FREE TO CHOOSE CHAPTER 2 THE TYRANNY OF CONTROLS

I. INTRODUCTION Free trade is good for society but bad for select segments of that society Choose an example of international trade. Identify the “winners” and “losers” involved in that trade. What’s the difference between free trade and fair trade? What are some of the social and ethical aspects of the free trade arguments that Friedman proposes?

II. INTERNATIONAL TRADE The exchange rate will change to bring the dollar value of goods foreigners buy from the US roughly equal to the dollar value of goods that Americans buy from foreigners Currency is used to buy/sell goods plus purchase financial assets and investment Review capital account and current account. How does the exchange rate bring these into balance?

Balance of Payments Balance of payments: accounts that summarize the transactions of a country’s citizens, businesses, and governments with foreigners Any transaction that creates a demand for foreign currency (and a supply of the domestic currency) in the foreign exchange market is recorded as a debit item; e.g. imports Transactions that create a supply of foreign currency (and demand for the domestic currency) on the foreign exchange market are recorded as a credit item; e.g. exports.

Balance of Payments Current account transactions: all payments (and gifts) related to the purchase or sale of goods and services and income flows during the current period Four categories of current account transactions: Merchandise trade (import and export of goods) Service trade (import and export of services) Income from investments Unilateral transfers (gifts to and from foreigners)

Balance of Payments Capital account transactions: transactions that involve changes in the ownership of real and financial assets The capital account includes both direct investments by foreigners in the United States and by Americans abroad, and, loans to and from foreigners. Under a pure flexible-rate system, official reserve transactions are zero; therefore: a current-account deficit implies a capital-account surplus. a current-account surplus implies a capital-account deficit.

U.S. Balance of Payments, 2010* Current account: 1. U.S. merchandise exports 2. U.S. merchandise imports 3. Balance of merchandise trade (1 + 2) 4. U.S. service exports 5. U.S. service imports 6. Balance on service trade (4 + 5) 7. Balance on goods and services (3 + 6) 8. Income receipts of Americans from abroad 9. Income receipts of foreigners in the U.S. 10. Net income receipts 11. Net unilateral transfers 12. Balance on current account ( ) Debits Balance deficit (-) / surplus (+) Credits Source: * Figures are in Billions of Dollars Continued on next slide …

U.S. Balance of Payments, 2010* Current account: Debits Balance deficit (-) / surplus (+) Credits Source: * Figures are in Billions of Dollars 12. Balance on current account ( ) Capital account: 13. Foreign investment in the U.S. (capital inflow) 14. U.S. investment abroad (capital outflow) 15. Net other currency transactions 17. U.S. official reserve assets 20. Total ( ) -1, Official Reserve Transactions: Foreign official assets in the U.S Balance, Official Reserve Account ( ) 16. Balance on capital account ( )

II. INTERNATIONAL TRADE Friedman’s suggestion: over specified time period, unilaterally move to free trade What would be the consequences of unilaterally moving to free trade?

II. INTERNATIONAL TRADE “Trying to use trade as a political weapon or political measures as a means to increase trade with collectivist countries only makes the inevitable political frictions even worse.” Has there been an example of using trade to improve relations with collectivist countries?

II. INTERNATIONAL TRADE Laws to promote competition (e.g. Sherman Act) can do no better than complete free trade can “A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device.” What are the devices or policies that government uses to insure competition? Does government do this well? Is there a US business or industry that is or could become a monopoly even with complete free trade? That is, can you identify an example of a business unaffected by international trade?

III. CENTRAL ECONOMIC PLANNING Central planning lowers standard of living and individual freedom Detailed example: India and Japan Japan followed voluntary exchange, India followed central planning

IV. CONTROLS AND FREEDOM A. Economic Freedom Essential part is freedom to choose how to use our income Currently, over 40% of our income is spent for us Another essential part is freedom to use the resources we possess in accordance with our own values Another essential part is freedom to own property Discuss Economic Freedom of the World data. Identify examples of intrusions on your freedom.

IV. CONTROLS AND FREEDOM B. Human Freedom Restrictions on economic freedom affect other freedoms “…freedom is one whole, that anything that reduces freedom in one part of our lives is likely to affect freedom in the other parts.”