Trade, Well-Being, and Inequality
Nothing in your day is made entirely in your neighborhood: the coffee at your breakfast may come from Chiapas, the avocado from Michoacán, and the cell phone from another continent. Trade lets each person focus on what they do best and then exchange. But the fact that trade creates gains doesn't guarantee they are shared equally. Who gains, and how much? We answer that at the end.
Voluntary exchange creates mutual gain
Think about recess: you trade your ham sandwich for a classmate's bean sandwich. Nobody forces you. If you both do it, it's because each of you prefers what you receive to what you give up.
Explain with a playground example (swapping stickers, sandwiches, or study notes) why two people exchange things voluntarily. What condition must be met for both to…
Explain with a playground example (swapping stickers, sandwiches, or study notes) why two people exchange things voluntarily. What condition must be met for both to benefit?
The diagram shows an exchange between two town neighbors: Ana has oranges from her orchard and Biel bakes bread. They swap $4$ kg of oranges for $2$ loaves of bread. a)…
The diagram shows an exchange between two town neighbors: Ana has oranges from her orchard and Biel bakes bread. They swap $4$ kg of oranges for $2$ loaves of bread.
- a) Explain why Ana and Biel accept the exchange without anyone forcing them.
- b) Imagine that Biel only wants oranges if he is given $6$ kg per loaf. What would happen to the exchange? What role does the agreed 'price' play?
From barter to money
In an ancient open-air market (or in a savings circle among friends with no cash), barter has two problems:
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Double coincidence of wants: you need to find someone who wants what you have and has what you want.
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No unit of measure: how many beans is a hen worth?
When you shop at the open-air market, you pay with money (medium of exchange), compare prices in pesos (unit of account), and can keep what's left over in a piggy bank (store of value).
Look at your breakfast today and on any given day: oranges, bread, cocoa, banana, sugar. Find out (or reason) which ones might come from your local region and which come…
Look at your breakfast today and on any given day: oranges, bread, cocoa, banana, sugar. Find out (or reason) which ones might come from your local region and which come from other countries, and explain what long-distance trade offers us that would be impossible to produce locally alone.
Specialization and comparative advantage
When each person does the thing at which they "lose" the least, together they produce more. To measure this we use opportunity cost: what you give up doing or producing in order to do something else.
Marta takes $10$ minutes to make a bracelet and $20$ to make a keyring; Leo takes $20$ minutes per bracelet and $15$ per keyring. Each of them has $60$ minutes…
Marta takes $10$ minutes to make a bracelet and $20$ to make a keyring; Leo takes $20$ minutes per bracelet and $15$ per keyring. Each of them has $60$ minutes available.
- a) Calculate how many bracelets and how many keyrings each person can make if they devote all their time to a single product.
- b) If they specialise (each working only on what they can do faster) and then trade, explain why together they produce more than if each worked individually.
The surplus from exchange
At the open-air market, Carla sells jam. There is a minimum price at which she would agree to sell and a maximum price that the customer would pay. The actual price falls in between.
At the local market, Mei sells homemade jam at $\$4$ per jar. A customer would have bought it even if it cost $\$6$, and Mei would have sold it even if she was paid…
At the local market, Mei sells homemade jam at $\$4$ per jar. A customer would have bought it even if it cost $\$6$, and Mei would have sold it even if she was paid $\$3$. Explain what each person gains from this deal, what this gain is called, and what would happen if the price rose to $\$5.50$.
Trade and inequality
If both sides gain in a voluntary exchange, why is there so much inequality? Because nothing guarantees that the gain is shared equally.
Common causes: differences in education and health, in inheritance and assets, in formal versus informal employment, in region, and in bargaining power. Consequence: those with fewer resources have fewer options to study, save, or start a business.
Here two ideas used in the curriculum come into play: economic efficiency (producing and distributing in a way that doesn't waste resources) and social equity (that the distribution is fair). An outcome can be efficient and still be unfair.
In Mateo's neighborhood, there are three families with very different incomes: a couple of doctors, a family with two supermarket wages, and a grandmother with a small…
In Mateo's neighborhood, there are three families with very different incomes: a couple of doctors, a family with two supermarket wages, and a grandmother with a small pension. Explain what economic inequality is, name two causes that create it, and one consequence it can have on the projects that each family can afford to undertake.
For $40$ years, the canning factory employed half of Rosalía's village. Two years ago it closed down and production moved to another country where labor is cheaper. In…
For $40$ years, the canning factory employed half of Rosalía's village. Two years ago it closed down and production moved to another country where labor is cheaper. In the village there is now less employment, but in the supermarkets tinned food costs $20\ \%$ less.
- a) Analyse who wins and who loses with this change, inside and outside the village.
- b) Propose two measures that could have made the transition fairer for the village and evaluate their cost.
In a fair trade cooperative, a pack of coffee costs 8.00 pesos, compared to 6.00 pesos for conventional coffee. The breakdown of the retail price shows the following:…
In a fair trade cooperative, a pack of coffee costs 8.00 pesos, compared to 6.00 pesos for conventional coffee. The breakdown of the retail price shows the following:
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Conventional coffee (6.00 pesos): 0.60 pesos for the farmer; 3.20 pesos for intermediaries and processing; 2.20 pesos for the supermarket.
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Fair trade coffee (8.00 pesos): 2.40 pesos for the farmer; 3.40 pesos for the cooperative, certification, and processing; 2.20 pesos for the shop.
- a) Interpret the data: calculate what percentage of the final price the farmer receives in each case and justify why the free market on its own tends to leave small producers with such a small margin (analyze their bargaining power against large distributors).
- b) Design two measures that allow the cooperative to reduce the 2.00 pesos gap with conventional coffee without cutting the farmer's compensation or giving up social standards, and justify the feasibility of each one.
In an economic panel discussion, an analyst states: "If two people or two countries trade voluntarily, it is impossible for inequality to increase, since both are better…
In an economic panel discussion, an analyst states: "If two people or two countries trade voluntarily, it is impossible for inequality to increase, since both are better off compared to their initial situation; therefore, trade is always fair and benefits everyone equally."
- a) Refute the statement by demonstrating with a specific example how an exchange in which both parties gain can, at the same time, trigger soaring economic inequality between them. In your response, analyze the distribution of surplus and asymmetry in bargaining power.
- b) Predict what economic consequences a group or region lacking productive resources, technology, or skills to participate in global trade exchanges will suffer, and justify why free trade can worsen their situation of exclusion.
Go back to the beginning: the coffee from Chiapas or the avocado from Michoacán reaches your table through voluntary exchanges that benefit both parties, but how much of that gain reaches the person who grew the product depends on bargaining power and the rules of the market.