The table below shows the trade balances for the nations from which my year two IB Economics student come. They are ranked in order from the country whose trade deficit makes up the largest percentage of its GDP to the country whose trade surplus makes up the largest percentage of its GDP. The blue bars represent the value of the deficit or surplus of each nation. As can be seen, Zimbabwe’s trade deficit is very small in dollar terms, but since its economy is also very small this deficit makes up a large percentage of its total GDP. Click on the image to visit an interactive version of the chart on which you can study the data more closely. Then answer the questions that follow. Discussion Questions:
Identify and define the four components of a nation’s current account balance.
According to the data, which three countries are the most import dependent? Which three countries are the most export dependent? Which country has the most balance trade in goods and services? Which has the most imbalanced trade?
For one of deficit countries above, answer the following two questions:
Assuming its currencies’ exchange rates is floating, explain how persistent current account deficits will affect a country’s exchange rate over time?
Using chapter 24 in the textbook Pearson Baccalaureate’s Economics for the IB Diploma, you and your group are to prepare a short Google Presentation outlining the characteristics of, examples of and effectiveness of one of the types of trading blocs that countries may form to promote trade.
Sit with your group at a table. One person must log into their school Google Apps account and create a new Presentation. Share this presentation with the other group members.
While the first person is creating the Presentation, the rest of the group should start reading (as a group) the section of chapter 24 on your assigned trading bloc.
Once the group has read the correct section, begin working on #1 below. Summarize in large font the main characteristics of your assigned topic. Try to do this in no more than two slides.
Next, follow the link in #2 below and read about the suggested example. On one or two slides in your presentation, summarize the history and impact the trading bloc has had on member states.
Finally, as a group, read pages 517-520 and then discuss with your partners the effectiveness of your assigned trading bloc at promoting the benefits of free trade discussed earlier in the course. Summarize your evaluation of your assigned trading block on one or two slides in your presentation.
Once your Google Presentation is finished (it should be between 4 and 8 slides), go to “File: Publish to the Web…”, select “start publishing” then copy the link to your presentation. In a comment on this post, include your group’s assigned topic, group member names, and the link to your presentation.
You have one period to complete this assignment. If it is not done by the end of class, please complete your presentation for homework and make sure the link is posted in the comment section before your next class!
Based on what you’ve learned, evaluate the effectiveness of custom unions and common markets at promoting the benefits of free trade discussed earlier in this course (must read pages 517-520)
Group 4: Monetary unions and complete economic integration
Define and identify the characteristics. Distinguish between a monetary union and complete economic integration.
Research and summarize the history of a monetary union: The Eurozone
Based on what you’ve learned, evaluate the effectiveness of monetary unions and complete economic integration at promoting the benefits of free trade discussed earlier in this course (must read pages 517-520)
Share your findings: Once each group has put together a short Google Presentation with their findings, we will get into four new groups for the last part of class (one representative from each of the above groups represented) and share our presentations.
I have two interesting stories on Apple and the iPad to reflect on today.
First, ABC’s Nightline recently became the first Western journalists actually welcomed into an Apple assembly plant in China. The show recently aired a 15 minute feature on working conditions inside Apple’s Foxconn factory in Shenzhen, China last week. Watch the video and then scroll down for what may be some additional surprising news about Apple’s operations in China.
Next, the story that has gone unreported lately is a University of California study titled “Capturing Value in Global Networks: Apple’s iPad and iPhone”. The study’s most interesting finding, in my opinion, is the tiny percentage of the total value of Apple’s iPhone and iPad that actually goes to the Chinese manufacturers of the products. The charts below, from the study, show how the value is divided among the various groups involved it their production and sales:
The chart shows a geographical breakdown of the retail price of an iPad. The main rewards go to American shareholders and workers. Apple’s profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and memory chips, whose profits account for 7% of an iPad’s value. The main financial benefit to China is wages paid to workers for assembling the product and for manufacturing some inputs—equivalent to only 2% of the retail price.
A student today asked why Apple doesn’t produce its products in the United States, where an economic downturn has left 14 million American out of work for the last three or four years. If iPads and iPhones were just made in America, jobs could be created, households would have more income to spend on Apples products, and both the country and the economy would benefit.
The data in the UC study indicates that in fact, more than half the value of an iPad or iPhone does end up in the hands of Americans. But Apple could never achieve the low costs and high profits that it does by assembling its products in the US. After watching the Nightline video above, it should be clear that the type of production involved in Apple factories’ is very low-skilled and labor-intensive. Using American labor, with its unions, minimum wages and 40 hour work weeks, would require Apple to employ such large numbers of workers and raise the company’s variable cost to such a level that the firm’s profits would be reduced significantly and its sales would fall dramatically. Apple would lose out to foreign producers of smart phones and tablet computers, such as LG, Samsung, Sony and others, which would continue assembling their goods with Chinese labor.
Ultimately, any gain to the low-skilled American workers (presuming Apple could even find enough to do the work of the 400,000 Chinese employed in the production of Apple products in China), would be offset by a loss of profits enjoyed by the millions of Americans who hold shares in Apple Computer and the thousands of American who are employed engineering and designing its products, as the firm’s sales would slip in the face of lower-cost competitors.
