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Read Paul Krugman's 1993 article "What Do Undergrads Need to Know About Trade?"and write a short (200-300 words) report. In your report, briefly describe the six misconceptions about international trade and share your personal thoughts about the article. Is any of the author's claims surprising? Do you think these misconceptions are still common today? American Economic Association What Do Undergrads Need to Know About Trade? Author(s): Paul R. Krugman Source: The American Economic Review, Vol. 83, No. 2, Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association (May, 1993), pp. 23-26 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/2117633 Accessed: 02-07-2019 16:40 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review This content downloaded from 128.12.246.27 on Tue, 02 Jul 2019 16:40:42 UTC All use subject to https://about.jstor.org/terms What Do Undergrads Need To Know About Trade? By PAUL R. KRUGMAN * Few of the undergraduates who take an introductory course in economics will go on to graduate study in the field, and indeed most will not even take any higher-level economics courses. So what they learn about economics will be what they get in that first course. It is now more important than ever before that their basic training include a solid grounding in the principles of interna- tional trade. I could justify this assertion by pointing out that international trade is now more important to the U.S. economy than it used to be. But there is another reason, which I think is even more important: the increased perception among the general public that international trade is a vital subject. We live in a time in which Americans are obsessed with international competition, in which Lester Thurow's Head to Head is the non- fiction best-seller and Michael Crichton's Rising Sun tops the fiction list. The news media and the business literature are satu- rated with discussions of America's role in the world economy. The problem is that most of what a stu- dent is likely to read or hear about interna- tional economics is nonsense. What I want to argue in this paper is that the most important thing to teach our undergrads about trade is how to detect that nonsense. That is, our primary mission should be to vaccinate the minds of our undergraduates against the misconceptions that are so pre- dominant in what passes for educated dis- cussion about international trade. I. The Rhetoric of Pop Internationalism As a starting point, I would like to quote a typical statement about international eco- nomics. (Please ignore the numbers for a moment.) Here it is: "We need a new eco- nomic paradigm, because today America is part of a truly global economy (1). To main- tain its standard of living, America now has to learn to compete in an ever tougher world marketplace (2). That's why high productivity and product quality have be- come essential (3). We need to move the American economy into the high-value sec- tors (4) that will generate jobs (5) for the future. And the only way we can be compet- itive in the new global economy is if we forge a new partnership between govern- ment and business (6)." OK, I confess: it's not a real quotation. I made it up as a sort of compendium of popular misconceptions about international trade. But it certainly sounds like the sort of thing one reads or hears all the time-it is very close in content and style to the still- influential manifesto by Ira Magaziner and Robert Reich (1982), or for that matter to the presentation made by Apple Computer's John Sculley at President-elect Clinton's Economic Conference last December. Peo- ple who say things like this believe them- selves to be smart, sophisticated, and for- ward-looking. They do not know that they are repeating a set of misleading cliches that I will dub "pop internationalism." It is fairly easy to understand why pop internationalism has so much popular ap- peal. In effect, it portrays America as being like a corporation that used to have a lot of monopoly power, and could therefore earn comfortable profits in spite of sloppy busi- ness practices, but is now facing an on- slaught from new competitors. A lot of com- panies are in that position these days (though the new competitors are not neces- sarily foreign), and so the image rings true. Unfortunately, it's a grossly misleading image, because a national economy bears very little resemblance to a corporation. And the ground-level view of businessmen is * Department of Economics, Massachusetts Institute of Technology, Cambridge, MA 02139. 