Fair trade schemes aim to get more of the money we spend on our stuff into the hands of the workers in less developed countries where they originate. Some examples of goods produces in fair trade cooperatives in poor countries include fruits, tea, coffee and cocoa. Some handicrafts and textiles are also available from Fair trade programs as well.
It is estimated that approximately 7.5 million producers in the developing world participate in fair trade programs, producing $5 billion worth of output.
a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South.
Fair Trade organisations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade”.
Fair trade as a strategy for economic development is controversial, as many argue that either fails at raising the incomes of the farmers it is supposed to serave or that it incentivizes farmers to remain in the low-productivity agricultural sector rather than seeking higher productivity jobs in manufacturing, thereby contributing to poverty in poor countries.
Below are two videos that proclaim the benefits of free trade. After watching the videos, discuss the benefits of fair trade with your class.
Discuss the strengths and weaknesses of Fair Trade programs at promoting economic development.
Outline the possible advantages of a country specializing in manufactured goods instead of primary products.
What factors explain the growth in importance of multinational corporations over recent decades? Illustrate your answer where possible by making reference to your own or other countries. Do multinational corporations work in favor of or against the interests of Less Developed Countries?
To what extent has the international trading system contributed to economic growth and development in less developed countries?
Discuss the view that increased trade is more important than increased aid for less developed economies.
For your final quiz on our market failure unit, you will not be sitting in class writing, as usual. Rather, you will answer one of two possible questions in a video dialogue using the software available through the website Xtranormal. Here’s an example of what you will create:
Create a free account on Xtranormal.com or log in using one of your other online accounts.
Once logged in, click the “Create” tab.
Choose one of the themes for your video. Notice, however, that you have only 300 xp (xtranormal points) to use in the production of your video, so some of the themes you cannot use for free.
Once you’ve chosen a theme you can afford to make a video on, choose the question you wish to answer in your video.
Think about how to best answer the question in dialogue form. It is recommended that rather than simply answering the question like you would on a written test or quiz, you have your two characters engage in a conversation about the topic. Another suggestion would be to show a simulated transaction in which the main idea of the topic is illustrated.
Experiment with camera angles, expressions, gestures, sounds and so on. While your grade will be based wholly on the content of your dialogue, production quality can certainly add to the entertainment value of your video.
Keep your video between 4 and 5 minutes in length. Either of the two questions should be able to be addressed in this amount of time. Be sure to preview your video before publishing, otherwise you will spend your xp points and not have enough to make changes later on.
When you have previewed the video and re happy with it, publish it to the Xtranormal site. After it has finished rendering, view your video and copy the embed code, then log into our class Posterous page (zis-economics.posterous.com) and past the embed code into the html screen of a new post. Publish your video on that page for your teacher to see. Make sure you name is included in the post.
The questions: You may chose ONE of the following questions to address in your video:
Explain, using examples, how market failure may occur when one party in an economic transaction possesses more information than the other party. (10 marks)
Explain why inequality in the distribution of income within a nation is sometimes considered a market failure and how government policy can help reduce income inequality (10 marks)
Students, check out the link below. The winner of this competition will receive a cash prize of 1,000 British pounds. The questions are very interesting this year, and I believe a year two IB Economic student has all the knowledge and skill to write an outstanding essay on any one of this year’s topics!
This year’s competition is open to IB Economics students. The essays must be below 2,500 words. This topic questions the student may chose from are:
Africa is well-placed to achieve rapid and sustainable development in the decade ahead. Do you agree?
Over a million young people in the UK are unemployed. What should be done to address the problem?
A breakup of the euro provides the best hope for a durable recovery of the European economy. Discuss
To what extent can we use ideas drawn from behavioural economics to help address specific social and economic problems?
Manufacturing’s share of the UK economy shrank from 19% in 1998 to 12% by 2007. Does this matter and, if so, how could policy revitalise British manufacturing?
Is there a better way out of the debt crisis than austerity?
If any of my students are interested in entering the competition, let me know and I would be happy to speak with you about the selection of topic.
The prevalence of income inequality in free market economies indicates that inequality may be the result of a market failure. Those who are born rich are more likely to become rich, while individuals who are born poor are more likely to live a life of relative poverty. In a “free” market, it is believed, all individuals possess an equal opportunity to succeed, but due to a mis-allocation of resources in a purely market economy, this may not always be the case.
