Analytical Essay 1

General Directions: This assignment is due at 5:00 p.m. on Friday, February 23.

• The assignment must be submitted by email to pholleran@radford.edu Assignments must be received by 5:00 p.m. on Friday, February 23.
• The assignment must be submitted as an attachment – submissions pasted into the body of the email will not be accepted.
• Tables 1 and 2 must be incorporated into the body of the essay (or at the end of the essay) – that is, the tables should not be attached in a separate file.
• The subject line of your email must read Lastname_ECON408_Essay1 with of course your actual name in place of Lastname.
• Your essay must be in the form of an essay rather than a set of numbered answers. Please do not include the questions in your essay. See the Sample Essay for a model.

The Basic Topic: Mercantilists (such as Thomas Mun), Adam Smith, and David Ricardo had differing views on the relationship between the balance of trade and national income. Your task in this paper is to describe the competing views of this relationship and then to use modern evidence to determine which of these defunct economists was right and which on has the most influence today.

I. Introduction and Context (5 points)

Briefly explain why the relationship between the balance of trade and national income is a topic of interest to us in the 21^st century. A good way to do so is to present evidence on the size of the current U.S. trade deficit. While you're at it, be sure to include a title for the essay that describes what the essay is about. Essays entitled ECON 408 Analytical Essay 1 will not be accepted.

II. The Theories of Defunct Economists

A. Mercantilists. (9 points)

1. Explain in your own words the Mercantilist view of the relationship between the balance of trade and national income (that is, did Mercantilists predict that a country with a trade deficit would have a larger national income or a smaller national income than a country with a trade surplus, other things being?). Support your answer with a specific quotation.
2. Describe the evidence (if any) that Mercantilists used to support their view.
3. Explain the government policy or policies that Mercantilists advocated because of their view of the relationship between the balance of trade and national income. Support your answer with a specific quotation or quotations.

B. Adam Smith. (9 points)

1. Explain in your own words Adam Smith’s view of the relationship between the balance of trade and national income (that is, did Smith predict that a country with a trade deficit would have a larger national income or a smaller national income than a country with a trade surplus, other things being?). Support your answer with a specific quotation.
2. Describe the evidence (if any) that Smith used to support his view.
3. Explain the government policy or policies that Smith advocated because of his view of the relationship between the balance of trade and national income. Support your answer with a specific quotation or quotations.

C. David Ricardo. (9 points)

1. Explain in your own words David Ricardo’s view of the relationship between the balance of trade and national income (that is, did Ricardo predict that a country with a trade deficit would have a larger national income or a smaller national income than a country with a trade surplus, other things being?). Support your answer with a specific quotation.
2. Describe the evidence (if any) that Ricardo used to support his view.
3. Explain the government policy or policies that Ricardo advocated because of his view of the relationship between the balance of trade and national income. Support your answer with a specific quotation or quotations.

III. The Influence of Defunct Economists (10 points)

According to John Maynard Keynes, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Let’s see which of these defunct economists has the most influence on today’s practical men and women. Find 3 newspaper articles or essays about a particular issue in the balance of trade today (for present purposes, we will define “today” as “within the past six months”). For each of them, explain whether article or essay reflects a Mercantilist view, a Smithian view, or a Ricardian view. Support your discussion with specific quotations from the articles/essays.

More detail: find 3 recent articles from different sources on the same subject. For example, you might try searching for articles on the current U.S. trade deficit or perhaps the trade balance between the U.S. and China. Do the articles suggest that a U.S. trade deficit is a Good Thing or a Bad Thing?

IV. The Evidence

To test which of the three theories – Mercantilist, Smithian, Ricardian – of the relationship between the balance of trade and national income is correct, we must confront them with the evidence. We will gather two types of evidence, using data from NationMaster.com (which in turn draws much of its information from the CIA World Factbook and from the World Bank but frequently presents it in a more-organized fashion).

1.  (4 points) First, look at the relationship between trade balances and national income by finding the countries in the world today with the largest trade deficits and the largest trade surpluses, and comparing their national incomes.

a. Create a spreadsheet in Excel or a table in Word with the title: Table 1. Trade Balances and National Incomes.

b. Create the following column headings in your spreadsheet: “Largest Trade Surplus,” GDP per capita,” “GDP growth,” “Largest Trade Deficit,” “GDP per capita,” and “GDP growth.”

c. Go to the website NationMaster.com – from the menu at the top of the page, click on the Statistics link. Under the Categories link, click on Economy. We will use Current Account Balance (Per $ GDP) as a measure of the trade balance. By using this measure as “per $ GDP” we are essentially measuring a country’s trade deficit or trade surplus as a percentage of its GDP. So click on “Current Account Balance (Per $ GDP).”

d. Enter the names of the first ten countries in your “Largest Trade Surplus” column. For example, Kuwait has the largest trade surplus in the world, as measured by percentage of GDP. Kuwait’s value of $644.82 per $1000 of GDP means that Kuwait’s trade surplus is equal to 64.48 percent of its GDP. Remember: you should enter the country’s name, not its trade balance.

e. Scroll to the bottom of the list and enter the countries with the ten largest trade deficits in your “Largest Trade Deficit” column. Enter Sao Tome and Principe first, since it has the largest trade deficit as a percentage of GDP. Remember: you should enter the country’s name, not its trade balance.

f. Now we need information on each country’s GDP per capita and GDP growth. Perhaps the easiest way to do this is to click on each country’s name in the NationMaster list to bring up a profile of each country’s economy. By clicking on Kuwait, for example, we find that Kuwait’s GDP per capita is 17,871 and its real growth rate is 4.8 – enter these values, and the corresponding values for the other countries, in the appropriate column in your spreadsheet.