23 This content downloaded from 128.12.246.27 on Tue, 02 Jul 2019 16:40:42 UTC All use subject to https://about.jstor.org/terms 24 AEA PAPERS AND PROCEEDINGS MAY 1993 deeply uninformative about the inherently general-equilibrium issues of international economics. So what do undergrads need to know about trade? They need to know that pop internationalism is nonsense-and they need to know why it is nonsense. II. Common Misconceptions I inserted numbers into my imaginary quotation to mark six currently popular mis- conceptions that can and should be dis- pelled in an introductory economics course. 1.-"We need a new paradigm..." Pop internationalism proclaims that everything is different now that the United States is an open economy. Probably the most impor- tant single insight that an introductory course can convey about international eco- nomics is that it does not change the basics: trade is just another economic activity, sub- ject to the same principles as anything else. James Ingram's (1983) textbook on inter- national trade contains a lovely parable. He imagines that an entrepreneur starts a new business that uses a secret technology to convert U.S. wheat, lumber, and so on into cheap high-quality consumer goods. The en- trepreneur is hailed as an industrial hero; although some of his domestic competitors are hurt, everyone accepts that occasional dislocations are the price of a free-market economy. But then an investigative reporter discovers that what he is really doing is shipping the wheat and lumber to Asia and using the proceeds to buy manufactured goods-whereupon he is denounced as a fraud who is destroying American jobs. The point, of course, is that international trade is an economic activity like any other and can indeed usefully be thought of as a kind of production process that transforms ex- ports into imports. It might, incidentally, also be a good thing if undergrads got a more realistic quantita- tive sense than the pop internationalists seem to have of the limited extent to which the United States actually has become a part of a global economy. The fact is that imports and exports are still only about one-eighth of output, and at least two-thirds of our value-added consists of nontradable goods and services. Moreover, one should have some historical perspective with which to counter the silly claims that our current situation is completely unprecedented: the United States is not now and may never be as open to trade as the United Kingdom has been since the reign of Queen Victoria. 2.-"Competing in the world market- place": One of the most popular, enduring misconceptions of practical men is that countries are in competition with each other in the same way that companies in the same business are in competition. Ricardo al- ready knew better in 1817. An introductory economics course should drive home to stu- dents the point that international trade is not about competition, it is about mutually beneficial exchange. Even more fundamen- tally, we should be able to teach students that imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import things it wants. Exports are not an objective in and of them- selves: the need to export is a burden that a country must bear because its import sup- pliers are crass enough to demand payment. One of the distressing things about the tyranny of pop internationalism is that there has been a kind of Gresham's Law in which bad concepts drive out good. Lester Thurow is a trained economist, who understands comparative advantage. Yet his recent book has been a best-seller largely because it vigorously propounds concepts that unin- tentionally (one hopes) pander to the cliches of pop internationalism: "Niche competi- tion is win-win. Everyone has a place where he or she can excel; no one is going to be driven out of business. Head-to-head com- petition is win-lose." (Thurow, 1992 p. 30). We should try to instill in undergrads a visceral negative reaction to statements like this. 3.-"Productivity": Students should learn that high productivity is beneficial, not be- cause it helps a country to compete with This content downloaded from 128.12.246.27 on Tue, 02 Jul 2019 16:40:42 UTC All use subject to https://about.jstor.org/terms VOL. 83 NO. 2 INTERNATIONALIZING THE UNDERGRADUATE CURRICULUM 25 other countries, but because it lets a coun- try produce and therefore consume more. This would be true in a closed economy; it is no more and no less true in an open economy; but that is not what pop interna- tionalists believe. I have found it useful to offer students the following thought experiment. First, imagine a world in which productivity rises by 1 percent annually in all countries. What will be the trend in the U.S. standard of living? Students have no trouble agreeing that it will rise by 1 percent per year. Now, however, suppose that while the United States continues to raise its productivity by only 1 percent per year, the rest of the world manages to achieve 3-percent