The resources I refer to here are those required for an individual to escape poverty and earn a higher income. These include public and merit goods that those with high incomes can afford to consume, while those in poverty depend on the provision of from the state, including:
Good education
Dependable health care
Access to professional networks and the employment opportunities they provide
Whenever a market failure exists, it can be argued that there is a role for government in regulating the market to achieve a more optimal distribution of resources. When it comes to income inequality, government intervention typically comes in the form of a tax system that places a larger burden on the rich, and a system of government programs that transfer income from the rich to poor, including welfare benefits, unemployment benefits, healthcare for low income households, public schools and support for economic development in poor communities.
Many politicians and some economists like to argue that income inequality is not as evil as many people make it out to be, and that greater income inequality can actually increase the incentive for poorer households to work harder to get rich, contributing to the economic growth of the nation as a whole. Allowing the rich to keep more of their income, in this way, leads more people to want to work hard to get rich, as they will be able to enjoy the rewards of their hard work.
Another common argument is that higher income inequality leads to social and economic disruptions that can slow economic growth and bring an economy into a recession or a depression, since the middle and lower income groups in the nation will not benefit from a relatively equal share of the nation’s output, and over time will see their living standards drop and their overal productivity and contribution to national output decline.
Some believe that increase inequality leads to more growth, others argue that it leads to less growth.
A more interesting question is whether rising income inequality leads to a higher standard of living for everyone in society, or whether standards of living decline for those in the middle as the percentage of total income earned by the top 10% increases.
The study found that the higher the percentage of income earned by the top 10%, the incomes of those in the middle and bottom of the income distribution actually decreases. Not just the percentage of total income, but the actual incomes of these groups falls as the rich get richer.
The popular belief is that reducing taxes on the rich increases the amount of investment in the economy, creating more jobs and helping increase incomes of the middle and lower income households. This theory is sometimes referred to as “trickle down” economics, as the increased incomes and wealth at the top will “trickle down” and raise the incomes of the rest of society as well.
However, actual data shows that a 10% increase in the share of total income earned by the top 10% of income earners leads to a 2% decline in the incomes of households in the middle of the income distribution (based on data for the period between 1979 and 2005).
It’s not just that the rich get richer and the poor get poorer, rather that the rich getting richer makes the poor (and the middle income earners) poorer. This is a breakthrough discovery.
Possible explanations:
The rich contribute to growth abroad, rather than at home: Rich households’ higher incomes allow them to consume more domestic output and imported goods and services, but it also allows them to save more, which sometimes translates into more investment. But more investment does not always translate into domestic economic growth, since investment is now global. A rich American saving more does not mean American firms will have access to cheaper capital, as domestic savings may fuel investment in emerging markets or elsewhere abroad. Foreign investment resulting from savings among rich Americans counts as a leakage from America’s circular flow of income, leaving less income within America for the middle and low income earners. Essentially, much of the income earned by the rich is saved abroad, contributing to employment and growth overseas, reducing incomes of the middle class at home.
Reduced support for the provision of public goods: When examining living standards, more than just income must be considered, but also access to education, provision of health care and other public goods such as public safety and security. Richer households are less interested in things like public schools and social welfare programs, as they do not rely on these for their own well-being. Therefore, the richer the top 10% become, the greater their incentive to work against efforts to fund public education, public health and public safety. The underprovision of these social welfare enhancing goods by govenrment further widens the gap between the living standards of the richest and the middle class. Economist Robert Reich refers to this phenomenon as “the secession of the successful”.
Wage competition reduces incomes in the middle: Business owners, who make up a large percentage of the richest households in America, increase their own incomes to the extent that they can drive down the wages they pay their employees. In this way a higher share of national income is enjoyed by a smaller proportoin of society. The minimum wage has barely increased over time, and workers have less bargaining power as fewer workers than ever are members of labor unions; this has allowed business owners to pay lower wages over time, concentrating an increasing share of national income in business profits, and less and less in wages for workers.
In the video below, the study’s author shares some of the findings discussed above. Watch the video and respond to the discussion questions that follow.
Discussion Questions:
Summarize the argument against a government taking measures to redistribute its nation’s income to reduce the level of inequality between the rich and the poor.
Summarize the argument for a government reducing inequality.