Notes: GDP per capita is measured in dollars, but it’s best to enter the value only (without the dollar sign) in your spreadsheet. That will make it easier to calculate an average in Excel. Similarly, the growth rate is measured in percent, but you should enter just the value (without the % sign). The real growth rate is a measure of how much that country’s GDP increased, taking out the effects of inflation, during the past year.

2. (4 points) Second, look at the relationship between trade balances and national income by finding the countries in the world today with the highest and lowest national incomes and growth rates (measured by GDP per capita and GDP growth), and comparing their trade balances.

a. Create a spreadsheet in Excel or a table in Word with the title: Table 2. National Incomes and Trade Balances.

b. Create the following column headings in your spreadsheet: “Highest GDP per capita,” “Trade Balance,” “Lowest GDP per capita,” “Trade Balance,” “Highest GDP growth,” “Trade Balance,” “Lowest GDP growth,” “Trade Balance.”

c. In NationMaster, under the listing of Economics Statistics by Country, click on “GDP>nominal (per capita).” Enter the names of the countries with the ten highest GDP per capita in your spreadsheet in the “Highest GDP per capita” column. Scroll to the bottom of the list, and enter the names of the countries with the ten lowest GDP per capita in your spreadsheet in the “Lowest GDP per capita” column.

d. Return to the listing of categories and click on “GDP>real growth rate.” Enter the names of the countries with the ten highest GDP growth rates in your spreadsheet in the “Highest GDP growth,” column. Scroll to the bottom of the list, and enter the names of the countries with the ten lowest GDP per capita in your spreadsheet in the “Lowest GDP growth” column.

e. Now we need trade balance information for each of these countries. Return to the listing of categories in NationMaster and click on “Current Account Balance (Per $ GDP).” Look through the listing to find the trade surplus (a positive number) or trade deficit (a negative number) for each of the countries in Table 2. Enter these values in the appropriate column and row of the spreadsheet.

• Enter only the dollar values – do not include the $ or the “per $1000 of GDP.”
• Divide each of the values by 10, so that the entries in your spreadsheet are trade balances as a percentage of GDP
• Several countries in the “highest GDP per capita,” “Lowest GDP per capita,” “highest GDP growth,” and “lowest GDP growth” lists do no have trade balances listed. In such cases, add the next country from the GDP lists. For example, Luxembourg, which has the highest GDP per capita inexplicably is missing from the trade balance list. So add the country with the 11^th highest GDP per capita to your “Highest GDP per capita” list and find the trade balance for that country.

3. Now we can interpret the evidence. We will do so by determining whether the evidence (the facts) is consistent with the predictions of each of the three theories.

a. (8 points) Refer to Table 1, which shows national income measures for countries with trade deficits and with trade surpluses. According to the Mercantilist theory, which set of countries should have stronger economic performance? Is that in fact the case? According to Adam Smith’s theory, which set of countries should have stronger economic performance? Is that in fact the case? According to David Ricardo’s theory, which set of countries should have stronger economic performance? Is that in fact the case? Which theory seems to be most strongly supported by the evidence in Table 1? Explain. Note that in your discussion you should specifically refer to the evidence in Table 1, with phrasing such as “As shown in Table 1 . . .”

b. (8 points) Refer to Table 2, which shows trade balances for countries with high incomes and with low incomes and for countries with high economic growth rates and with low economic growth rates. According to the Mercantilist theory, what should be true of the trade balances of the richer countries compared to the poorer countries? Is that in fact the case? According to Adam Smith’s theory, what should be true of the trade balances of the richer countries compared to the poorer countries? Is that in fact the case? According to David Ricardo’s theory, what should be true of the trade balances of the richer countries compared to the poorer countries? Is that in fact the case? Which theory seems to be most strongly supported by the evidence in Table 2? Explain. Note that in your discussion you should specifically refer to the evidence in Table 2, with phrasing such as “As shown in Table 2 . . .”

c. (4 points) Overall, then, which theory seems to be most strongly supported by the evidence? Explain. Which theory seems to be inconsistent with the evidence? Explain.

V. Evidence and Influence (5 points)

Is the theory that seems to be most “correct” based on the evidence in Part IV the same theory that seems to have the most current influence based on your reporting in Part III? Why or why not?