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

3. 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

4. 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

5. 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)

6. 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)

7. Limits to Terms of Trade
Alpha
Omega
Bread 1 2
Milk

8. 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

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

10. 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

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

12. 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
3. Net Services
51.04
4. Net Investments
33.28
5. Transfers
67.44
Balance on Current Account
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
51.47
Statistical Discrepancy

13. 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

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

15. International Trade Restrictions
Voluntary Restraint Agreements
Embargoes

16. 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

17. 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