Popular belief holds that “a rising tide lifts all boats”. In other words, if the total income of a nation is increasing, it does not matter if the rich are enjoying a larger percentage of the higher income than the poor and middle, because everyone is likely to be better off than if total income were not growing at all. Does the study discussed above support this popular view? Why or why not?
What measures can a government take to assure that higher national income leads to higher standards of living for everyone in society, including the middle class and the poor? Why might the highest income earners be opposed to such attempts by government?
Should government intervene to reduce the level of income inequality in society?
This week we’ve been exploring the issues of common access resources and how they give rise to a market failure. The video below illustrates the tragedy of the commons in Indonesia’s fish populations.
The high demand for fresh seafood from Southern China and Hong Kong create demand for Indonesia’s reef fish species. Over the last decade, the fish stocks around the more populated Western islands of the archipelago have all but disappeared, so today fishermen have brought their unsustainable methods to the Eastern islands of Indonesia, using dynamite and cyanide to stun fish, which are then caught live and rapidly transported to the markets in China for consumption. According to some estimates, Indonesia’s fish stocks are declining by 30% per year, a rate at which they will be depleted within the next decade.
This poses several problems for both the consumers and producers of fresh fish. For the Chinese consumers, the increasing scarcity of fish in the next decade will mean rising prices and, eventually, the death of the market altogether. For Indonesian fishermen, the outcome is more dire; a loss of their livelihood as the fish stocks dry up.
This raises the question: Why do fisherman continue to use these unsustainable methods? Of course, in a competitive market with thousands of fisherman, if one individual chooses to fish using sustainable methods (using hook and line, for example), he risks catching fewer fish than the competition using cyanide and dynamite. Fewer fish mean less income and a lower standard of living. The rational thing for each individual fisherman, therefore, is to catch fish using the most productive method available. The tragedy of this is that the highest yielding methods are unsustainable, as the story explains, and before long the fish will be exploited to extinction.
The organization profiled in the video is using education to encourage fisherman to use sustainable methods to catch fish. Unfortunately, I fear this will not be enough to save the wild fish stock of Indonesia. The Indonesian government must intervene in the market to enforce strict catch limits, perhaps employing a permit scheme that would allow fishermen to buy and sell permits to catch a strictly controlled quantity of fish during a fishing season.
As it stands, however, Indonesia’s dwindling fish stocks demonstrate yet another example of the tragedy of the commons. Without clear property rights or management by a government, the common resource of Indonesia’s reef fish will continue to be exploited unsustainably, leaving future fishing communities with fewer sources of income and future consumers with less variety of fish to consume and enjoy. The resource is over-exploited today, to the gain of today’s consumers and fisherman, at the expense of future generations.
The folks at my favorite podcast, NPR’s Planet Money, recently produced a five minute video answering the questions, “What is GDP?”. This could be a good resource when introducing the topic to high school students:
Over the last few weeks in our IB Economics class, we have been studying cases in which markets fail to achieve an efficient, socially optimal level of production and consumption when the private buyers and sellers are left to interact in a free market. Markets fail in many ways; sometimes they produce too much of a good, and sometimes too little is produced. There are some things society would benefit from having more of, while other things society would be better off with less than what is produced by the free market.
When the free market fails to achieve a socially optimal level of output, at which the costs and benefits not just of the individual consumers and producers are accounted for, but all social, environmental and health costs and benefits are weighed as well, the government may be able to improve on the free market outcome by intervening in some way. For example, certain goods deemed beneficial for society are simply under-provided by private firms: Education, infrastructure, public transportation, security, health care… these are all markets in which government often intervenes to increase the provision of the good to society. In other cases, government intervenes to decrease the amount of a good consumed: Cigarettes, alcohol, reckless driving, polluting factories, violence on TV, child pornography, dangerous drugs… in each of these cases governments tend to use taxes, regulation or legislation to reduce the amount of the harmful good available on the market.
Besides the merit (beneficial) goods and the demerit (harmful) goods described above, markets may fail in other ways as well. One notable form of market failure arises due to a phenomenon first articulated by American ecologist Garrett Hardin, who warned of the Tragedy of the Commons. In his 1968 essay, Hardin explained that when there exist common resources, for which there is no private owner, the incentive among rational users of that resources is to exploit it to the fullest potential in order to maximize their own self gain before the resource is depleted. The tragedy of the commons, therefore, is that common resources will inevitably be depleted due to humans’ self-interested behavior, leaving us with shortages in key resources essential to human survival.
