Chapter 10Competition 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)

100100

100

200

200150

100

50

A M

B N

C

A1

50

P50

25

P1

N1

C1

Alpha Omega

Milk (million gallons per year)

10-5

Limits to Terms of Trade

Alpha Omega

Bread 1 2

Milk 2 1

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 £75,000

10-7

10-8

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

10-9

Foreign Exchange Market

Pounds per month

Dollars per pound

D

D

S

S

q

r

10-10

U.S. International TransactionsTransaction Type Demand for Foreign

CurrencySupply of

Foreign CurrencyBalance

Current Account

1. Goods exported 1,148.48

2. Goods imported -1,967.85

3. Net Services 119.12

4. Net Investments 233.86

5. Transfers -112.71

Balance on Current Account -579.10

Capital Account

6. Change in U.S. assets abroad -1,289.85

7. Change in foreign assets in the U.S.

2,057.70

Balance on capital account 767.85

Totals -3,370.41 3,559.16 -188.75

Statistical Discrepancy -188.75

10-11

International Trade Restrictions

• Tariffs• Import duties

Cars per year

Dollars $

D

D

S

SS1

S1

$22,500

$20,000

$17,500

8,000 10,000

10-12

International Trade Restrictions

• Quotas

Sugar (tons per year)

Dollars $

D

D

S

S

$35

$30

$25

750 1,000

S1

S1

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

q1

$1.50

q2q 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

Currency Dollars Foreign Currency Unit

Argentina 0.2869 1 peso

Australia 0.6354 1 dollar

Britain 1.449 1 pound

Canada 0.8155 1 dollar

China 0.1463 1 yuan

Denmark 0.1718 1 kronar

European Union 1.2985 1 euro

Japan 0.0113 1 yen

Mexico 0.0713 1 peso

Russia 0.0304 1 ruble

Saudi Arabia 0.2666 1 riyal

South Africa 0.0979 1 rand

South Korea 0.007 1 won

Switzerland 0.8651 1 franc

Taiwan 0.0297 1 dollar