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Introduction

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

This free course, Exploring economics: the secret life of t-shirts, aims to describe what goes into making and selling a t-shirt: which resources, which markets, who is involved, the income people get, the income and value they create. You will explore these questions at different stages of the production of a t-shirt, and will use concepts from economics such as supply chains and value added to answer them.

The secret life of t-shirts will be described using data. This will help you to think about key numbers and data which help constructing evidence of how a t-shirt is produced, from raw cotton to our wardrobe. To look at data, to interpret it, and to construct your own, means that you will also be developing some maths skills.

This OpenLearn course is an adapted extract from the Open University course DD126 Economics in context.

Learning outcomes

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

After studying this course, you should be able to:

define a supply chain and understand how different stages of the t-shirt production chain can be organised differently
engage with different data sources and their objectives
read into data to tell an economic story
evaluate what the ‘made in…’ tag on your t-shirt really means.

1 Defining a supply chain and organisation of the supply chain for a t-shirt

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Every day we use and buy many goods and services that have been supplied to us. Economists investigate the way in which economic agents organise and are involved in these transactions. One way to study the provision of goods in the market is through the so-called ‘supply chain’.

1.1 The supply process

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

The aim of this course is to think about this process of supply. To do this you will look at the example of a simple cotton t-shirt. What is the process that takes the basic inputs required through to the final product?

Who are the suppliers?

The first step in understanding supply of goods is to think about who the suppliers are. For example, we can easily identify the supplier of a loaf of bread, whether it be a supermarket, corner shop or bakery. If we have a leaky roof, we can find local builders who are willing to sell their services to repair our roof. The supermarket, the corner shop, the bakery and the builder are all examples of sellers, that is, agents who are willing to supply goods and services.

Activity 1

Jot down ten suppliers from which you have recently bought goods and services. Try to make them as varied as possible.

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Discussion

A market-based economy, such as the UK, includes a dizzying number and a vast diversity of agents engaged in activities related to supply. Sometimes agents work alone as individuals, or perhaps within a household, or these days, a person selling goods via eBay. Often sellers are organisations such as businesses. A business may be a local takeaway, or may operate in multiple locations across the globe; both are, in economic terms, referred to as firms. In this course you will focus on firms as the main economic agents involved in supplying the economy.

Firms are a crucial part of the modern economy, supplying the food we eat, the clothes we wear, or the leisure activities we enjoy. But to do this, firms need resources. They use inputs to produce an output which is the good or service they supply.

1.1.1 The firm’s transformation process

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

The production of goods is a complex process which combines various inputs. Often economists make a distinction between material means of production such as cotton and machineries and labour force. This is because the cost of labour depends on social forces. At this stage, we include workers as inputs.

Activity 2

Consider the examples mentioned earlier: the supermarket, the bakery and the builder. Make a list of the inputs that would be needed by each to produce its final output.

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Discussion

You might have come up with something similar to the following:

Bread: wheat, workers, water.

Builder: workers, bricks, cement, glass.

Supermarket: land, workers, foodstuffs.

The three examples in Activity 2 include a range of inputs. One input that is common to all three suppliers is workers, who are an important input for any firm. In economics these workers are referred to as labour. In addition to labour, firms will need inputs such as machinery, computers and some premises to work in. This is referred to capital.

These examples demonstrate that in order to produce an output the firm needs to use inputs. The role of the firm is to combine these inputs and to transform them so that an output can be produced and this output sold to consumers.

Figure 1 The firm’s transformation process.

Long description

1.1.2 Labour intensive and capital intensive techniques of production

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

A good or service in question may be produced using a technique that employs mostly labour, referred to as a labour intensive technique, or a capital intensive technique, where machinery and technology are important.

Activity 3

Write down an example of a good you imagine being produced with a labour intensive technique, and a good you imagine produced with a capital intensive technique.

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Discussion

Fruit picking can be done using a labour intensive technique when the farm owner employs a large amount of seasonal workers to pick up the fruit. These days, fruit picking can also be done using machinery, which would be a capital intensive technique. Another example of capital intensive techniques are often found in car production.

1.1.3 From inputs to goods sold in markets: stages of production

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Activity 2 also shows that firms are not working in isolation; they are only part of the supply story. In the production of a loaf of bread there will be other firms involved. There will be a farmer growing the grain, a miller processing the wheat and transforming it into flour, a baker producing the bread and a retailer (or two) to sell the bread. Therefore, the supply of a final good to the customer will usually involve more than one stage of production and more than one firm.

Figure 2 Diagram showing the stages of producing bread.

Long description

This process of linking the stages of production required to produce a loaf of bread can be thought of as a chain. This relationship between the stages of production is known as the supply chain.

The supply chain may involve many firms working at each stage, all producing and selling their goods on to the next stage of production. However, it may also be true that one firm is involved at more than one stage of the supply chain. A firm that mills wheat into flour may also bake the bread itself, or a dairy farmer may use the milk to produce other products such as butter or cheese. A farmer might choose to retail their own produce directly rather than using a retailer to sell their output to the customer. In these cases, where a firm operates at more than one stage of production, the firm can be said to be vertically integrated. Before you go into detail about what vertical integration is, you’ll first look at the supply chain of a t-shirt.

1.2 The supply chain of a t-shirt

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Whichever retailer we buy our t-shirt from, whether it is an online retailer, a supermarket, market trader or high-street shop, it is likely our t-shirt is part of a supply chain that includes several firms.