Each of the videos below illustrates a different example of the tragedy of the commons. Watch the videos and think about how each applies Hardin’s concept.
Example 1: Thousands of fishermen empty lake in minutes:
Example 2 – Dr. Suess’s The Lorax
Example 3 – Tuna fishing
In each of the videos above, there is a common resource (fish and trees) over which no ownership has previously been established. The resource users (the Malian fishermen, the Once-ler and his family and the tuna boat), all have a strong incentive to maximize their own short term gain by extracting and exploiting the resource as quickly as possible.
In the Mali fishing hole, the outcome is observable: within minutes the resource is depleted and there are no more fish for for future fisherman to enjoy.
In The Lorax the result of the Once-ler’s exploitation of the forest is foretold in the beginning of the story when the young boy comes upon the desolate outskirts of his town.
The tragedy of the commons acts as a warning to the tuna fishing industry, in which there are still tuna surviving in the world’s oceans, but at the rates industrial fishing boats such as the Albatun Tres exploit the resource, it will not be around much longer.
In each instance above, a market failure occurs. Due to the lack of private ownership over valuable resources, self-interested individuals stand to gain by exploiting them to the fullest extent possible while they still exist. The unfortunate outcome is that over time the resources are exploited unsustainably until they are ultimately depleted. As in the case of merit and demerit goods, the market failure of common resources provides an opportunity for government to intervene to achieve a more socially optimal allocation of resources. In the interview below, Garrett Hardin suggests that there are only two possible solutions to the tragedy of the commons. Watch the video and then respond to the discussion questions that follow.
Garret Hardin – the Tragedy of the Commons
Discussion Questions:
Hardin refers to Karl Marx’s adage “from each according to his abilities, to each according to this needs.” What does Hardin have against this socialist idea?
How does Hardin’s example of a “common pasture” illustrate the tragedy of the commons? How is a common pasture similar to the three examples in the videos above?
According to Hardin, what are the only two solutions to the common pasture problem? Which of these solutions do you think would be most socially desirable?
Explain Hardin’s claim that “the unmanaged commons cannot possibly work once the population gets above a certain size”. Of the world’s common resources today, what are some examples of common resources that remain unmanaged?
Whose responsibility should it be to decide how common resources should be dealt with?
Do you agree with Hardin’s claim that “the world cannot possibly live at the American standard of living at its present population size”? Which of his predictions do you think is most likely to occur: Will the American (and Western European) standard of living have to go down or will the number of people in the world have to be reduced? Or is there a third possibility? Discuss.
Hans Rosling, a Swedish professor of international health, is well known for his animated presentations on Human Health and Development. Some would describe Rosling’s presentations as doing for Economic Development what Al Gore’s “The Inconvenient Truth” did for global warming, in that they have spread awareness of the obstacles to and sources of economic development to a wide audience using powerful visual metaphors and data presentations.
Using software he developed to analyze data on human development called “Gapminder”, Rosling gives a mind-blowing presentation on the trends in economic and human welfare over the last thirty years, debunking several myths believed true by many in the first world about development and poverty.
Watch three of Rosling’s presentations below before beginning the assignment.
2006 TED Conference:
2007 TED Conference:
Hans Rosling’s Magical Washing Machine
Learning outcomes:
Distinguish between economic growth and economic development.
Explain the nature of economic development in terms of reducing widespread poverty, raising living standards, reducing income inequalities and increasing employment opportunities.
Explain that the most important sources of economic development include increases in quantities of physical capital and human capital, the development and use of new technologies that are appropriate to the conditions of the economically less developed countries, and institutional changes.
Explain the relationship between growth and development, noting that some limited economic development is possible in the absence of growth, but that over the long term, economic growth is usually necessary for development to occur.
What is the HDI? The Human Development Index (HDI)is a summary measure of human development. It measures the average achievements in a country in three basic dimensions of human development:
health as measured by life expectancy at birth,
access to education as measured by literacy rates and school life expectancy,
and income as measured by gross national income percapita.
Data availability determines HDI country coverage. To enable cross-country comparisons, the HDI is, to the extent possible, calculated based on data from leading international data agencies and other credible data sources available at the time of writing.
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The assignment: Follow the steps below and make notes to help you complete the follow up questions at the end of this post.