produc- tivity growth. What is the trend in our living standard? The correct answer is that the trend is still 1 percent, except possibly for some sub- tle effects via our terms of trade; and as an empirical matter changes in the U.S. terms of trade have had virtually no impact on the trend in our living standards over the past few decades. But very few students reach that conclusion-which is not surprising, since virtually everything they read or hear outside of class conveys the image of inter- national trade as a competitive sport. An anecdote: when I published an op-ed piece in the New York Times last year, I emphasized the importance of rising pro- ductivity. The editorial assistant I dealt with insisted that I should "explain" that we need to be productive "to compete in the global economy." He was reluctant to pub- lish the piece unless I added the phrase-he said it was necessary so that readers could understand why productivity is important. We need to try to turn out a generation of students who not only don't need that kind of explanation, but understand why it's wrong. 4.-"High-value sectors": Pop interna- tionalists believe that international competi- tion is a struggle over who gets the "high- value" sectors. "Our country's real income can rise only if (1) its labor and capital increasingly flow toward businesses that add greater value per employee and (2) we maintain a position in these businesses that is superior to that of our international com- petitors" (Magaziner and Reich, 1982 p. 4). I think it should be possible to teach students why this is a silly concept. Take, for example, a simple two-good Ricardian model in which one country is more produc- tive in both industries than the other. (I have in mind the one used in Krugman and Maurice Obstfeld [1991 pp. 20-1]. The more productive country will, of course, have a higher wage rate, and therefore whatever sector that country specializes in will be "high value," that is, will have higher value-added per worker. Does this mean that the country's high living standard is the result of being in the right sector, or that the poorer country would be richer if it tried to emulate the other's pattern of spe- cialization? Of course not. 5.-"Jobs": One thing that both friends and foes of free trade seem to agree on is that the central issue is employment. George Bush declared the objective of his ill-starred trip to Japan to be "jobs, jobs, jobs"; both sides in the debate over the North Ameri- can Free Trade Agreement try to make their case in terms of job creation. And an astonishing number of free-traders think that the reason protectionism is bad is that it causes depressions. It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and de- pending in the long run on the natural rate of unemployment, with microeconomic poli- cies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost. 6.-"A new partnership": The bottom line for many pop internationalists is that since U.S. firms are competing with for- eigners instead of each other, the U.S. gov- ernment should turn from its alleged adver- sarial position to one of supporting our firms against their foreign rivals. A more sophisti- This content downloaded from 128.12.246.27 on Tue, 02 Jul 2019 16:40:42 UTC All use subject to https://about.jstor.org/terms 26 AEA PAPERS AND PROCEEDINGS MAY1993 cated pop internationalist like Robert Reich (1991) realizes that the interests of U.S. firms are not the same as those of U.S. workers (you may find it hard to believe that anyone needed to point this out, but among pop internationalists this was viewed as a deep and controversial insight), but still ac- cepts the basic premise that the U.S. gov- ernment should help our industries com- pete. What we should be able to teach our students is that the main competition going on is one of U.S. industries against each other, over which sector is going to get the scarce resources of capital, skill, and, yes, labor. Government support of an industry may help that industry compete against for- eigners, but it also draws resources away from other domestic industries. That is, the increased importance of international trade does not change the fact the government cannot favor one domestic industry except at the expense of others. Now there are reasons, such as external economies, why a preference for some in- dustries over others may be justified. But this would be true in a closed economy, too. Students need to understand that the growth of world trade provides no additional sup- port for the proposition that our govern- ment should become an active friend to domestic industry. III. What We Should Teach By now the thrust of my discussion should be clear. For the bulk of our economics students, our objective should be to equip them to respond