Activity 4

Consider the process of making a cotton t-shirt. This starts with growing cotton plants on a farm to make cotton fibres. Once the cotton fibre is harvested it can be turned into a yarn and woven into fabric. This fabric is cut and sewn to produce the t-shirt, which is then distributed to retailers to sell to the final consumers. Use this information to create a supply chain for a cotton t-shirt.

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Discussion

Here is an example of the supply chain of a t-shirt.

Figure 3 The supply chain of a t-shirt.

Long description

A cotton t-shirt is a cheap, lightweight product which is not fragile. This suggests that it is easy and inexpensive to transport. As a product it has a simple design which is easy to convey to workers elsewhere. There is less need to be continuously checking design and quality. The t-shirt is therefore a commodity which may be easily moved from one firm to another or one country to another so that its supply chain can involve many firms and many countries.

1.3 Vertical integration

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Although it is possible to separate out different parts of the supply chain each involving different firms, it is also possible that one firm might have a role at more than one stage of production.

Case study: Marks and Spencer and Zara

Marks and Spencer or Zara are examples of two retailers from whom we might buy a cotton t-shirt so we can say that these are two firms involved in the retail stage of production. However, the relationship each has with the earlier stages of the supply chain differs.

Activity 5

Read the following and reflect on the level of vertical integration in the two retailers Marks and Spencer and Zara. Zara forms part of the Inditex fashion group.

Cotton is very important to M&S. Within our Clothing & Home business it is the largest raw material and on average we use around 50,000 tonnes of lint cotton each year. Our cotton fibre mainly comes from India, China, Pakistan, Turkey, Brazil, USA, Africa and Australia and our supply chain is complex. We don’t own farms or factories and don’t purchase raw materials directly. Most of the raw materials that go into our products are sourced in a global market and cotton is no exception.

(Marks and Spencer PLC, 2018)

Our sustainable business model is characterised by a high degree of integration of all phases of the fashion process: design, supply, product and manufacturing quality control, logistics and retail through our 7,475 stores worldwide and in 47 online markets.

(Inditex Annual Report 2017, p. 27)

Discussion

As a clothing retailer Marks and Spencer are positioned towards the end of the supply chain. They are not involved in the manufacturing process, preferring not to vertically integrate their firm with the earlier stages of production. As M&S report on their website, the firm does not directly own any farms or any of the factories that produce the cotton fabric used in products available in their stores. Instead they use other firms in the supply chain who produce intermediate goods such as raw cotton fibre and fabric, or cut and sew the garments to produce the final good sold by M&S.

In contrast, Zara, also a household name in clothing retail, claim to be involved in many stages of production from design through to retail and hence can be said to be vertically integrated. As well as employing in-house designers they prefer to locate their production close to their headquarters, even owning some of their factories.

The following sections will look at the ‘life’, or supply chain, of a t-shirt in more detail. Who are the producers at each stage of production? Where are these firms located and who benefits?

2 Who are the main actors at each stage of production?

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Figure 3 (repeat) The supply chain of a t-shirt.

Long description

In Section 1 the supply chain was described as a network of firms operating at different stages of production to produce a final product. These firms can be, and indeed in the cotton industry are, located worldwide. This section will use data to address the question of which countries are important each stage of t-shirt production. In the secret life of the t-shirt which countries might it visit?

2.1 Stage 1: cotton production

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

This section will look at which countries are the key producers of cotton, i.e. which countries feature strongly at the beginning of the supply chain. In order to do this two sources of data were used: production figures and export figures.

2.1.1 Production figures

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

We can find data on the main world producers of cotton from Agricultural statistical offices, and from international organisations such as the Food and Agriculture Organisation (FAO).

If you want to find out more about FAO, or about the Agricultural statistical office in your country, you can search online for their webpages. In what follows, you will be using data from the US Department of Agriculture.

Presenting data in a chart helps to summarise numerical information in such a way that it is visually easy to understand. A bar chart is one example of how this may be done.

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Figure 4 Leading cotton producing countries worldwide (adapted from Statista, 2018).

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Maths skills 1: reading a bar chart

Consider the bar chart in Figure 4. This chart uses data published by the US Department of Agriculture on the leading cotton producing countries across the world in 2017/8. The amount of cotton produced by each country is measured in thousands of metric tons. That is, cotton production is measured by the volume of cotton. Each bar shows how much is produced in thousands of metric tons by each country. This figure can be found by reading from the top of each bar to the vertical, or y, axis.

The benefits of the bar chart are readily recognisable as it is easy to see which countries produce the most cotton. The bar chart does not show exactly the thousands of tons of cotton that each country produces but does clearly show which countries produce the most and by approximately how much.

Activity 6

According to the data presented in the bar chart in Figure 4, which three countries produce the most cotton? Approximately how much does each country produce?

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Discussion

The top three leading countries for cotton production in terms of volume are India, China and the USA.

In thousands of metric tons they produce the following volume of cotton: India just over 6000, China close to 6000 and the USA approximately 4500 metric tons.

Again using the data in Figure 4, how does the quantity of cotton produced in India compare to that produced in Brazil?

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Discussion

India produces a little more than 6000 thousand tons of cotton compared to just under 2000 thousand tons produced by Brazil, i.e. India produces more than 3 times as much cotton as Brazil. Considering Brazil is the fourth biggest cotton producer by volume this shows the extent of cotton production in India. The USA is the third largest cotton producer and they produce more than double that of Brazil.

