Exercises: Trade, welfare and inequality

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?

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.

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.

1. a) Explain why Ana and Biel accept the exchange without anyone forcing them.
2. 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?

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.

1. a) Calculate how many bracelets and how many keyrings each person can make if they devote all their time to a single product.
2. 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.

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 $\$5.50$.

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 the village there is now less employment, but in the supermarkets tinned food costs $20\ \%$ less.

1. a) Analyse who wins and who loses with this change, inside and outside the village.
2. 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:

• Conventional coffee (6.00 pesos): 0.60 pesos for the farmer; 3.20 pesos for intermediaries and processing; 2.20 pesos for the supermarket.

• 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.

1. 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).
2. 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 off compared to their initial situation; therefore, trade is always fair and benefits everyone equally."

1. 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.
2. 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.