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Step 1: Go to the UNDP website, and watch the video entitled 2010 Human Development Report. Take note of the indicators that have contributed most to the development of the countries profiled as well as the obstacles that have and are still standing in the way. After watching the video, answer the four questions below.
Of the four countries profiled, which have been most successful in achieving economic development in recent years? Justify your answer.
What indicators are pointed to as evidence of successful economic development?
Of the countries profiled, which have struggled most to achieve development? What obstacles exist that prevent development from occuring?
Besides rising incomes, identify four of the variables that contribute to a country’s economic development as profiled in the video?
Step 2: Go back to the UNDP website and click on the tab for “Indices and Data”and look up the current statistics for three countries:
A country listed under “Very High Human Development”,
A country listed under “Medium Human Development”, and
A country listed under “Low Human Development”.
Record the following data for the countries you selected:
Indicator
Country 1: ____________________
Country 2: ____________________
Country 3: ____________________
HDI Score
Education
Income
Inequality
Poverty
Gender
Sustainability
Click on the tab labeled “Indicators” and briefly describe each of the indicators used to measure the above variables.
Education index:
GNI per capita in PPP terms:
Inequality-adjusted HDI:
Multidimensional Poverty Index:
Gender Inequality Index:
Adjusted net savings:
Step 3: Go to Hans Rosling’s site, GapMinder World. Spend some time exploring the indicators available on the horizontal and vertical axes in the graphing software. Be sure to select the three countries you’ve chosen to investigate from the menu on the right so that you can compare a very high, medium and low developed country. Attempt to identify relationships between various social, environmental, health, economic and environmental variable.
- Attempt to form THREE HYPOTHESES regarding the relationships between two or more variables and economic development. Does your very high human development country demonstrate any obvious characteristics compared to your medium and low human development countries? When you discover a relationship between various data that you think you can build a hypothesis on, take a screenshot of the graph you have created and upload it to this page. Explain our three hypotheses below:
Hypothesis #1:
Screenshot of graph:
Hypothesis #2:Screenshot of graph:
Hypothesis #3:
Screenshot of graph:
Step 4: Focus now on your low human development country.
Using data and trends from GapMinder, identify three obstacles to human development that you believe the country faces.
Brainstorm and describe strategies the country could follow to overcome one of its major obstacles to development.
Step 5: Follow Up Questions – Answer these questions once you have completed the above activity.
What are the weaknesses and strengths of the Human Development Index (HDI) as an indicator of progress in comparison to GDP per capita?
Explain why increased investments in the following areas are essential for improving human welfare in less economically developed economies.
Education
Health care
Infrastructure
Explain how economists might measure the extent to which living standards vary between countries.
Poor people in less developed countries often derive little benefit from economic growth. Why might this be so?
In what ways might a more equal distribution of income contribute to economic development.
Under what circumstances might a country achieve economic growth without economic development?
What evidence would indicate to an economist that a country is experiencing economic development as well as economic growth?
Discuss the view that investment in human capital is the most effective way to provide development.
Explain how an increase in the quantity and quality of a nation’s factors of production can promote economic development.
Over the last two weeks our IB Year 1 Economics students here at Zurich International School have been writing, recording, editing, and now publishing their own podcasts. Over the next two days these podcasts, covering several economics issues relating to Market Failure, will be published to the site below. If you have the chance, give them a listen; there are some very high quality examples of economic analysis and commentary here! Enjoy!
Over the weekend I watched the new Justin Timberlake movie,In Time. In this edition of Welker’s Wikinomics Podcast I analyze the movie’s basic premise from a macroeconomic viewpoint.
Listen to the podcast, and then answer the discussion questions at the bottom of this post.
Discussion Questions:
Why does increasing the supply of money cause the demand for goods and services to rise?
Why does increasing the supply of money ultimately cause the supply of goods and services to fall?
When would an increase in the money supply be most inflationary, when an economy is producing close to its full employment level or when an economy is experiencing a recession? Explain.
With the help of a money market diagram and an aggregate demand / aggregate supply diagram, illustrate the effects of Will and Silvia’s re-distribution of time on the Ghetto’s economy.
According to Friedman, expansionary monetary policy cannot contribute to a nation’s long-run economic growth. What types of government policies can be implemented to promote economic growth in a nation?
Podcast Credits:
Intro song: The Rolling Stones – Time is On My Side