2.1.2 International trade figures

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Another reliable source of data is trade data, which is available from the World Trade Organisation, the World Cotton Map Report, the Trade Map and the MIT Atlas websites. Trade data is often shown in nominal terms, that is, in terms of amount of money spent on the tradeable goods, and not in volume as agricultural sources. This data may be used to see which countries export the most cotton rather than those who produce the most. Often the country currency used in international websites with trade data is the US dollar ($).

Table 1 World cotton exports in 2017 $2Bn


China	15.1
United States	7.6
India	4.7
Pakistan	3.5
Vietnam	2.6
Turkey	1.7
Australia	1.6
Hong Kong	1.6
Brazil	1.5
Italy	1.4

(Source: Workman, 2019a)

In Table 1 you have observed which countries export the majority of cotton in the world in 2017. Now you are going to play with the figures, and apply some of the calculations economists use. The next box will use the proportions.

Activity 7

Table 1 shows the top ten cotton exporting countries in 2017. Use Table 1 to answer the following question: which countries are the main exporters of cotton in nominal terms?

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Discussion

China, United States and India are the top three exporters of cotton when their exports are measured in terms of US dollars made from the sale.

In the next three boxes you will have the opportunity to refresh some of the basics of how to use percentages, rounding numbers and decimals.

Maths skill 2: percentages

How can we calculate the percentage of world cotton exports that come from the United States? To do this the value of cotton exports for the US needs to be expressed as a percentage of total world cotton export which were $53.7bn in 2017 (Workman, 2019a).

From Table 1 the US cotton exports have a value of $7.6bn. The percentage of world exports produced by the USA is calculated as follows, with the answer given to one decimal place.

Note that this percentage was calculated with both US and world exports measured in the same units, billions of dollars. If they were provided in different currencies, we would need to convert them to the same units.

Maths skill 3: rounding

Earlier you looked at decimals. Consider the following numbers:

8.1

8.13

8.13345877

Depending on how we use the numbers or the audience for which they are intended, numerical values may be expressed with more or fewer decimal places. 8.13345877 is a more precise number than 8.13. If we have a number such as 8.13345877 we may want to present something smaller. This is the issue of rounding.

When calculating the percentages in Activity 9 your calculations may result in many numbers after the decimal point. It would be useful to write these numbers more concisely, reporting to fewer decimal places. In this example we will give the percentages to 1 decimal place. The first step is to count 1 place after the decimal point then look at the next digit. If this is 5 or above the preceding digit will be rounded up, if it is below 5 the preceding number will remain the same. For example: 5.41 becomes 5.4, 1.67 is rounded to 1.7 while 10.05 is rounded to 10.0

Activity 8

The following table is an extract from a data source showing the percentages of world exports accounted for by the top 10 cotton exporting countries. Using the figures in Table 1 and a total value of world exports of $53.7bn complete the table by calculating the percentages that are missing.

China	28.2%
United States	14.2%
India	1
Pakistan	2
Vietnam	4.9%
Turkey	3
Australia	3.0%
Hong Kong	3.0%
Brazil	4
Italy	2.7%

(Source: Workman, 2019a)

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Discussion

India’s exports are $4.7bn. As a share of world exports:

Pakistan’s exports are $3.5bn:

Brazil’s cotton exports are 1.5$bn:

Turkey’s exports are 1.7$bn

Table 2

China	28.2%
United States	14.2%
India	8.8%
Pakistan	6.5%
Vietnam	4.9%
Turkey	3.2%
Australia	3.0%
Hong Kong	3.0%
Brazil	2.8%
Italy	2.7%

(Source: Workman, 2019a)

Notes on the table:

Care should be taken when reading figures from a table. Sometimes figures do not always piece together as they should due to rounding. For example if you were to calculate the percentage of world cotton exports accounted for by China:

This answer differs from the 28.2% shown in the table. This discrepancy is likely to have arisen due to rounding. The figures used in the calculation in the original data source may have had more decimal places. For example:

Which we can round up to 28.2%. It is for this reason that sometimes in a table of percentages you will notice that all the figures may not add exactly up to 100.

Maths skill 4: decimals

Every day we deal with whole numbers or ‘integers’ such as 274 without thinking about the number in detail or what it means. How is this number made up? 274 is formed of three components.

200 + 70 + 4.

That is, there are 2 hundreds, 7 tens and 4 single units.

We can go on to consider bigger numbers such as 4274 where the 4 refers to four thousands.

In addition to integers or whole numbers we can also use parts of I unit. To show this we use a decimal point. To the right of the decimal point the numbers are a fraction of a whole number.

The first place to the right of the decimal point shows how many tenths the number has. So for example, 274.6 is the whole number 274 plus 6 tenths or 6/10.

As we move further to the right of the decimal point the numbers represent smaller parts of a whole number, measuring in hundredths, thousandths and so on.

For example:

274.68 would be 274 plus 6 tenths and 8 hundredths.

Activity 9

Write the following as decimals:

2 and 1 tenth

222 and 5/10

1465 and 7 tenths

364 plus 3/10 plus 7/100

98 plus 6/10 plus 2/100 plus 9 thousandths.

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Answer

2.1

222.5

1465.7

364.37

98.629

Break down the following numbers into integers, tens, hundredths and thousands:

3.987

6.405

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Answer

3.987 = 3 + 9 tenths + 8 hundredths and 7 thousandths.