intelligently to popular dis- cussion of economic issues. A lot of that discussion will be about international trade, so international trade should be an impor- tant part of the curriculum. What is crucial, however, is to understand that the level of public discussion is ex- tremely primitive. Indeed, it has sunk so low that people who repeat silly cliches often imagine themselves to be sophisticated. That means that our courses need to drive home as clearly as possible the basics. Offer curves and Rybczinski effects are lovely things. What most students need to be prepared for, however, is a world in which TV "ex- perts," best-selling authors, and $30,000-a- day consultants do not understand budget constraints, let alone comparative advan- tage. The last 15 years have been a golden age of innovation in international economics. I must somewhat depressingly conclude, how- ever, that this innovative stuff is not a prior- ity for today's undergraduates. In the last decade of the 20th century, the essential things to teach students are still the insights of Hume and Ricardo. That is, we need to teach them that trade deficits are self- correcting and that the benefits of trade do not depend on a country having an absolute advantage over its rivals. If we can teach undergrads to wince when they hear some- one talk about "competitiveness," we will have done our nation a great service. REFERENCES Crichton, Michael, Rising Sun, New York: Knopf, 1992. Ingram, James, International Economics, New York: Wiley, 1983. Krugman, Paul and Obstfeld, Maurice, Interna- tional Economics: Theory and Policy, New York: Harper Collins, 1991. Magaziner, Ira and Reich, Robert, Minding America's Business, New York: Random House, 1982. Reich, Robert, The Work of Nations, New York: Knopf, 1991. Thurow, Lester, Head to Head, New York: William Morrow, 1992. This content downloaded from 128.12.246.27 on Tue, 02 Jul 2019 16:40:42 UTC All use subject to https://about.jstor.org/terms Contents image 1 image 2 image 3 image 4 Issue Table of Contents The American Economic Review, Vol. 83, No. 2, May, 1993 Front Matter [pp. i - vi] Editors' Introduction [p. vii] Foreword [p. viii] Richard T. Ely Lecture The Search for Relevance in Economics [pp. 1 - 16] Internationalizing the Undergraduate Curriculum in Economics Why the Principles Course Needs Comparative Macro and Micro [pp. 17 - 22] What Do Undergrads Need to Know About Trade? [pp. 23 - 26] International Perspectives in Undergraduate Education [pp. 27 - 33] Economists' Professional Activities Professional Etiquette for the Mature Economist [pp. 34 - 38] Reflections on the Hiring of Faculty [pp. 39 - 43] Discussion: The Economics of Professional Etiquette [p. 44] Women in the Labor Market Female Workers as a Buffer in the Japanese Economy [pp. 45 - 51] Gender Differences in Academic Career Paths of Economists [pp. 52 - 56] Probabilities of Job Choice and Employer Selection and Male-Female Occupational Differences [pp. 57 - 61] Broken Down by Age, Sex, and Race: Employment-Discrimination Litigation After 25 Years The Law, Its Interpretation, Levels of Enforcement Activity, and Effect on Employer Behavior [pp. 62 - 66] Analyzing Employment Discrimination: From the Seminar Room to the Courtroom [pp. 67 - 72] Problems in Assessing Employment Discrimination [pp. 73 - 78] Affirmative Action and the Racial Wage Gap [pp. 79 - 84] The Economic Status of Black Americans: What Can We Do About It? Trends in Relative Black-White Earnings Revisited [pp. 85 - 91] Antidiscrimination Enforcement and the Problem of Patronization [pp. 92 - 98] Affirmative Action in Higher Education [pp. 99 - 103] Lessons from Empirical Labor Economics: 1972-1992 Inequality and Relative Wages [pp. 104 - 109] What Have We Learned from Empirical Studies of Unemployment and Turnover? [pp. 110 - 115] What Has Been Learned About Labor Supply in the Past Twenty Years? [pp. 116 - 121] Income and Earnings During the 1980'S: The Failure of Trickledown Occupational Change and the Demand for Skill, 1940-1990 [pp. 122 - 126] International Competition and Real Wages [pp. 127 - 130] The Contribution of Employment and Hours Changes to Family Income Inequality [pp. 131 - 135] Changes in Inequality of Family Income in Seven Industrialized Countries [pp. 136 - 142] The Economics of Altruism Altruism as a Problem Involving Group versus Individual Selection in Economics and Biology [pp. 143 - 148] How Altruism Can Prevail in an Evolutionary Environment [pp. 149 - 155] Altruism and Economics [pp. 156 - 161] Antitrust and Industrial Organization The Current State of the Law and Economics of Predatory Pricing [pp. 162 - 167] Exclusionary Vertical Restraints Law: Has Economics Mattered? [pp. 168 - 172] Horizontal Mergers: Law, Policy, and Economics [pp. 173 - 177] The Breaking up