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Table of Contents

INTRODUCTION

THE BASICS OF TRADE LESSON 1: THE BASICS STILL APPLY: DOMESTIC OR

INTERNATIONAL, A MARKET IS A MARKET Addendum: Overview of U.S. Involvement in International Trade Activity: The Magic of Markets Activity: Tag Check

LESSON 2: BRIDGES AND BARRIERS TO TRADE Activity: The Euro: Currency Exchange and Transaction Costs Activity: U.S. Sugar Policy – A Sweet Deal?

Table of Contents

TRADE ISSUES

LESSON 3: TRADE AND LABOR: SWEATSHOPS Activity: Standing Up for Sweatshops?

LESSON 4: TRADE AND JOBS Activity: The “Giant Sucking Sound” – Job Woes or Labor Flows?

LESSON 5: TRADE AND THE ENVIRONMENT Activity: Trash

THE MECHANICS OF TRADE LESSON 6: THE BALANCE OF PAYMENTS ALWAYS BALANCES

Activity: Balance of Trade Among States LESSON 7: INTERNATIONAL MONETARY EXCHANGE

Activity: Foreign Currency and Foreign Exchange

RESOURCE LIST

“The Shopping Game”

Classroom Activity:

To Convert Pinks, Blues, and Yellows

For

5 Yellows, You Can Buy

For

2 Blues,

You Can Buy

For

1 Pink,

You Can Buy

2

Blue

1

Pink

5

Yellow

1

Pink

5 Yellow

2 Blue

Conversion TableFor

5 Yellows, You Can Buy

For

2 Blues,

You Can Buy

For

1 Pink,

You Can Buy

3 € 3 € 3 €

2

Blue

1

Pink

5

Yellow

1

Pink

5

Yellow

2

Blue

The “Giant Sucking Sound”

Classroom Activity:

Checklist: The demand for labor is derived demand. Market prices of products and labor shape employers’ hiring

decisions. labor is a cost of production profit = price – cost

Hiring decisions are made at the margin. “What is your marginal revenue product?”

Wages are a function of productivity. labor productivity = output per man-hour

Productivity Labor productivity is determined by a number of factors,

some under control of the worker himself and some the result of the conditions of employment. the worker's physical abilities; the worker's level of education; the type and amount of equipment (capital) available;

including infrastructure other factors and conditions specific to the job location

regulations unions

Adding workers affects productivity at the margin specialization increases productivity diminishing marginal returns = reduction in

productivity

1 Kitchen - How Many Cooks?

# cooks

#pizzas made

# additional pizzas from hiring this

cook?

What happened?

0 0 0

1

2

3

4

5

6

No Cook – No Pizza !

10 10

25

45

55

55

40

15

20

10

0

-15 Get her out of the way !

Things aren’t so hectic

Extra guy – helps who ever is behind

1 baker+1 prep+1 waiter – what a system!

1 baker, 1 prep and waiter

Good cook – does everything himself

Scenario

In college, Maria and Mario started a t-shirt business out of their parents' garage. Now they've graduated, and would like to expand the business and become the bosses instead of the "do-everything" people.

They've made a list of the different tasks involved in the business - most of which they now do themselves. They figure there are 2 kinds of tasks in the t-shirt business:

Skilled •

Bookkeeping

Marketing

T-shirt Design

Advertising

Shipping & Ordering

Unskilled or low-skill

Taking orders

Cutting Patterns

Sewing

Printing

Labeling

Packing

Delivery

Every person they hire means one less thing they have to do themselves - and they can choose to do the things they enjoy most - like the design and marketing, for example.

The question is how many people to hire.

Mario & Maria’s dilemma

Output, Additional (Marginal) Product, and Additional (Marginal) Revenue

T-shirt price (P) = $_________

YELLOW CARD WORKERSYELLOW CARD WORKERS PINK CARD WORKERSPINK CARD WORKERS

#Hired

T shirtsMade

AddedProduct

(MP)P xMP

#Hired

T shirtsMade

AddedProduct

(MP)P x MP

1st 5 1st 8

2nd 8 2nd 14

3rd 10 3rd 19

4th 11 4th 22

5th 12 5th 24

6th 12 6th 25

$50

3

2

1

1

0 1

2

6

5

3

85

$20

$10

$10

$0

$30

$20

$30

$60

$50

$10

$80

$10

Round #2 – Wages Paid Round #2 – Profit Calculation

Yellow Card Pink Card # t-shirts produced (pink+yellow)

(from chart)

Worker Wage Worker Wage

Hired Paid Hired Paid X Price of t-shirts X $ 10

1st 1st = $

2nd 2nd = TOTAL REVENUE

3rd 3rd

4th 4th — $

5th 5th — TOTAL COST

6th 6th

$= PROFIT Round #2

Sub-total +Sub-total = Total cost

Part 2: Make It Work Circles

Composition: Create discussion groups: go to your last employer All roles represented