6.405= 6 + 4 tenths + 0 hundredths and 7 thousandths.

Note that even though there are no hundredths in the number we still need to include 0 to note its place.

Maths skill 5: adding decimals

Step 1: line the numbers under each other so that the decimal points are aligned.

Step 2: carry out addition in the normal way by adding up each column.

Step 3: put the decimal point in the answer in the same position as the numbers above.

For example: Italy produces 2.7% of world exports and Turkey 3.2%. Together they export 5.9% of world exports.

Starting from the right: 2 and 7 are 9, 3 and 2 are 5. Answer = 5.9.

Activity 10

Using Table 2 and without using a calculator answer the following questions:

What is the percentage of world cotton exports provided by Pakistan and Turkey?

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Answer

What percentage of world cotton exports from China, US and India account for all together?

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Answer

The percentage of world exports accounted for by each country are China 28.2 %, United States 14.2% and India 8.8%. Therefore together their cotton exports constitute 51.2% of global cotton exports, i.e., the top three cotton exporting countries supply more than 50% of total world cotton exports.

What percentage of total world cotton exports come from Hong Kong, Brazil and Italy?

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Answer

The percentage share of world cotton exports for Hong Kong, Brazil and Italy are 3.0%, 2.8% and 2.7% respectively which adds up to a total of 8.5%.

Note that it is important to include the zero as in 3.0% for Brazil so that all numbers are expressed to the same number of decimal places. This keeps the decimal point in the right place when carrying out addition.

2.1.3 Production and international trade data compared

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

This section has used data to consider which countries are important at the initial stages of the supply chain for a cotton t-shirt. The discussion has centred on two types of data: firstly, data which shows how much cotton each country is exporting and secondly, figures recording how much each country exports. What information have these data sets given us and how do the datasets compare?

Activity 11

Compare the top three countries in the supply of cotton as measured by production figures and those from the trade figures. Note down any similarities or differences that you notice.

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Answer

Whichever measure is used the top three countries are the same. The production and export figures both have the top three countries as India, China and the US. The only difference is in the ranking of these three top countries which changes as we switch from considering production data to trade data. The production figures rank India as producing the most cotton, followed by China and the US. When using the trade figures China exports the most cotton, USA second and India third.

Why might the production and trade figures vary?

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Answer

Countries that produce cotton do not necessarily export all their cotton to foreign countries; instead some of the cotton could be used domestically in later stages of the supply chain. It may be the case that India retain more of the cotton that they produce to supply their own factories rather than factories in other countries.

How does the measurement of data differ in the two datasets?

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Answer

The data in the production figures is in volume, measured in thousands of metric tons, that is, the quantity of cotton produced. The data on exports measures the monetary value of the cotton exports billions of dollars rather than the physical quantity of cotton. This difference in measurement may also account for the variation in the results in terms of the most important countries. The difference in results from the two datasets highlights an important point which is that care should always be taken when using data to consider closely how the data is measured and reported.

In the following sections trade data in the global markets for cotton and for cotton products is the one you will use.

2.2 Stage 2: textile and spinning

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

In this second stage of textile production the cotton bales are used to create a cotton yarn which is then woven into a fabric. As a means of identifying the countries most involved at this stage of the supply chain you will look at which countries import the most cotton. This will be measured by considering which countries import the most cotton using data on the top ten importers as a percentage of total world cotton imports.

Table 3 Top ten importers of cotton as a percentage of total world cotton imports in 2017 (measured in $bn)

China	17.3%
Bangladesh	10.7%
Vietnam	8.4%
Turkey	6.0%
Indonesia	4.3%
Hong Kong	3.0%
Italy	2.5%
South Korea	2.1%
Germany	2.0%
Mexico	2.0%

(Source: Workman, 2019b)

Activity 12

According to Table 3, which are the top cotton textile producers in the world?

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Answer

The data in Table 3 tells us that the three main importers of cotton are China, Bangladesh and Vietnam. Further down the list of importing countries you would find the United States 13th with 1.9% of world imports and the UK 34th with 0.6%.

This stage of the supply chain introduces some different key actors compared with our initial stage of cotton production. Bangladesh imports 10.7% of the world’s cotton imports. In terms of volume of cotton imported Bangladesh is the biggest importer of cotton, importing 1 655 thousand metric tons (Statista 2019). The large amount of cotton imported into Bangladesh reflects its extensive use of cotton as an input combined with its own relatively low cotton production. China is notable as an important cotton producer and importer of cotton. Vietnam is interestingly not on the list of top 10 cotton producing countries but are important exporters of cotton and key players as cotton importers.

Activity 13

Using Table 3 what percentage of the total global cotton imports do the 3 biggest importing countries account for?

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Answer

By value, the top 3 countries, China, Bangladesh and Vietnam, account for 36.4% of world cotton imports.

2.3 Stage 3: making the garment

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

The third stage in the cotton supply chain is to take the woven cotton and transform it into a garment. This stage involves cutting and sewing. To see which countries are involved most at this stage of the supply chain you will use figures on t-shirt exports by country as shown in Table 4.

