Chapter 10 Protectionism Versus Free Trade: Can We Restrict Ourselves Into Prosperity?

The Controversy Over International Trade The Protectionist Viewpoint Protect from cheap foreign goods Payments problems Protection of Key and Infant Industries Protection of environment and human rights The Free Trade Viewpoint Free trade promotes international specialization and division of labor Since trade is voluntary, it would not take place unless both parties benefited

How Trade Takes Place Define imports Define exports Buying a good produced abroad We must export in order to import/We must import in order to export

Alpha’s Production and Consumption Possibilities Bread (million loaves per year) A1 200 A 100 C C1 50 100 150 200 Milk (million gallons per year)

Omega’s Production and Consumption Possibilities Bread (million loaves per year) A1 100 P1 P 50 N 25 50 100 Milk (million gallons per year)

Limits to Terms of Trade Alpha Omega Bread 1 2 Milk

The Principle of Comparative Advantage Comparative Advantage – good the country produces at the lowest opportunity cost Comparative Disadvantage Sources of Comparative Advantage Resource endowments State of technology

Buying Goods and Services Produced Abroad £75,000 $50,000

Exchange Rates Exchange Rate – the rate at which a person can trade the currency of one country for the currency of another. Appreciation versus Depreciation

Foreign Exchange Market Dollars per pound S D r D S Pounds per month q

U.S. International Transactions Transaction Type Demand for Foreign Currency Supply of Foreign Currency Balance Current Account 1. Goods exported 713.12 2. Goods imported 1260.67 3. Net Services 51.04 4. Net Investments 33.28 5. Transfers 67.44 Balance on Current Account -597.23 Capital Account 6. Change in U.S. assets abroad 283.41 7. Change in foreign assets in the U.S. 829.17 Balance on capital account 545.76 Totals 1644.80 1593.33 51.47 Statistical Discrepancy

International Trade Restrictions Dollars ($) D S1 Tariffs Import duties S $22,500 $20,000 $17,500 S1 D S 8,000 10,000 Cars per year

International Trade Restrictions Dollars ($) D Quotas S1 S $35 $30 $25 D S S1 750 1,000 Sugar (tons per year)

International Trade Restrictions Voluntary Restraint Agreements Embargoes

Analysis of the Controversy Dollars per pound Protection from cheap foreign goods Payments problems Balance of payments deficit Protection of key and infant industries Protection of environment and human rights D S $1.75 $1.50 S D q1 q2 q Pounds per month

Today’s International Trade Environment World Trade Organization (WTO) Most-favored-nation Dispute Settlement Body Dumping Common Markets European Union custom union the euro North American Free Trade Agreement (NAFTA) Free trade area The Spread of Common Markets