Chapter 10 Competition in the Global Marketplace: Should We Protect Ourselves from International Trade? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

10-2 The Controversy Over International Trade The Protectionist Viewpoint  Protect from cheap foreign goods  Balance of Trade and Balance of 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

10-3 The Economics of the Global Marketplace 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

10-4 Alpha and Omega’s Production and Consumption Possibilities Bread (million loaves per year) Milk (million gallons per year) Bread (million loaves per year) A M B N C A1A1 P 25 P1P1 N1N1 C1C1 AlphaOmega Milk (million gallons per year)

10-5 Limits to Terms of Trade AlphaOmega Bread12 Milk21

10-6 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 $50,000 £75,

10-8 Exchange Rates Exchange Rate – the rate at which a person can trade the currency of one country for the currency of another.Exchange Rate Appreciation versus Depreciation

10-9 Foreign Exchange Market Pounds per month Dollars per pound D D S S q r

10-10 U.S. International Transactions Transaction TypeDemand for Foreign Currency Supply of Foreign Currency Balance Current Account 1. Goods exported1, Goods imported-1, Net Services Net Investments Transfers Balance on Current Account Capital Account 6. Change in U.S. assets abroad-1, Change in foreign assets in the U.S. 2, Balance on capital account Totals-3, , Statistical Discrepancy

10-11 International Trade Restrictions Tariffs Import duties Cars per year Dollars $ D D S S S1S1 S1S1 $22,500 $20,000 $17,500 8,00010,000

10-12 International Trade Restrictions Quotas Sugar (tons per year) Dollars $ D D S S $35 $30 $ ,000 S1S1 S1S1

10-13 International Trade Restrictions Voluntary Restraint Agreements Embargoes

10-14 Analysis of the Controversy Protection from cheap foreign goods Payments problems  Balance of payments deficit Protection of key and infant industries Protection of environment and human rights Dollars per pound D D S S $1.75 q1q1 $1.50 q2q2 q Pounds per month

10-15 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

10-16 Dollar Exchange Rates for Selected Foreign Currencies, Spring 2009 source: The Wall Street Journal, February 1, 2009, 87 CurrencyDollarsForeign Currency Unit Argentina peso Australia dollar Britain pound Canada dollar China yuan Denmark kronar European Union euro Japan yen Mexico peso Russia ruble Saudi Arabia riyal South Africa rand South Korea won Switzerland franc Taiwan dollar