Table 4 T-shirt exports as a percentage of world exports by country during 2017

Bangladesh	18.3%
China	14.2%
Turkey	5.9%
Germany	5.0%
India	4.4%
Italy	3.8%
Spain	3.2%
Vietnam	3.0%
Netherlands	3.0%
Honduras	2.9%

(Source: Workman, 2019c)

Activity 14

According to Table 4, which countries are the top producers of t-shirts?

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Answer

As is shown in Table 4, Bangladesh is the biggest exporter of t-shirts followed by China and Turkey. Bangladesh and China are clearly much more significant t-shirt exporters than the other countries in the table. What can’t be seen in Table 4 is the large increases in t-shirt exports that had taken place in some countries. Since 2013 Honduras saw the greatest increase in exports of 194% with Italy and Bangladesh seeing increases of 42.1% and 16.9% respectively. France was another country experiencing a large increase in t-shirt exports with exports increasing by 17.6%.

Those countries seeing a decline in the value of their t-shirt exports were notably India which saw a fall of 33.8% and China, albeit a smaller fall of 8.7%.

Maths skill 6: percentage change and percentage points

i) Percentage change. What do we mean when we say that India has seen a fall in t-shirt exports of 33.8%?

If our starting point is $1.813bn worth of exports and this declines to $1.200bn what is the percentage change? To calculate a percentage change, we calculate the change as the difference between the most recent value and the previous value, divide this change by the initial value, and to express the change as a percentage, we multiply the result by 100%. In this case, the change is calculated as:

Which we can round to 33.8% to 1 decimal place.

The share of world exports of t-shirts for India has fallen by 33.8%.

ii) Percentage points. Rather than calculating the percentage change we might just want to work out how the percentage itself has changed. Imagine prior to 2017 the value of t-shirt imports from India was 5.2% of the world total value of exports, it subsequently falls to 4.4% in 2017. We can then say that the proportion of world t-shirt exports accounted for by Indian t-shirt exports has fallen by 0.8 percentage points. This is calculated as (4.4 – 5.2) = -0.8 percentage points.

2.4 Stage 4: packing, trading and retail

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

The final stage in the life of our t-shirt is for it to be packed and commercialised to the countries where it will be sold. The role of the retailer is to provide an outlet for the sale of the t-shirt. This may involve elements such as providing an attractive shopping environment, marketing or customer service. You will again use trade data as a guide to see which countries feature strongly at this final stage of the supply chain.

Maths skill 7: pie charts

A pie chart is a circular chart divided into ‘slices’. Each slice shows the proportion of that category in the overall ‘pie’. This allows the size of each group relative to other groups to be seen clearly and also the proportion of each group as part of the whole pie.

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Figure 5 Pie chart showing garment imports by country as a percentage of world garment imports (source: ITC Trademap, 2018).

Long description

Activity 15

Which country has the largest share of world garment imports?

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Answer

The pie chart in Figure 5 clearly shows that the USA is the largest importer of garments.

Which other countries are also key importers of garments?

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Answer

Germany, Japan, France, UK and Spain are also important importers of garments.

The pie chart in Figure 5 shows that countries such as the USA and UK are large importers of cotton t-shirts. This corresponds to the role of the retail sector in these countries. The UK’s role in the fashion industry is very much weighted towards the retail end of the supply chain. Of the 550, 000 people employed in fashion in the UK, 75% work in retail. In addition to this another 20% are employed in the retail sale of footwear and leather goods and wholesale clothing and footwear. Only 6% of workers in the UK fashion industry are employed in the manufacturing of clothing (Fashion United, 2019). Similarly in the USA an estimated 1.8m are employed in the fashion industry with 79% working for clothing retailers (Fashion United, 2019).

3 Value added in the supply chain

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Using production and trade data as evidence, Section 4 looked at which countries were most involved at each stage of the supply chain for cotton. The data showed that firms involved in the various stages of the supply chain for a cotton t-shirt were located in many different countries.

The following table is a summary of the findings in Section 4 showing which countries were prominent at each stage of production.

Table 5 Summary of the main actors in the supply chain of producing and selling a t-shirt

Cotton exporters	Textile and spinning	Making	Retail
China	China	Bangladesh	USA
USA	Bangladesh	China	Germany
India	Vietnam	Turkey	Japan
Pakistan	Turkey	Germany	France
Vietnam	Indonesia	India	UK
Turkey	Hong Kong	Italy	Spain
Australia	Italy	Spain	Netherlands
Hong Kong	South Korea	Vietnam	Italy
Brazil	Germany	Netherlands	Korea
Italy	Mexico	Honduras	Hong Kong

Activity 16

Identify three countries which feature as important participants in more than one stage of production. What do you notice about the countries who are important in the retail stage, as measured by the top ten importers of garments?

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Answer

There are a number of countries who feature at more than one stage of the supply chain. China features as being an important producer, spinner and maker of cotton garments but does not feature in the top retailing countries. Bangladesh is a key player in the middle part of the supply chain which includes spinning, weaving and making the garment itself. Vietnam and Turkey are important at the first three stages of the supply chain but not at the retail stage. The countries that feature strongly at the retail stage are very different to those countries which dominate as suppliers in the earlier stages of the supply chain with the USA and European countries such as the UK and France now important in this final stage. Interestingly the United States was a key supplier at the beginning and end stages of the supply chain but not in the middle.

Table 5 and the discussion in Activity 16 show that not only are the firms involved over the life of a t-shirt located in many different countries, but also that the countries in which these firms are based varies across the supply chain. This section will use the information summarised in Table 5 to determine which countries receive the greatest benefit from the t-shirt production and sale.

