Trade Politics of Middle Earth

This may have been more appropriate as an exam question in an earlier age; nevertheless, it is clever - even with the problems with details. (HT to Marginal Revolution)

Team or Trade

There is a thought-provoking article in today's issue of The Wall Street Journal (subscriber content at this writing). Matt Ridley discusses the work of evolutionary biologist David Sloan Wilson. Wilson has done some work on cooperative behavior and, according to Ridley, sees cooperation evolving from generosity or altruism. Ridley notes that others in the field see ideas like reciprocity and see groups of people agreeing to punish non-social behavior.

Ridley notes Adam Smith pointed out that this works among small groups of friends and family.  But for larger groups of strangers, another mechanism is needed. Smith's idea of division of labor and the corresponding idea of specialization promotes cooperation because of interdependence.  We need each other and we benefit from cooperating with each other. As Ridley states "trade dissolves hostility between groups."

This article caught my attention because it connects with insights from Adam Smith: An Enlightened Life by Nicholas Phillipson.  In that book, the author recounts that Smith felt the origin of language resides in our need to convince one another of mutual benefit from cooperative behavior.

If you can find an un-gated version of the Ridley article, I strongly recommend it. If you can't, see if you can access it through a library or other legitimate source. Barring that, I again recommend Phillipson's book.

Supply, Demand, Interdependence, Inflation

Last week, we were discussing inflation. Later, outside of class, one of my students brought this article in Slate to my attention. It talks about rising food prices and some underlying factors. It gets into basics of supply and demand and provides opportunities to review whether you shift the curve or move along curve.

It also talks about the impact of government price policies and the interdependence that comes with a global marketplace. I think you’ll find it a useful addition to the discussion with your students on a number of levels. Let me know if you agree.

Gains from Trade

For those of you looking for an interesting article to use when teaching gains from trade in your macro courses, look no further. Today’s edition of The Wall Street Journal has a very good piece titled “Chinese Demand Lifts U.S. Wood Sales.” The article itself is subscriber content at this writing, but you might find an ungated version if you put the title in your browser.

 But even if you can’t access the article, there is value here. The video and the slideshow are open and both provide enough information to use with your classes. The video focuses on Canadian lumber and the slideshow on U.S. lumber, but the story is the same.  And the reference to a export duty on Russian lumber adds even more depth to the discussion.

Take a look and share your thoughts.

Interdependence Updated

I'm sure many of you are familiar with I, Pencil. You may even use it to demonstrate the gains from trade and increased standard of living or to demonstrate the value of interdependence. I have used it and continue to use in appropriate circumstances.

Here is a new twist from TED Talks (HT to Carpe Diem). You can call it I, Toaster - Attempted. It offers a new view on an old concept. 

Share your thoughts. Do you like one better than the other?  Why?

Measuring Trade

This past week, there have been a number of posts and articles that address the continuing fascination with trade imbalances. But the three that follow are particularly helpful if you want your students to really understand the nature of trade.

First I present a pair of links that are related. The first is an article in The Wall Street Journal that connects the iPhone to the trade deficit. If you are a devotee of that particular piece of electronic hardware, examine it. You will notice it says "Assembled in China." What you may not realize is that is equivalent to "Made in China" for purposes of measuring trade. But the article explains that while, for statistical purposes, the last shipping point is what counts. The bulk of the cost of an iPhone is actually due to the U.S.

This is made even clearer if you look at this blog post on Carpe Diem. Mark Perry provides a clear explanation of how the Chinese actually are responsible for the smallest portion of the cost.

Don Boudreaux at Cafe Hayek provides another view of trade. Too often, our students think of trade as a tied to a single event or product. What they need is a clearer understanding of the concept of interdependence. They need to think beyond the initial exchange and examine what the consequences of that exchange. What other exchanges does it make possible?

Not Really a Whole Lot More to Say

U.S. - China Currency Rap

You will want to watch this before using in class (HT to the folks at Chartporn). It may not be appropriate in some settings. I'm thinking high schools and lower will have more problem with it than colleges. There are also some oversimplifications; but I think it can be good discussion starter. I'm not going to embed it for now, but I may change my mind.

China Isn't Solely a Major Exporter

When it comes to international trade, your students could get the idea from many media stories that China is strictly an exporting power. But this graphic (HT Chartporn) shows some interesting import flows. See if your students can account for them.

On Markets, Globalization and the Chilean Miners

Last week, Mark Perry at Carpe Diem put up this post with a video. The point was that globalization, capitalism (and trade) helped save the Chilean miners. I'm not one to say they were doomed without the forces of economics. But economic forces certainly helped. And it was capitalism in the best way - the way that Adam Smith intended when he wrote both The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

But, it was a profit motive that developed the technology. And it was also the idea that we best serve ourselves by serving others that led many firms in many nations to make the technology available. The idea was brought home, yet again over the weekend when this article appeared in my local newspaper, The Richmond Times-Dispatch.

It's just something to think about and discuss with your students. As always, I welcome your comments.

The Globalization of an American Export

In my opinion, one of the best definitions of globalization is found in the first paragraph of this page of the Globalization 101 web site.

When I was teaching a course on Globalization for the Powell Center for Economic Literacy, I would start off the course with that paragraph. I would ask the students about the various parts of the paragraph and what they thought was meant by each part, or if they could give me an example.

The Wall Street Journal had an excellent example of how globalization drives cultural and economic decision-making recently. The story is about how movies are pitched, written and produced in the U.S. as a result of the global marketplace. The short explanation is that proposals for Hollywood films need to be translatable (and I'm not talking about language) to foreign audiences. To truly understand what I mean, check out the graphics that are part of the article.

