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 Source Gottschalk tabulations of the PSID 1997