To help us identify where in the supply chain most contribution is made to the final garment in terms of value the concept of value added will be used.

3.1 Value added

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Each stage of the supply chain adds value to the product. For example a spinning factory will buy in cotton and turn it into yarn. This will increase the value of the cotton as the yarn will have a greater value than the raw cotton. Therefore, the value added is the final value of the yarn minus the price the factory managers have paid for the cotton. As the cotton is developed from fibre to woven material and then into the final garment, value is added each step of the way. The aim of this section is to consider how this added value is distributed through the supply chain. In particular, it will investigate whether the value added varies over the supply chain. If so, at what stage is the most value added?

Figure 3 (repeat) The supply chain of a t-shirt.

Long description

Activity 17

Before reading on, where in the supply chain of cotton do you think the most value will be added?

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In a study focusing on the case of Indian producers and UK retailers, Rieple and Singh (2010) estimate the value of a cotton t-shirt at each stage of production. These values are shown in Table 6. In their work Rieple and Singh break down the t-shirt supply chain into more stages than in Figure 3.

Table 6 shows the value of 1 kg of cotton t-shirts as calculated by Rieple and Singh (2010).

Table 6 Value in the cotton industry

Price (US$) Stages and product	Selling price of cotton per kg
Farming (crop)	0.56
Ginning (fibre or lint)	1.29
Spinning (yarn)	2.56
Knitting (grey fabric)	3.17
Dyeing and finishing (dyed fabric)	5.60
Garment stitching	12.68
Finished garment	64

Source: Rieple and Singh (2010).

* 1 kg of t-shirts equates to 4 t-shirts

Maths skill 8: working with decimals 2: subtraction

The subtraction of decimals is carried out using the same process as addition. You should work as if the decimal point isn’t there and then add into the answer in line with the decimal points above.

Without using a calculator work out the following:

1.Subtract 2.42 from 5.76

2.Subtract 2.68 from 6.96

3.Subtract 2.5 from 3.86.

Hint: Use 2.50 rather than 2.5 to ensure that the decimal place is in the correct place in your answer.

Activity 18

In Table 6 the selling price of cotton is $0.56 per kg. Once the fibre has been separated from the seed at the ginning stage this increases to $1.29 per kg. What is the value added at the ginning stage?

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Answer

The value added at this stage would be 1.29 - 0.56 = 0.73

Calculate the missing value added figures to complete the table.

Price (US$) Stages and product	Selling price of cotton per kg	Value added
Farming (crop)	0.56	0.56
Ginning (fibre or lint)	1.29	0.73
Spinning (yarn)	2.56	5
Knitting (grey fabric)	3.17	0.61
Dyeing and finishing (dyed fabric)	5.60	6
Garment stitching	12.68	7.08
Finished garment (1kg is 4 t-shirts)	64	7

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Answer

Price (US$) Stages and product	Selling price of cotton per kg	Value added
Farming (crop)	0.56	0.56
Ginning (fibre or lint)	1.29	0.73
Spinning (yarn)	2.56	1.27
Knitting (grey fabric)	3.17	0.61
Dyeing and finishing (dyed fabric)	5.60	2.43
Garment stitching	12.68	7.08
Finished garment (1kg is 4 t-shirts)	64	51.32

View larger image

Figure 6 Value added in the textile industry (using data from Rieple and Singh, 2010).

Long description

Figure 6 is a pie chart using the value added data from Table 6. A pie chart is a good way of representing this data as we are interested in the share of each part in the total value of a t-shirt.

Activity 19

Use the pie chart in Figure 6 to answer the following questions.

Which stage of the supply chain adds the most value? Which stage adds the least value?

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Answer

The most value is added at the retail stage while the least value is added by cotton farmers.

What do you notice about the size of the value added at the earlier stages of the supply chain compared to that added at the later stages?

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Answer

The processes at the beginning of the supply chain generally add lower value than those later on towards the final product. There is a very large difference between the value added at the cotton farming and retailing stages. The value added by cotton farmers, $0.56 per kg, is only just over 1% of the value added at the retailer stage, $51.32. [(0.56/51.32) x 100=1.09%]

Overall the value added was largely seen to increase as we moved ‘upstream’ through the supply chain.

Combining the information from Section 4 which highlights those countries most involved at each stage of production and the information above on value added at each stage of production, can we determine which countries benefit the most from the t-shirt production? It seems reasonable to expect that the countries which will gain the most are those who produce at the stage in the supply chain which contribute more to the final value of the t-shirt. And those tend to be European countries and the USA as you saw in Table 5.

3.2 Which countries benefit the most from t-shirt production?

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

The complexity of the global supply chain also entails that different countries and economic actors face different benefits from such transactions. You are now going to explore these differences in more detail.

Activity 20

Which countries are associated with low valued added operation? Put these countries in order of low value added (First) to high value added (Sixth).

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Can we account for this spread of countries among low value added and high value added operations? Why are some of the operations of t-shirt supply, notably those which add the least value, carried out in countries such as Bangladesh and Vietnam? The answer needs us to look back at the transformation process firms use in different stages of production

Labour intensive or capital intensive techniques in the production of t-shirts: how and where?

Activity 21

Right back at the beginning of this course a distinction was made between labour intensive production techniques such as fruit picking and capital intensive production such as car production. Do you think the t-shirt industry will be labour or capital intensive?