Problem: Market growth Difficulty hiring yellow-card workers

Apparel Sourcing, Cutting, Sewing, Distribution"A Relationship of Trust and Profitability"

The North America Free Trade Agreement has opened new opportunities for trade in the apparel industry between Mexico and the United States. Peñyasa was incorporated in 1997 as a garment manufacturing company to service the U.S. market.Peñyasa's cutting and sewing plant is a world class facility with an output capacity of 60,000 dozens per month with 450 operators. Peñyasa's management team is a blend of experienced professionals from different fields that fully understand the concept of global sourcing.Our labor costs are low - average 50% - 75% below comparable US rates. Work quality is high. We guarantee to cut your costs by 30-50%!Sourcing with Peñyasa will significantly reduce costs and add value to your entire operation, allowing you to concentrate on sales, marketing, and management.

Who?Helped or hurt by

"exporting" unskilled jobs

to Mexico?

How?

Employer

US Skilled worker

t-shirt consumer

Mexican unskilled worker

US Unskilled worker

helped

helped

helped

helped

Lower production cost means better able to compete and more profit

As company grows, more skilled positions available. More profit = higher incomes for workers

Unskilled worker may lose job, but more jobs because of growth. Worker needs education and training to take advantage of growth

More opportunities for employment and income – and accumulation of skills, too

Lower t-shirt prices

Short run – hurt

Long run - ???

The Economist, special report: “Here, There, and Everywhere” January 19, 2013

Outsourcing, Offshoring, and Re-shoring

Comparative Advantage is Dynamic

Re-shoring

Career Education Questions: College or Training?

Sweatshops – Ya Gotta Love ‘Em !

Classroom Activity:

Voluntary Exchange Creates Wealth

Slave Labor is NOT

Voluntary Exchange

Low wages are a symptom of poverty, not a cause.

Wage rates are a function of PRODUCTIVITY

Mystery

College students, organizations like the Worker Rights Consortium, and protesters at WTO and World Bank meetings clamor for an end to sweatshops. Many of us sympathize. We’ve been convinced by writing and rhetoric that poverty in the lesser-developed countries of the world results from a shameful partnership between materialistic American consumers and greedy corporations.

But Nicholas Kristof and Sheryl WuDunn, in their recent Pulitzer Prize-winning coverage of China and the Far East want to lead "Two Cheers for Sweatshops." They urge us to buy more from sweatshops, not less, warning that "refusing to buy sweatshop products risks making Americans feel good while harming those we are trying to help." Columbia Daily Spectator editorial page editor, Jaime Sneider, writing in the New York Times in May, 2000, chides the sweatshop protesters for "threatening to impoverish the very workers they claim to protect."

How can standing up for sweatshop workers do harm instead of good?

Large manufacturing companies are attracted to poor countries because wage rates are lower than in developed countries. However, the wage rates Americans regard as low are actually high by the standards of countries in the Sweatshop Belt. The earnings of sweatshop workers, who flock voluntarily to the income opportunity offered by the sweatshops, are a major source of improving wealth and standards of living. Pressure from American protesters raises production costs, and can cause factories to relocate out of the country or to cut back hiring by replacing workers with machines, leaving the workers much worse off.

Solution to the Mystery

#4, 8 & 9 are some of the most important clues, indicating that people are choosing to work in sweatshops for the wages being paid; their labor is voluntary. This tells us that desirable alternatives are not available. It also reminds us that the sweatshops are an outgrowth of the poverty of these nations, not a cause of that poverty.

#1 reminds us that the sweatshops offer the workers of poor countries an opportunity to exchange what they have - their low-skilled labor - for income to purchase goods and services. Closing the sweatshops denies them that opportunity.

#3, 4, 5 - These clues tell us that the wage rates we think abysmally low are actually quite high in comparison to the wages earned by other workers in poor countries.

#10, 11, 12 offer evidence that sweatshops are an important stepping stone for poor people in poor countries and that they produce wealth and significant improvements in standards of living, helping countries move out of poverty rather than miring them in it.

#3,6, 13, 15 indicate that the impact of American protest activity is to raise production costs. This encourages factories to relocate or mechanize, eliminating the jobs of low-skill workers in countries where they have few desirable alternative opportunities.

#2,7 - true and interesting but don't help us to solve the mystery.

#14 is likely to capture students' attention, but it really tells us very little. It doesn't tell us, for example, if any of Nike's income is profit - and how much, or whether the worker lives well or badly at the $3.37 rate. Encourage students to ask questions about what the data doesn't tell us, rather than focusing on the stark contrast of the numbers.

