly rates of compensation relative to the U.S. level.  Criticism of the hourly compensation indexes:  Index values do not take into account price differences across nations that affect the purchasing power of workers’ wages.  The indexes also apply only to manufacturing workers’ compensation.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–8 Figure 10-2 Indexes of Hourly Compensation Costs in Manufacturing for Selected Nations Source: U.S. Bureau of Labor Statistics.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–9 Wages and International Trade (cont’d) The Marginal Revenue Product of Labor  The additional revenue generated by employing an additional unit of labor; also equal to marginal revenue times the marginal product of labor. Marginal Product of Labor  The additional output generated by employing the next unit of labor. Marginal Revenue  The additional revenue a firm earns from selling an additional unit of output.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–10 Table 10-1 Calculating the Marginal Revenue Product of Labor

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–11 Wages and International Trade (cont’d) Law of Diminishing Marginal Returns  An economic law stating that when more and more units of a factor of production such as labor are added to fixed amounts of other productive factors, the additional output for each new unit employed eventually declines.  A profit-maximizing firm hires workers up to the point where the marginal product of labor is equal to the wage rate that it pays the next worker hired.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–12 Figure 10-3 The Demand for Labor

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–13 Wages and International Trade (cont’d) Market Wage Rate  The wage rate at which the quantity of labor supplied by all workers in a labor market is equal to the total quantity of labor demanded by firms in that market.  A fall in the price of firms’ products (due to less demand or increased supply) causes both a decline in the market wage rate and a decrease in the total quantity of labor employed.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–14 Table 10-2 Determining the Market Wage Rate

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–15 Table 10-3 Determining the Market Wage Rate

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–16 Labor and Capital Mobility Situations in which countries have different factor proportions for skilled and unskilled labor:  International trade will tend to cause the relative wages of trading countries’ workers possessing similar skills to converge.  Trade with another country helps a country’s unskilled workers to “gain ground” relative to the trading country’s skilled workers.  Trade with another country causes a country’s unskilled workers to “lose ground” relative to skilled workers in their own country.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–17 Figure 10-4 The Labor- Market Effects of a Decline in Product Price Induced by Increased International Trade

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–18 Figure 10-5 The Ratio of the Average Wage of U.S. College Graduates to the Average Wage of U.S. High School Graduates Source: Lawrence Katz, “Technological Change, Computerization, and the Wage Structure,” in Understanding the Digital Economy, Erik Brynjolfsson and Brian Kahin, eds., Cambridge, Mass.: MIT Press, 2000, 217–246; authors’ estimate for 2000.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–19 International Trade and Labor and Capital Flows: The Market for Capital Marginal Revenue Product of Capital  The additional revenue generated by using an additional unit of capital. Marginal Product of Capital  The additional output generated by using an additional unit of capital.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–20 Figure 10-6 The Labor-Market Effects of a Decline in Product Price Induced by Increased International Trade Source: Sandra Black and Elizabeth Brainerd, “Importing Equality? The Effects of Increased Competition on the Gender Wage Gap,” Working Paper, Federal Reserve Bank of New York, March 1999.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–21 Limitations of the Factor Proportions Approach Inter-industry trade  International trade of completely distinguishable goods and services. Intra-industry trade  International trade of goods or services that are closely substitutable.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–22 Figure 10-7a Immigration into the United States Source: Pia Orrenius and Alan Viard, “The Second Great Migration: Economic and Policy Implications, ”Federal Reserve Bank of Dallas Southwest Economy, May/June 2000, 1–8; and authors’ estimates.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–23 Figure 10-7b,c Immigration into the United States (cont’d) Source: Pia Orrenius and Alan Viard, “The Second Great Migration: Economic and Policy Implications, ”Federal Reserve Bank of Dallas Southwest Economy, May/June 2000, 1–8; and authors’ estimates.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–24 Figure 10-8 Population and Trade Shares of Selected World Regions Source: World Bank, World Development Indicators, and International Monetary Fund, Direction of Trade Statistics.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–25 Table 10-4 Unit Labor Costs in Selected Developing Countries Source: United Nations Trade and Development Report.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–26 Source: Organization for Economic Cooperation and Development and International Telecommunications Union. Figure 10-9a Physical and Online Population Distributions

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–27 Source: Organization for Economic Cooperation and Development and International Telecommunications Union. Internet Monthly Access Prices for 20 Hours of Off-peak Use, Selected Economies (U.S. dollars) Figure 10-9b Internet Access Prices for Selected Regions and Nations

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–28 Figure Trade Barriers versus Economic Growth Source: World Bank, World Development Indicators and Competitiveness Indicators, 2002.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–29 Figure 10-11a Private Capital Flows in Developing Nations Source: International Monetary Fund.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–30 Figure 10-11b National Income Growth in Developing Nations Source: International Monetary Fund.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–31 Figure Shares of Foreign Direct Investment in Developing Regions Source: United Nations, Trade and Development Report.

Copyright © 2004 South-Western/Thomson Learning. All rights reserved.10–32 Questions and Problems - 1)