Archive for December, 2013

Dec 04 2013

Planet Money’s t-shirt, comparative advantage and protectionism. A lesson in International Trade

A while back the team behind my favorite podcast, Planet Money, decided to make a t-shirt. In the process, they would tell the whole story of how a t-shirt is made in our global economy. They would track the production of the shirt from the fields where the cotton was grown to the plant where it was spun into thread to the factory where the cloth was cut and stitched into a finished t-shirt.

To finance the story, the Planet Money team undertook a Kickstarter crowd-financing campaign, hoping to get 4,000 listeners like myself to contribute $25 each to help pay for the production of the shirt and the reporting of said production. In the end, over 25,000 listeners supported the campaign, raising nearly $600,000 for the team to pursue its dream of making and telling the whole story behind it!

Along the way they’ve told many great stories about the people and resources that have gone into their shirt, and just this week they released an interactive documentary about the whole project, start to finish. On Sunday evening, after experiencing the documentary, I was inspire to create a lesson for my year 2 IB Economics students, who happen to be studying International Trade (section 3 of the IB course), at this very moment. Below is that lesson, which they are working on this week.

Introduction: The purpose of this activity is to reflect on the principle of comparative advantage and better understand how the patterns of global trade are shaped by this fundamental concept. You will watch and read the story of a t-shirt that was manufactured using resources from four separate countries. Next, you will respond to an essay prompt. Your answer will be graded as a minor assessment.

Steps:

  1. Read the page that tells the backstory to the Planet Money t-shirt project.
  2. Watch the five part documentary as a class
  3. Read the stories behind the t-shirt’s different stages of production:

Respond to the essay prompt below. (You may begin working on your response while reading the pages above). Your response is due at the beginning of next class and will be graded as a “minor assessment”.

Essay prompt:

A comparative advantage exists when a particular task can be done or a good can be produced at a lower opportunity cost by one nation than by a potential trading partner. When countries specialize in the goods for which they have a comparative advantage, the allocation of resources (land, labor and capital) between nations is more efficient, allowing for a greater level of overall production and income than what is possible without trade.

Carefully explain how the the story of the production of the Planet Money t-shirt demonstrates the principle of comparative advantage. (450 words maximum)

Bonus readingProtectionism and the Planet Money t-shirt

In the above post on the Planet Money blog (made December 2), we learn about the impact that tariffs had on the production of the Planet Money t-shirt.

As you saw in the documentary, the men’s shirt was made in Bangladesh, while the women’s was made in Columbia. We also learned that the Columbian textile worker earn about 3 times as much as the Bangladeshi workers. Why, you may ask, didn’t the ladies’ shirts get made in Bangladesh too? The answer has to do with two “P’s”: productivity and protectionism.

First productivity: According to this podcast, from a week ago, in the Bangladeshi factory where the men’s t-shirt was made, 32 workers on an assembly line would produce 80 t-shirts per hour. In Columbia, on the other hand, 8 workers could produce 140 t-shirts per hour. A simple calculation reveals that the productivity, measured in t-shirts per hour per worker, in the two countries is:

  • Bangladesh: 80/32 = 2.5 t-shirts per hour per worker
  • Columbia: 140/8 = 17.5 t-shirts per hour per worker

The Columbian workers, despite being paid three times the monthly wage that Bangladeshis are making, are 7 times more productive. What accounts for this productivity? Generally, increased productivity is the result of the integration of better or more technology and better training or education among workers. In a low-skilled manufacturing industry like garments, the greater productivity is almost certainly due to greater access to technology in Columbia than in Bangladesh.

On to the second “P”, protectionism: According to this post, due to Columbia’s free trade agreement with the United States, textiles, and most other goods, can be imported into the US “duty-free”, meaning there are no tariffs (import taxes) imposed on Columbian produced goods. This compares to textiles from Bangladesh, on which a 16% tariff is imposed, adding significantly to the cost of producing goods there.

So, let’s put all this together and weigh the advantages and disadvantages of producing t-shirts in the two countries:

In Bangladesh:

  • Advantages: Low wages
  • Disadvantages: Low productivity and a 16% tariff

In Columbia:

  • Advantages: High productivity and “duty-free” imports
  • Disadvantages: High wages

Ironically, while Columbia enjoys certain advantages as a trade partner with the US with high productivity, it appears that the garment industry is slowly disappearing there, as economic development and growth drives up the wage rate further, leading to the country losing its comparative advantage in textile production. Even duty-free status with the US may not allow Columbia to continue to produce t-shirts in the future, as the lower wages of even less developed countries like Cambodia, Laos and yes, even Bangladesh, are too tempting for the garment industry to resist.

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