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Cotton farming may be either labour or capital intensive. While in the US technology is a feature of cotton farming, in countries like India cotton farming more often employs labour intensive techniques. The stages that follow in the supply chain are also likely to be labour intensive. Garment production tends to take place in factories with many workers. Where production is labour intensive the cost of labour is an important factor in the overall cost of production.

3.3 Labour costs

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Figure 7 shows a comparison of the labour costs in the textile industry across different countries.

View larger image

Figure 7 A comparison of textile industry labour costs (Source: Werner International, 2015)

Long description

The data shown in Figure 7 is produced by gathering information from the textile industry through the use of questionnaires. The labour costs are for the primary textile industry: spinning, weaving, dyeing and finishing but cutting and sewing are not included. Figure 7 is another example of a bar chart. It is similar to earlier examples that we have looked at but differs in that the bars run horizontally rather than vertically. In the same way as before you can read the values for each country from the end of the bar, this time to the horizontal, or x axis.

Activity 22

Which countries shown in Figure 7 experience the lowest labour costs in the textile industry? Compare this to the highest labour costs in the table.

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Answer

The lowest labour costs are in Bangladesh. Other countries with low labour costs are India, Indonesia, Vietnam and Pakistan. The cost of labour in Bangladesh is $0.62 per hour. This is only 3.5% of the cost in the US $17.71 and only 1.25% of the Swiss rate of $51.36 per hour.

For production techniques which are labour intensive requiring a large number of workers countries with lower labour costs are attractive for firms and this is why large parts of the life of the t-shirt is spent in countries such as Bangladesh, Vietnam and India where labour costs are low.

Globalisation has allowed greater opportunities for countries like these to reap the benefits of the low wage costs. Many foreign firms and retailers in Europe and the USA outsource their production to these countries. Indeed, if you check the tag of your T-shirt, most likely that will show that is ‘made in Bangladesh’. This has led to economic changes in many low wage countries. Developing countries such as Bangladesh have benefitted greatly from the garment making process since their involvement from the late 1970s.

RMG is the mainstay of the Bangladesh economy which contributes 83.5% of the export earnings from production by 3,856 factories employing 3.6m workers, of which 85% are women.

(USAD, 2018)

The growth in the Bangladesh clothing industry has had beneficial effects on the economy as a whole with the economy growing by almost 6% per annum since the mid-1990s. Masum (2016). While the economy is growing poverty rates are falling:

Bangladesh’s poverty rate reduced to 24.3% at the end of the last year from 31.55% in previous years, according to a survey report.

(Dhaka Tribune, 2017)

However, despite these benefits there has also been some negative impact. The low wages are a source of competitive advantage (definition) but they are also detrimental to the welfare of the workers in these countries. Low wages often correspond to low living standards for the workers and their families. Many workers are obliged to work long hours, without or little rights such as social protection, pensions, or sick leave. The low wages also mean that workers find it difficult to cover basic education expenses such as books etc and so many children leave education. As a result the literacy rate in Bangladesh has traditionally been low, remaining below 50% in 2011 (Countryeconomy.com, 2019). However there is evidence that this has improved significantly over recent years. Unesco statistics suggest that the literacy rate has increased to more than 72% in 2016 (UIS, cited in Dhaka Tribune, 2018). The low levels of education and training make it difficult for the work force to increase the level of skills that they have.

Due to the competition for textile contracts among firms in different developing countries, but also because of the weak power of trade unions workers have low bargaining power to negotiate better working conditions. The governments are also keen to keep the contracts and so have no incentive to change the conditions in the labour market. There are concerns about working conditions in the factories with low profit margins often leading to poor working conditions and safety standards. The Rana Plaza factory collapse in 2013 saw 1134 people die. This lead to the Bangladesh Accord aimed at improving working conditions. The governments in these countries are also implementing minimum wage legislation and legislation aimed to reduce the use of child labour, although poor implementation of these rules by the firms is often an issue. But as working conditions in Bangladesh improve, their labour costs are increasing and many firms are choosing to move their production to countries which have cheaper labour. Ethiopia and other sub-Saharan countries for instance.

Instead, as you may have noticed in Activity 14 the countries involved at the high value added stage of retail are largely developed countries, mostly US and Europe, so they reap the value in this sector. According to the Rieple and Singh (2010) data the value added in the final stage of the life of the t-shirt adds approximately 80% of the overall value of the t-shirt. This is more than that estimated in Norfield (2012) who calculates that out of a €4.16 t-shirt €2.66 is added to the value of a €1.35 t-shirt after it leaves the Bangladesh factory. At this stage there are costs of transport, shop floor rental, retail staff, sales and marketing. In this analysis the profit of one t-shirt is 60c, more than half the daily pay of a seamstress in Bangladesh who after overtime receives €1.18 per day, Uchatius (2010). These countries tend to reap the biggest share of the benefit from the value chain of the T-shirt because they are endowed with higher human capital (technical skills, education), technology, logistics (i.e. transport) and information. And they are often the countries who decide where to invest to supply their t-shirts.

4 Interactive activity

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Explore the secret life of t-shirts as you look deeper into how they are made, how the value is created and who benefits from this value in an interactive activity on OpenLearn: The secret life of t-shirts.

