The Economics of Trade

Keynote Presentation by B. Ravikumar

Presentation slides (pdf)

In this presentation, St. Louis Fed economist B. Ravikumar, senior vice president and deputy research director, explains how economists view international trade and what recent data says about its effect on the U.S. economy, including jobs. After a brief welcome by Executive Vice President Julie L. Stackhouse, Ravikumar leads off with some historical context on how economists think about trade—going back to David Ricardo’s 1817 theory of comparative advantage.

• To demonstrate the Ricardian theory of comparative advantage, he leads the audience through a hypothetical example of two countries engaged in the production of two goods: wine and T-shirts. (Start at 4:15)
• To illustrate how overall gains can be realized from free trade, he uses a supply and demand picture of a domestic steel market that is opened to imports. (Start at 15:20)
• To provide perspective on recent estimates of U.S. manufacturing job losses attributed to Chinese imports, he discusses the overall “huge amount of churn” monthly in the U.S. labor market, as well as manufacturing’s long-term decline as a share of U.S. employment. (Start at 22:25)
• To discuss recent headlines about the balance of trade, he notes how the U.S. has been running a surplus in services and is a leading producer of capital goods. (Start at 27:15)

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Audience activity by Scott Wolla

Scott Wolla, a senior economic education specialist, leads the audience in a game to answer: Is trade a zero-sum game? He defines zero-sum game as one in which the existence of a winner means there is also a loser, as in football. Given four options of Hershey’s Miniatures, the audience ranks their favorite to least favorite. They then receive one piece of chocolate each. After resisting the temptation to eat it, participants quantify their satisfaction with what they received.

They are given the option to trade (or not trade) their candy with others in the immediate vicinity and again quantify how satisfied they are. Finally, Wolla offers the option of “global” trade, where participants can exchange candy with anyone in the room. Wolla once again quantifies satisfaction by tallying how many people ended up with their first choice, second choice, etc. The result? Overall satisfaction in the auditorium increases after all the rounds, and Wolla concludes that trade is not a zero-sum game.

Audience Q&A

After the keynote, Ravikumar, Stackhouse and Cletus Coughlin, senior vice president and chief of staff, field questions and comments from the audience. Audience questions include: Do news accounts about the trade deficit take into account both goods and services? Is China taking advantage of the U.S. when it comes to trade? Can we on a worldwide scale learn from the European Union approach to trade? Has there been much research into how federal trade policies can impact states? How has global trade impacted income and wage distribution? Are there efforts to look at quality of life, given variability?