The key findings indicate: • In 2006, the impact of trade flows increased the inequality of earnings by roughly 7%, with the resulting loss to a representative household (two earners making the median wage and working the average amount of (household) hours each year) reaching more than ,000.
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The great insight of comparative advantage, the cornerstone of international economics, is that even when one country can produce everything more cheaply than its trading partners, trade still provides benefits to both nations.
An important caveat, however, notes that even as globalization raises national income, it can still reduce the incomes of most workers. can be divided into workers (those who supply labor) and professionals (those who also supply additional skills, capital, and credentials). Workers and professionals can work in either sector.
However, a significant (and the fastest growing) portion of U. trade is with nations that are significantly poorer than the United States, and as such, the scenario sketched out above is (and should be) a real and growing concern to U. This sparks an adjustment in the wages of workers and managers, driving down workers’ wages as before.
This idea was initially developed for a closed economy, but one can look at it as a prediction of what will happen when labor-abundant nations (such as China and India) are integrated into the world economy, increasing the global labor pool.
Imports rise to replace this lost domestic production.
Lastly, and importantly, aircraft exports rise as domestic investment once ploughed into apparel looks for new opportunities and as U. trading partners’ greater specialization in apparel leads them to demand more aircraft from the U. As domestic apparel production contracts, too many workers are displaced to be absorbed in the expanding aircraft sector at the going wage for workers.It is these net gains (which are much smaller than either the gross gains or gross losses) that constitute the argument in favor of global integration. imports come from countries that are not that much poorer than the United States. While it is easiest to explain in terms of falling trade costs, one can get similar wage results even without a change in trade costs.However, it is (obviously) the gross losses that worry many workers about globalization, and this fear is utterly rational in light of economic theory. This sort of trade (call it rich/rich trade) is not necessarily inequality-inducing in the way described above. Using the previous example, if the prices of apparel and aircraft are flexible, an increase in the quantity of the factor (say labor) intensively used in a given sector (say apparel) will lead to a declining price for that sector’s output.Any incumbent worker in either aircraft or apparel not agreeing to this wage cut would be replaced with those unemployed workers.The process works in reverse for professionals, with the apparel sector not shedding enough of them at the going professional wage in order to meet the demands of the expanding aircraft sector. Essentially, by changing the structure of what an economy produces, globalization changes the relative demand for different kinds of labor, skill, and capital.This Briefing Paper reexamines what conventional economics actually predicts about the effects of integrating the rich United States and poor global economies.