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The Great Divergence


Hanaa Wahba

on 27 June 2014

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Transcript of The Great Divergence

The Great Divergence

Main Points

China's Economic Growth

Economic Growth vs. Income Inequality

Stolper-Samuelson Theorem

Foreign Trade

Offshoring of service jobs and income inequality

China's Economic Growth
Economic Growth VS. Income Inequality
Stolper-Samuelson Theorem
Foreign Trade
Foreign trade change employees' relationship
with their employers.
Offshoring of Service Jobs
Income Inequality
How does the offshoring of service jobs affect income inequality?
In 1979, China was a net importer, with a trade deficit of $2 billion.
Its total exports were about $14 billion.
In 2010, there was a productivity growth in China.
A trade surplus of $185 billion
Total exports $1.6 trillion
China is today the world's second-largest economy after the U.S.
Do you think China is a rich country?

China's per capita gross national income was $4,260.

That's lower than in Algeria, Jamaica, Cuba, & Bulgaria.
In 2010, America's per capita gross national income was $ 47,140.
That makes the U.S. a very rich nation.
Ten times as rich as China
In China, the average monthly wage is $449, or about one tenth the average in the US.


the world's second-largest economy but has such a tiny per capita gross national income.

Causes of China’s Economic Growth

Economists explained that China’s rapid economic growth because of two main factors:

Large-scale capital investment (financed by large domestic savings and foreign investment)
Rapid productivity growth.
China's Economic Growth

the world's largest economy and its gross national income is high but Americans still suffer from income inequality.

Stolper-Samuelson theorem (1941) is a basic theorem in Heckscher–Ohlin type trade theory. It has been used to address the trade and wages debate.
How much of the wage gap is explained by cheap foreign labor?
Prior to the Stolper-Samuelson theorem an economist,
David Ricardo
, believed that free trade benefited everyone, including high-wage workers.
Stolper-Samuelson theorem (1941), wasn’t always accepted by economists.
"That was because the resulting drop in prices would so exceed their reduced wages that the workers would net out with the practical equivalent of a raise"
(p. 95-96)
Krugman believed that "income from low-wage countries could affect income inequality" (p.97).
Krugman and Lawrence estimated that the U.S. trade with low-wage countries explained only three percentage points in the wage gap between skilled and unskilled workers.
More high-skill jobs than low-skill jobs were
ready to getting shipped offshore in the future.
computer operators
(low) are difficult to offshore.
computer engineers or computer scientists
(high) are less difficult to offshore.
Foreign trade enriches the US, but it also changes employees' relationship with their

Employers focus on:
employee's performance
work productivity

Bosses tend not to think of employees salaries
as they relate to labor market.

When a country, like China with a large pool of cheap labor sells lots of goods to America with a much higher paid workforce, the result will be lower wages for workers in America.
Prepared by,
Hanaa Wahba
Full transcript