Conclusion

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

In this free course, Exploring economics: the secret life of t-shirts, you have familiarised yourself with the core stages and mechanisms of a supply chain of t-shirts. You have learned how to use statistics presented in different forms to understand the international trends and the actions of actors involved. You might have learned that different countries and different economic agents are affected differently by dynamics of production and exchange. The case of the t-shirt is one case-study, but you might imagine that other goods are regulated by similar complex processes.

This OpenLearn course is an adapted extract from the Open University course DD126 Economics in context. You might also be interested to look at another OpenLearn course adapted from this OU course: Understanding economic inequality.

Glossary

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Firm: An organisation that purchases, combines and transforms inputs (land, labour and capital) into outputs of goods and/or services for sale.
Supply chain: A network of firms involved in different stages of producing and distributing a final good and service.
Value added: The additional value added at each stage of the supply chain.

References

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

Countryeconomy.com (2019) ‘Literacy rate goes up in Bangladesh’, countryeconomy.com. Available at https://countryeconomy.com/ demography/ literacy-rate/ bangladesh (Accessed 23 May 2019).

Dhaka Tribune (2017) ‘Country sees drop in poverty rate’, Dhaka Tribune, 18 October. Available at https://www.dhakatribune.com/ bangladesh/ 2017/ 10/ 18/ country-sees-drop-poverty-rate (Accessed 24 April 2019).

Dhaka Tribune (2018) ‘Unesco: Bangladesh literacy rate reaches all-time high of 72.76% in 2016’, Dhaka Tribune, 22 March.

Fashion United (2019) ‘Global fashion industry statistics - international apparel’. Available at https://fashionunited.com/ global-fashion-industry-statistics/ (Accessed 24 April 2019).

Inditex (2017) ‘Inditex Annual Report, 2017’. Available at https://static.inditex.com/ annual_report_2017/ assets/ pdf/ memoria_en.pdf (Accessed 24 April 2019).

Marks and Spencer (2018) ‘Cotton’. Available at https://corporate.marksandspencer.com/ sustainability/ clothing-and-home/ product-standards/ raw-materials-commodities/ cotton (Accessed 24 April 2019).

Norfield, T. (2012) ‘T-shirt economics: labour in the imperialist world economy’, Global Labour Column, edited by Society, Work and Development Institute. Available at http://column.global-labour-university.org/ 2012/ 08/ t-shirt-economics-labour-in-imperialist.html (Accessed 24 April 2019).

Masum, M. (2016) ‘The Bangladesh textile-clothing industry: a demand-supply review’, 社会システム研究, 33, pp. 109–39.

Rieple, A. and Singh, R. (2010) ‘A value chain analysis of the organic cotton industry: the case of UK retailers and Indian suppliers’, Ecological Economics, 69(11), pp. 2292–2302.

Statista (2018) ‘Cotton production by country worldwide in 2017/18’, Statista. Available at https://www.statista.com/ statistics/ 263055/ cotton-production-worldwide-by-top-countries/ (Accessed 24 April 2019).

ITC Trademap (2018) ‘Trade Map’. Available at https://www.trademap.org (Accessed 22 May 2019).

Uchatius, W. (2010) ‘The world shirt’, Die Zeit, 51, 16 December.

USDA Foreign Agricultural Service (2018) ‘Bangladesh’, Cotton Products Annual, P3.

Werner International (2015) ‘Werner International: hourly labour cost textile industry 2014’, Werner International. Available at http://www.werner-newtwist.com/ en/ newsl-vol-011/ index.htm#Title%204 (Accessed 22 May 2019).

Workman, D. (2019a) ‘Cotton exports by country’, World’s Top Exports. Available at http://www.worldstopexports.com/ cotton-exports-by-country (Accessed 22 May 2019).

Workman, D. (2019b) ‘Cotton imports by country’, World’s Top Exports. Available at http://www.worldstopexports.com/ cotton-imports-by-country/ (Accessed 22 May 2019).

Workman, D. (2019c) ‘T-shirt exports by country’, World’s Top Exports. Available at http://www.worldstopexports.com/ t-shirt-exports-by-country/ (Accessed 22 May 2019).

Acknowledgements

The Open University — Wed, 27 Nov 2019 10:57:23 GMT

This free course was written by Lorena Lombardozzi, Carol Patrick and Cristina Santos. It was first published in November 2019.

Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Licence.

The material acknowledged below is Proprietary and used under licence (not subject to Creative Commons Licence). Grateful acknowledgement is made to the following sources for permission to reproduce material in this free course:

Images

Figure 4: Source: US Department of Agriculture. n.d. Cotton production by country worldwide in 2017/2018 (in 1,000 metric tons). Statista. Accessed June 28, 2019. Available from https://www.statista.com/statistics/263055/cotton-production-worldwide-by-top-countries/.

Figure 5: Source; Rieple, A. and Singh, R. (2010) “A value chain analysis of the organic cotton industry: The case of UK retailers and Indian suppliers.” Ecological Economics, Volume 69, Issue 11, pp. 2292-2302. Trade Map, International Trade Centre, https://www.trademap.org

Figure 6: Source; Rieple, A. and Singh, R. (2010) “A value chain analysis of the organic cotton industry: The case of UK retailers and Indian suppliers.” Ecological Economics, Volume 69, Issue 11, pp. 2292-2302. Trade Map, International Trade Centre, https://www.trademap.org.

Every effort has been made to contact copyright owners. If any have been inadvertently overlooked, the publishers will be pleased to make the necessary arrangements at the first opportunity.

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