of AT&T and Changes in Telecommunications Regulation: What Are the Lessons? The Effects of the Breakup of AT&T on Telephone Penetration in the United States [pp. 178 - 184] Postdivestiture Long-Distance Competition in the United States [pp. 185 - 190] Effects of the Change from Rate-of-Return to Price-Cap Regulation [pp. 191 - 198] Bank Regulation and Reform The Effects of Lower Reserve Requirements on Money Market Volatility [pp. 199 - 205] Self-Interested Bank Regulation [pp. 206 - 212] Empirical Studies of Capacity Utilization Segment Shifts and Capacity Utilization in the U.S. Automobile Industry [pp. 213 - 218] Productivity, Market Power, and Capacity Utilization When Spot Markets are Complete [pp. 219 - 223] Shift Work and the Business Cycle [pp. 224 - 228] Cyclical Productivity and the Workweek of Capital [pp. 229 - 233] Some New Empirical Models of Firm and Industry Behavior Optimal Selling Strategies for Oil and Gas Leases with an Informed Buyer [pp. 234 - 239] Applications and Limitations of Some Recent Advances in Empirical Industrial Organization: Price Indexes and the Analysis of Environmental Change [pp. 240 - 246] Some Applications and Limitations of Recent Advances in Empirical Industrial Organization: Merger Analysis [pp. 247 - 252] The Value of Intangible Assets An Event-Study Approach to Measuring Innovative Output: The Case of Biotechnology [pp. 253 - 258] The Stock Market's Valuation of R&D Investment During the 1980's [pp. 259 - 264] The Impact of Intangible Capital on Tobin's q in the Semiconductor Industry [pp. 265 - 269] What Caused the Last Recession? Consumption and the Recession of 1990-1991 [pp. 270 - 274] Macro Theory and the Recession of 1990-1991 [pp. 275 - 279] Did Technology Shocks Cause the 1990-1991 Recession? [pp. 280 - 286] What Happened to Macroeconometric Models? Testing Macroeconometric Models [pp. 287 - 293] Macroeconometrics in a Global Economy [pp. 294 - 299] The Use of the New Macroeconometrics for Policy Formulation [pp. 300 - 305] The Contributions of Economic Modeling to Analysis of the Costs and Benefits of Slowing Greenhouse Warming Climate Change and Agriculture: The Role of International Trade [pp. 306 - 312] The Contributions of Economic Modeling to Analysis of the Costs and Benefits of Slowing Greenhouse Warming Optimal Greenhouse-Gas Reductions and Tax Policy in the "DICE" Model [pp. 313 - 317] The Contributions of Economic Modeling to Analysis of the Costs and Benefits of Slowing Greenhouse Warming Model Comparisons of the Costs of Reducing CO₂ Emissions [pp. 318 - 323] Recent Findings on Living Standards, Work Levels, Health, and Mortality: An International Comparison Technological Progress and the Decline of European Mortality [pp. 324 - 330] The Changing View of the Standard-of-Living Question in the United States [pp. 331 - 336] Mortality Decline in the Low-Income World: Causes and Consequences [pp. 337 - 342] Political Economy of Policy Reform: is There a Second Best? Secrets of Success: A Handful of Heroes [pp. 343 - 350] Virtuous and Vicious Circles in Economic Development [pp. 351 - 355] The Positive Economics of Policy Reform [pp. 356 - 361] Free Trade: A Loss of (Theoretical) Nerve? The Narrow and Broad Arguments for Free Trade [pp. 362 - 366] The Optimality of Free Trade: Science or Religion? [pp. 367 - 371] Making the Practical Case for Freer Trade [pp. 372 - 376] Economic Development: Recent Lessons Fighting Poverty [pp. 377 - 382] The Structural-Adjustment Debate [pp. 383 - 389] Socialist Economy Reform: Lessons of the First Three Years [pp. 390 - 395] New Developments in Development Modeling Technology Adoption in Developing Countries [pp. 396 - 402] Labor Markets and Institutions in Economic Development [pp. 403 - 408] Why Is Rent-Seeking So Costly to Growth? [pp. 409 - 414] Empirical Evidence in Economic Growth Theory On the Empirical Aspects of Economic Growth Theory [pp. 415 - 420] Explaining Economic Growth [pp. 421 - 425] What we Have Learned about Policy and Growth from Cross-Country Regressions? [pp. 426 - 430] What do we Know About the Long-Term Sources of Comparative Advantage? Technological Differences as a Source of Comparative Advantage [pp. 431 - 435] Factor-Supply Differences as a Source of Comparative Advantage [pp. 436 - 439] Internal Returns to Scale as a Source of Comparative Advantage: The Evidence [pp. 440 - 444] Product Differentiation as a Source of Comparative Advantage? [pp. 445 - 449] R&D and Invention Potential Equilibrium R&D and the Patent--R&D Ratio: U.S. Evidence [pp. 450 - 457] Science, R&D, and Invention Potential Recharge: U.S. Evidence [pp. 458 - 462] Patents, R&D, and Invention Potential: International Evidence [pp. 463 - 468] Proceedings of the Hundred and Fifth Annual Meeting [pp. 469 - 516] Back Matter [pp. i - xxviii]