APPLIED ECONOMICS FOR MANAGERS SESSION 20— I. REVIEW: TRADE AND COMMERCIAL POLICY A. RICARDO’S ENDURING INSIGHT 1. TRADE BASED ON COMPARATIVE ADVANTAGE NOT ON ABSOLUTE ADVANTAGE 2. FREE MARKETS TEND TO EXPLOIT COMPARATIVE ADVANTAGE TO MUTUAL BENEFIT OF BOTH COUNTRIES 3. SOURCES OF COMPARATIVE ADVANTAGE a. RESOURCE ENDOWMENTS b. HISTORY—PATH DEPENDENCE B. THE SIMPLE ECONOMICS OF PROTECTIONIST POLICIES 1. TOO MANY DOMESTIC RESOURCES ALLOCATED TO PROTECTED INDUSTRY 2. TOO LITTLE OF THE PROTECTED COMMODITY CONSUMED 3. LOSS OF VARIETY 4. LOSS OF INNOVATIVE PRESSURE C. INTERNATIONAL TRADE AND FINANCE ACCOUNTING 1. THE FUNDAMENTAL EQUATION OF THE CURRENT ACCOUNT 2. SH + (T – G) – I = X – M 3. CURRENT ACCOUNT EQUAL TO: a. THE DIFFERENCE BETWEEN TOTAL DOMESTIC PRODUCTION AND DOMESTIC SPENDING b. THE DIFFERENCE BETWEEN TOTAL DOMESTIC SAVINGS (PRIVATE & PUBLIC) AND DOMESTIC INVESTMENT II. THE ISSUE THAT DARE NOT SPEAK ITS NAME: EQUITY A. MOVEMENT OVER TIME IN THE DISTRIBUTION OF INCOME AND WEALTH B. THE FUNCTIONAL DISTRIBUTION OF INCOME C. INCOME BY QUINTILE D. THE MOBILITY ISSUE III. EXPLAINING GROWING INEQUALITY A. SATISFACTORY EXPLANATION MUST 1. CAPTURE PERVASIVNESS OF THE CHANGE a. ACROSS GROUPS b. ACROSS REGIONS 2. BE CONSITENT WITH ECONOMIC THEORY B. SOME ELEMENTS OF A MODEL 1. INCREASED RETURN TO HUMAN CAPITAL 2. INCREASED PREVALENCE OF “WINNER-TAKE-ALL MARKETS”—ATHLETES, MOVIE STARS, CEO’S IV. DO WE CARE? Share of aggregate income -----------------------------------------------Year Lowest Second Third Fourth Highest fifth fifth fifth fifth fifth ----------------------------------------------------------------2001 3.5 8.7 14.6 23.0 50.1 2000 3.6 8.9 14.8 23.0 49.8 1999 3.6 8.9 14.9 23.2 49.4 1998 3.6 9.0 15.0 23.2 49.2 1997 3.6 8.9 15.0 23.2 49.4 1996 3.7 9.0 15.1 23.3 49.0 1994 3.6 8.9 15.0 23.4 49.1 1993 3.6 9.0 15.1 23.5 48.9 1992 3.8 9.4 15.8 24.2 46.9 1991 3.8 9.6 15.9 24.2 46.5 1990 3.9 9.6 15.9 24.0 46.6 1989 3.8 9.5 15.8 24.0 46.8 1988 3.8 9.6 16.0 24.3 46.3 1987 3.8 9.6 16.1 24.3 46.2 1986 3.9 9.7 16.2 24.5 45.7 1985 4.0 9.7 16.3 24.6 45.3 1984 4.1 9.9 16.4 24.7 44.9 1983 4.1 10.0 16.5 24.7 44.7 1982 4.1 10.1 16.6 24.7 44.5 1981 4.2 10.2 16.8 25.0 43.8 1980 4.3 10.3 16.9 24.9 43.7 1979 4.2 10.3 16.9 24.7 44.0 1978 4.3 10.3 16.9 24.8 43.7 1977 4.4 10.3 17.0 24.8 43.6 1976 4.4 10.4 17.1 24.8 43.3 1975 4.4 10.5 17.1 24.8 43.2 1974 4.4 10.6 17.1 24.7 43.1 1973 4.2 10.5 17.1 24.6 43.6 1972 4.1 10.5 17.1 24.5 43.9 1971 4.1 10.6 17.3 24.5 43.5 1970 4.1 10.8 17.4 24.5 43.3 1969 4.1 10.9 17.5 24.5 43.0 Top 5 percent 22.4 22.1 21.5 21.4 21.7 21.4 21.2 21.0 18.6 18.1 18.6 18.9 18.3 18.2 17.5 17.0 16.5 16.4 16.2 15.6 15.8 16.4 16.2 16.1 16.0 15.9 15.9 16.6 17.0 16.7 16.6 16.6 INCOME MOBILITY TRANSITION MATRIX, 1968-91 1991 Income Quintile 1968 Income Quintile Lowest Second Middle Fourth Highest Total Lowest 46.7 24.5 17.3 8.7 2.7 100.0 Second 23.6 26.2 26.4 14.3 9.6 100.0 Middle 13.6 21.8 20.2 26.2 18.2 100.0 Fourth 9.2 16.7 20.4 26.2 27.6 100.0 Highest 6.7 10.8 16.1 24.5 42.0 100.0 100.0 100.0 100.0 100.0 100.0 Total