Introduction

    Output has been growing over 2% faster each year than population
    Trade has been growing more than 2% faster each year than output
    Output per capita: up 2.0% per year, doubles every 36 years.

    True for the US too:

    ? Why does the US have such a low import share?
    large country
        --large workforce
        --many domestically available resources

    How globalized are you?

    Course spreadsheet

Part 1: Markets and the global economy

    Markets rely on the incentive-response mechanism of benefit-cost behavior by individuals
    They provide an institutional mechanism to facilitate voluntary transactions
    Concerns, as always: (1) efficiency and (2) equity

    Key lessons:
    (1) Efficiency: Globalization can make everyone richer.
    (2) Equity: Free-market globalization will make at least some people poorer.

    Consider 2 ways to get personal computers (PCs)

    You always have 2 options for getting something you want:
    Option (1) direct production -- reallocate your own resources to produce it (black box = a factory)
    Option (2) indirect production -- produce something and exchange it to get something else
    Indirect production utilizes markets (black box = a market)
    trade = indirect production

    "James Ingram's (1983) textbook on international trade contains a lovely parable. He imagines that an entrepreneur starts a new business that uses a secret technology to convert U.S. wheat, lumber, and so on into cheap high-quality consumer goods. The entrepreneur is hailed as an industrial hero; although some of his domestic competitors are hurt, everyone accepts that occasional dislocations are the price of a free-market economy. But then an investigative reporter discovers that what he is really doing is shipping the wheat and lumber to Asia and using the proceeds to buy manufactured goods--whereupon he is denounced as a fraud who is destroying American jobs. The point, of course, is that international trade is an economic activity like any other and can indeed usefully be thought of as a kind of production process that transforms exports into imports."
    (Paul Krugman. "What Do Undergrads Need to Know About Trade." AER, May 2003.)

I. The fundamentals of international trade

    International trade: flow of Goods and services between countries
    Trade  = indirect production via global markets instead of local markets

    Trade generates a lot of controversy: trade quotebook
    (agree or not? -- anonymous vote)

    Consider U.S. Imports (wrldecon.popgt.xls)

    According to trade critics: given this import trend, what should be happening to US employment?

        U.S. Imports and Employment (handout -- switch to landscape to print)
    Quotebook: "Forcing our middle class to compete with cheap foreign labor will result in systemic job loss..."

    How would you assess that quote based on the handout?
    Doesn't account for the data

    ? What explanation can you offer for the observed positive association between employment and import share?
    Higher employment --> more income --> higher import share if income elasticity of demand for imports > 1
    And vice versa.
    The data suggests that employment (and income) influences imports rather than imports influence employment.