So this student’s question identifies an interesting paradox: America, with its large pool of unemployed workers, will never be attractive as a place to produce labor-intensive products such as phones and tablet computers, due to the vast wage differential between the US and China. And even if one firm did decide to produce its products in America, the gains to low-skilled workers who may find minimum wage work in the new assembly plants would be off-set by losses to the firms’ shareholders and the high-skilled workers whose jobs would be lost as sales decline due to the lower prices offered by lower-cost competitors.
The lesson here is two-fold: First, Apple and other American technology companies should continue using Chinese labor to assemble their products, and second, America is better off for it: lower costs mean cheaper products and higher sales, thus greater employment in the high-skilled sectors of the US economy, and more profits and returns on the investments of shareholders in American corporations. Americans are richer and enjoy a higher standard of living thanks to the millions of Chinese working in factories assembling the goods we consume.
Keep in mind, this analysis did not even consider the effect on the Chinese economy and the millions of Chinese workers (whose lives are much harder than the typical American) should companies like Apple shut down their Chinese manufacturing plants. That’s a whole other blog post!
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.
Sometimes when I read the news, I wonder what it would be like to NOT understand basic economics, and then I realize how much of what goes on around us can be explained by two simple concepts: demand and supply. The NPR story below talks about how the construction of two proposed coal exporting facilities on America’s west coast could, indirectly, lead to a greener future for America. Listen to the story then read on for more analysis:
China, already the world’s largest coal consumer, continues to build new coal burning electricity plants at an alarming rate. Its appetite for the “black gold” has driven the world price up to $100 per ton, as it has demanded increasing quantities from its own coal producers, but also those in other coal rich areas like Australia and the United States.
However, because of America’s lack of coal transporting and shipping infrastructure, US coal producers have been unable to sell their abundant coal to the Chinese, who are willing to pay 500% the equilibrium price in the US. The US market has remained isolated from the world market, not due to any explicit, government-imposed barriers to trade, rather due to fact that they simply can’t get their coal to the Chinese energy producers who demand it most.
Graphically, this situation can be illustrated as follows:
If the export facilities on the West coast of the US are not constructed, it will remain difficult for US coal producers to sell their output to China at the high price of $100, and the domestic quantity (Q2) will continue to be produced and sold for $20 per ton. But with the new port facilities, US energy producers will now have to compete with Chinese energy producers for American coal, and the US price will be driven up to the world price, since demand now includes thousands of Chinese coal-fired power plants. As the price rises from $20 to $100, the domestic quantity demanded in the US will fall to Q1, as domestic energy producers seek alternative sources of energy, switching instead gas, solar, or wind power.
The irony is that through increasing the ease with which American coal producers can sell their product to China, the US may reduce its own consumption of coal and its emissions of greenhouse gasses. Overall coal production in the US will rise with increased trade, but overall consumption within the US will fall.
Now, this may sound great if you’re the kind of person who thinks only locally. Air pollution will be reduced in the US, health will be improved, our electricity production will be greener and more sustainable. But globally, by making its coal available to China, the US market will contribute to the continued dependence on carbon-intensive energy production, and delay any progress among Chinese energy producers towards a transisttion to greener fuel sources.
The podcast also points out the fact that if the US did undertake the construction of the new coal-exporting facilities, it could be that the current high price of coal will have led to the entrence of several other large coal prodcuing countries into the world market, reducing China’s demand for US coal, reducing the price at which American producers can sell to China and thereby off-setting any domestic environmental benefit that may have resulted from the large decrease in quantity demanded among US producers at the current price of $100 per ton.
The whole conversation about the coal industry is somewhat depressing when the environmental costs of the industry are considered. Another NPR show, Planet Money, ran a story this week about the “gross external damages” caused by the production of coal-powered electricity.
They cited a study which found that the damages caused by coal to human health and the environment outweight the benefits enjoyed by society from the generation of cheap electricity by around $10 billion in the United States alone. This means that if the US shut down every coal-powered energy plant in the country immediately, total welfare in the US would increase by $10 billion. There’s no doubt that energy prices would rise, but the gains in human and environmental health would outweight the added costs of electricity generation by $10 billion. If a similar analysis were undertakein in China, I would guess the potential welfare gain of transitioning to alternative energies would be far greater for the Chinese people.
Here’s the chart from Planet Money’s blog showing the net welfare loss of coal-generated electricity and other economic activities in the United States.
*GED = Gross external damages from pollution
Notice that although generating electricity by burning coal adds nearly $25 billion of value to America’s economy, its negative environmental externalities create nearly $35 billion in damage to the US economy. The net effect of using coal to make electricity, therefore, is around -$10 billion. America would be better off without coal-generated electricity, if we include environmental and health factors in our measure of well-being. Unfortunately, the negative environmental and health costs of coal-electricity generation are currently externalized by the industry, indicating that this industry may be experiencing a market failure.
How would the construction of two coal-exporting facilities on America’s West coast ultimately lead to a cleaner environment in the United States? Do you think this prediction is realistic?
Who stands to gain the most if the coal-exporting facilities are constructed? Who would suffer? In your opinion, should the facilities be constructed? Why or why not?
Interpret the colorful diagram above. What do the green bars represent? What do the yellow and red bars represent? According to the graphic, which type of activity is most harmful to American society? How do you know?
True, false, or uncertain. Explain your reasoning. “The burning of coal to make electricity should be completely banned in China, since China is the world’s largest greenhouse gas emitter.”