Chapter 10 - International Trade and Finance

Some of the specific arguments advanced for trade restrictions are:

(1) to protect domestic labor against cheap foreign labor; (2) to reduce domestic unemployment; (3) to protect young or "infant" industries; and (4) to protect industries important for national defense.

Figure 10-1 shows

a hypothetical production-possibilities frontier for cloth (C) and food (F) for the U.S. and U.K. under constant costs.

There are many commodities that the U.S. could produce domestically but only at

a relatively higher cost than the costs of some foreign countries. Thus, trade is very important to the welfare of the U.S.

Even though the U.S relies only to a relatively small extent on foreign trade,

a significant part of its standard of living on it.

The domestic cost ratio is 1C = 2F, or 1/2C = 1F,

and is constant in the U.S. and 2C in the U.K., the U.S. has comparative advantage in F.

Foreign currencies have prices just like

any other good or service.

The U.S. is a nation of continental size with immense natural and human resources,

as such it can produce with relative efficiency most of the products it needs. In general the larger the nation, the smaller its economic interdependence with the rest of the world.

This deficits could be corrected

by reducing the level of national income, by allowing domestic prices.

The nation gains foreign currencies by

exporting goods and services.

Bretton Woods System

fixed-exchange-rate system

The resulting lack of adjustment

forced the abandonment of the fixed exchange rate system and the establishment of a flexible exchange rate system.

These restrictions, however,

generally impose a burden on society as a whole because they reduce the availability of goods and increase their prices.

Trade restrictions are often supported by

groups that will specifically benefit from the restrictions, oftentimes at the expense of other groups.

A nation has a surplus in its balance of payments

if its total credits exceed its total debits in its current and capital accounts.

The nation spends foreign currencies to

import goods and services and to invest and lend abroad.

Trade restrictions are advocated by labor and firms

in some industries as a protection against foreign competition.

An import tariff

is a tax on the imported commodity.

An import quota

is quantitative restriction on the amount of a good that may be imported during a year.

Trade

is very important to the welfare of the U.S

For each unit of clot the U.S. gives up,

it releases resources to produce two additional units of food.

The nation uses foreign currencies to

make grants by importing goods and services.

Large countries are generally

more open than small countries.

Import restrictions are not

required to protect the nation's labor against foreign competition.

Small nations can only

specialize in the production and export of a small range and must import all of the others.

With trade, the U.S. should specialize in the production of F and produce at B (80F and 0C) and

the U.K. should specialize in C and produce at B' (60C and 0F).

When each nation specializes in the production of the commodity of its comparative advantage,

the combined output of both commodities increases.

With increasing opportunity costs,

the production-possibilities frontiers are concave or bulge outward, and there would be incomplete specialization in production.

The larger the nation,

the smaller its economic interdependence with the rest of the world

A rough measure of the degree of interdependence of a nation with the rest of the world is given by

the value of its exports as a percentage of its GDP.