Microeconomic Analysis Automobile Industry. Eassy:show Favoritism Trade

¶ … microeconomic analysis automobile industry. Eassy:Show favoritism Trade Income Give relationship trade income distribution countries car industry. Give findings suggestions.

Project Plan -- Trade and Income

In the era of globalization, countries strive to capitalize on the opening of boundaries by operating in other regions to benefit from their comparative advantage, but also by selling their products onto various global regions in order to enhance revenues. The economic role of exports is often perceived as positive. Governments and economic agents seek to produce and export as many commodities as possible in order to enhance their competitive positions within the international market, but also to generate more profits. Through this, it is expected that the incomes of the citizens in the respective firms and countries increase.

At a wider scale nonetheless, the relationship between trade and income is more controversial. Carol Letwin (1998) for instance found that trade and exports reduce the income inequality only when the increase in trade is based on the development, training and education of the staff members. Donald R. Davis however argues that exporting countries will register an increase in the income of the blue collar workers, directly involved in manufacturing and exporting, rather than the incomes of the white collar employees. In other words, the income inequality within exporting countries would be reduced.

Richard Barry Freeman and Lawrence F. Katz (1995) then believe that trade will reduce income inequalities at a global level in the meaning that the gross domestic products of exporting countries would increase and the gap between their GDPs and the GDPs of the more developed states would decrease. In their perception however, the income inequality within the more developed country would decrease as the blue collar jobs would be outsourced to more cost effective regions. This means that the incomes of blue collar individuals in developed countries would diminish, increasing as such the income gap.

Overall, the relationship between trade and income distribution is a complex one and it cannot be generalized as a recurring phenomenon, but has to be analyzed in specific contexts. In the case of the United States automobile industry for instance, the export of automobiles has generated demand for the auto industry and has initially improved the wages of the employees, to contribute to the reduction of the income gap. In more recent years however, the American automobile industry has capitalized on the forces of globalization and has outsourced countless jobs to Mexico or other more cost effective regions.

Within the past two years for instance, General Motors cut over 100,000 jobs (McIntyre, 2010). While these cuts are associated with the recession, it must be noted that they followed an ascendant trend even before the crisis emerged. The United States automobile industry was facing incremental competition from the Japanese auto makers and cost reduction was the most effective means of fighting the competition. In this context, outsourcing manufacturing operations generated financial savings and abilities to invest in technologies, research and development.

At the level of the population, countless people lost their jobs. Cole and co-editors (2008) estimate that over 1 million jobs were lost in the U.S. automobile industry, but the figure is a rough approximation. Overall, the impact was that of increasing unemployment and as such an increasing income gap between the while collar and the blue collar positions. In respect to Mexico however, the income inequality here decreased, as did the income inequality between Mexico and the U.S. This specifically implies that the relationship between trade and income distribution in the American automobile industry is consistent with Freeman and Katz's theory of decreasing global inequalities, but shifting results at national levels.