And please share your thoughts.

Trilemma of International Finance

In a recent post, Greg Mankiw pointed to his piece published in The New York Times this past weekend. In it, he discusses what he refers to as the Trilemma of International Finance. Mankiw notes there are three goals for financial policy-makers. The trilemma arises because you can choose two, but in doing so you forfeit the third. (Doesn’t that present an interesting aspect of opportunity cost?)

Where this article can be of particular value to the classroom is during discussion about open economies, foreign exchange and policy in macroeconomics. Mankiw points out that the U.S. has opted for one combination, China for another and the Eurozone for a third. In doing so, he presents a rubric for analysis to help students understand the trade-offs inherent in policy. If you haven't already seen it, I highly recommend it.

Hypothetically, What Would It Cost?

Visualeconomics has an engaging visual on some of the costs we might associate with celebrating Independence Day in the U.S. Included is information on where various parts of the traditional mid-summer cookout come from. As I looked at the chart, I thought "what would our celebration cost if we imposed trade barriers between the states - depending totally on locally grown or produced items? Alternatively, how would we celebrate differently if it weren't for ideas like comparative advantage, productivity and specialization?"

It's just a thought as we pass the "mid-point" of summer and start thinking ahead (the local stores have their "back-to-school" displays up).

Haiti Update

A few weeks back, I posted on the unintended consequences of foreign aid. Specifically I highlighted a story on National Public Radio about how food aid to people in Haiti who had been impacted by the earthquakes earlier this year was affecting local rice farmers.

NPR did an earlier story (which I did not see or cover) about a Haitian woman who was in danger of losing her small business, which had been devasted by the earthquake, because she did not have the funds to make a loan payment.

But her life has changed. Many NPR listeners sent her money - more than enough to make the payment. She has taken the bulk of the extra funds and reinvested in her business. It's a great story, and speaks to the positive side of aid to developing countries - and especially to the power of small amounts of capital to change a life.

Now in NPR's Friday podcast, there is a follow-up on that story. You can listen beginning at about the 3-minute mark. I see it as an interesting variation of an unfettered market. Funds did not have to go through a government bureaucracy, and they provided a benefit to both parties - the donor and the recipient. The recipient’s business is clearly better off, and the donor "profits" although not in a monetary sense. Rather the donor feels better knowing they have done some good. This is similar to what I try to teach about Adam Smith. It is not just about The Wealth of Nations, but it is also about The Theory of Moral Sentiments. (However, suffice it to say, there is a trade-off to success. But I don’t want to give it away.)

In that same podcast, there is another story about economic success in Haiti, beginning at about the 14:45 mark. In this case, it involves an economic development project to help Haitian mango farmers. The previous attempts by various governmental and non-governmental entities failed. But through the combined efforts of the villagers who benefitted, the work gets done - apparently including digging up and replacing 27 miles of pipe to bring water to a newly-built processing center.

I recommend this. If you can’t sit and listen, download and put it in your personal device and listen while you jog, while you work in the yard, or around the house. It will be time well-spent.

Positive Externalities and Wal-Mart

Finally, I know many people like to castigate Wal-Mart, but if you're looking for something new and current to use as counterpoint to the usual negatives, here's an interesting story about the positive externalities attendant to a new Wal-Mart. (HT to Carpe Diem.)

Follow Up to Haitian Rice Farmers

A few days ago, I posted on the unintended consequences of aid to Haiti and the impact it was having on that nation's rice farmers.  Here's a follow-up from National Public Radio's Planet Money.

More Greece (No, I'm not Talking about Cooking)

First, a double HT to Chartporn for these links.
First from The New York Times, comes this simple and easy to understand graphic which focuses on the main players in this financial disturbance.

Next from Flickr, we see this more original and visually appealing take on the European debt crisis. And it's downloadable in a variety of sizes. I especially like the "Debt Trip" and "Debt Trap" visualization in the upper right hand corner. I think that has general application for use with students.

I would welcome you to share your thoughts on these charts as well as your possible uses for the classroom.

Unintended Consequences (of Subsidies and Aid)

There is a very interesting and deceptively intricate story on NPR’s Planet Money about the impact of foreign aid on Haiti’s rice farmers. It seems that well-intentioned aid for those caught in the devastating earthquakes in Haiti, is having a negative effect on the rice farmers of that country who live far outside the damage zone.  Free rice for the victims is depressing the price of Haitian rice.

When we choose to help others, those actions have effects far beyond the immediate. This is because, in any society or economy, actions impact those initially involved. But this changes conditions and changes the resource mix and other choices that have to be made. These are secondary effects. They are costs imposed on others outside the initial action. By my way of thinking, you might want to use this story to illustrate a number of concepts: unintended consequences, secondary effects, externalities, interdependence.

I also found myself wandering down a different mental road. Would the rice farmers be in the same situation if U.S. rice production wasn't subsidized? Wouldn't it be preferable if various aid agencies in the U.S. and elsewhere, bought local rice first to help the quake victims? Wouldn't that minimize the effect on the local market?  Why should subsidized U.S. rice be used if it is negatively impacting the Haitian producers? Evidently, the practice is prompting questions elsewhere.

Neat but Incomplete

I ran across this interactive from the Brookings Institute on the global economic recovery (HT to the folks at Chartporn). While it is incomplete (most economies that I would consider developing are not included - and a number of economies that are grabbing headlines are missing as well); for those that are included, there are charts and data that could be used for reports or project or end-of-year discussions.  It's even fun just to poke around.  It's worth a look, in my opinion.

This Is Funny...and a Bit Unnerving

We teach that deficit spending is appropriate in times of trouble.  So where did things go wrong?