Trash

Classroom Activity:

Trash – It Has to Go SomewhereDespite an active recycling program and a successful ongoing campaign to reduce per-household garbage, the city of Bayview is facing a trash problem. Its last remaining landfill is rapidly reaching capacity and the city must decide what to do about disposal of solid waste. The available options are:

•Build a new city-owned landfill•Build a city-owned waste energy incineration facility•Pay to dump in landfills in neighboring counties•Contract to ship waste out of the state

Bayview Trash Problem – Fact Sheet

Bayview, a thriving city on Blue Inlet, began as an ocean shipping center, grew with U.S. overseas trade, and is today one of the nation’s busiest ports.

In the 1960s, Bayview gained a reputation as a haven for the environmentally conscious. It maintains that reputation to the present, although recently a few candidates without “green” credentials have done well in city and county elections.

Pristine and picturesque, Bayview’s blue skies attract tourist dollars. Bayview businesses know the value of clean water and blue skies in maintaining or improving their bottom line.

Because of the residents’ interest in the environment, the city of Bayview has traditionally owned and operated its own landfills in order to maintain control over the disposal of waste.

City government – and taxpayers – are reeling from $80 million in court-ordered environmental damage claims and restoration projects caused by methane gas migrating from one of the city-owned landfills.

Because of improved technology, newly constructed landfills have almost none of the contamination and migration problems common to older designs.

Built on the hilly promontories surrounding Blue Inlet, the city and county of Bayview are hemmed in by surrounding counties and cannot expand. Land prices are among the highest in the nation.

Two neighboring counties are willing to accept Bayview waste. Both have new landfills with proven disposal technologies. Rates for Bayview to use these landfills are twice what residents have been paying and will increase as those facilities approach capacity in the next decade.

Ultra-modern waste incinerators could be safely constructed within the city limits and would keep disposal costs at or below current levels.

Opposition to the “graying of Bayview” has forged an unlikely coalition between the Bayview Chamber of Commerce and environmental activist groups in the area.

There is disagreement among experts over whether, given Bayview’s climatic conditions, incineration would dim or obscure the signature blue skies of the Inlet. (This is not a disagreement over safety, but over aesthetics.)

The neighboring state’s laws regarding waste disposal allow larger landfill operations than Bayview’s state allows. The Flatland County Landfill is permitted and regulated by the state’s Department of Environmental Quality.

Flatland County’s landfill has 20 state-of-the-art disposal cells occupying 640 of the site’s 2,000 acres. Cells will be filled one at a time, and waste compacted and covered each day with dirt or other approved cover material. Filled cells will be capped with clay and re-vegetated for grazing.

Trash Cache, Inc., has approached the Bayview city council with an offer to ship Bayview trash by rail to the Flatland County Landfill in a neighboring state.

Trash Cache, Inc. is proposing that Bayview continue to collect trash at curbside and then deliver it to the company’s central transfer facility in the Bayview rail yard. There, TCI will load it onto rail cars each day and ship it to Flatland County Landfill every afternoon. The train will offload the waste and return to Bayview each night in order to be ready to re-load the next morning.

Because Flatland County is rural, arid country located east of the mountains, its climate and weather conditions are better suited to landfill than the Blue Inlet country.

Shipping its trash to Flatland County is the cheapest option for Bayview, with disposal fees projected to be lower than current rates.

Role Cards:Stakeholders in the Trash Problem

Concerned Bayview Residents Bayview City Council Flatland County Commissioners Environmental Coalition Trash Cache, Inc.

Considered Alternatives

Contract with Trash Cache to ship trash to Flatland County Landfill

Ship trash to counties bordering Bayview Build trash incinerators in Bayview Build new landfills within the city boundaries

Key Tool of Economic Analysis:

Opportunity Cost

Alternatives Option X Option Y

Perceived Benefits

choice

Opp cost

BenefitsRefused

Alternatives Option X Option Y

Perceived Benefits

choice

Opp cost

BenefitsRefused

This exercise is based on a real situation. Bayview is the city of Seattle, and Flatland is Gilliam County, Oregon. Gilliam County lobbied actively for Seattle’s trash and was awarded a contract in late 1989 that went into effect in April of 1991. Each day at 4:00 p.m. a fifty-car container train leaves Seattle to make the 340-mile trip to Gilliam County, Oregon. Each year more than 475,000 tons of municipal solid waste is hauled.

Debriefing – Voluntary Trade

Should the residents of Flatland County be allowed to accept lower environmental quality in return for higher income?

Critical Thinking – Teaching TransferSuppose that instead of being in a neighboring state, the Flatland Landfill were in Mexico or Honduras or another landscape inhabited by very poor people and/or where environmental regulations are less strict than in the United States.

Would that make a difference in your decision about whether or not people should be able to “export” a portion of their environmental quality?

Is it acceptable to, in effect, “import” a portion of another country’s environmental quality by sending them municipal waste or some other form of pollution? Why? Why not?

How is the issue of logging the Amazon or the clearing of Bolivian jungles for growing coffee similar to and different from the Bayview trash problem?