Chapter 18 focuses on the topic of international trade and the role it plays in our lives. Barriers to trade and the international payments system are also explained.

Section 1 examines the basis for trade that is rooted in the concept of comparative advantage and the uneven distribution of resources among nations. If people and countries specialize in the things they do relatively more efficiently, and if they engage in trade to secure the things they do not produce or do not own, then total world output will increase and everyone will be better off.

Section 2 deals with the trade barriers such as tariffs and quotas that are used to restrict the free flow of products between nations. Trade barriers are supported for a number of reasons, but the costs of such actions almost always outweigh the benefits. Trade barriers made the Great Depression in the early 1930s even worse, but the world has moved toward freer trade since 1934. Nations have made considerable progress under the GATT, which evolved into the World Trade Organization. The North American Free Trade Agreement (NAFTA) will eventually remove most of the trade barriers in North America.

Section 3 examines foreign exchange, the international currencies used by countries to conduct international trade. The current system of flexible exchange rates means that the value of a country's currency fluctuates with the supply and demand for it. The strength of a nation's currency often determines the amount of goods and services that are exchanged in trade. For example, in the mid-1980s the strong dollar led to large trade deficits. When the value of the dollar declined, the trade deficit improved. Because deficits tend to be self-correcting, most nations no longer design economic policies just to improve the balance of payments.
Chapter 19: Comparative Economic Systems
Chapter 19 deals with comparative economic systems and the transition to capitalism, which is one of the remarkable phenomena of this century.

Section 1 examines the spectrum of economic systems, which range from communism to socialism to capitalism. The features that distinguish the three are the ownership of resources, the allocation of resources, and the role of government. The systems range from those with almost total government control to those with almost no government regulation.

Section 2 explores the rise and fall of communism, which is a both a political and an economic framework. In the early years, the Soviet Union made great strides with forced labor and collective ownership of resources under the direction of the Gosplan, the central planning agency. As the economy matured, however, problems with central planning emerged. President Gorbachev tried a policy of perestroika, or restructuring, by introducing some reforms, but the economy collapsed in the early 1990s.

Section 3 discusses the challenges the former communist systems face as they try to move toward capitalism. These challenges include the privatization of capital resources, the shift of political power from the Communist Party to elected officials, and learning to live with the new incentives of a capitalist economy. Other countries throughout the world have also been moving toward capitalism, but the transition is seldom smooth and not all countries are expected to make it.

Section 4 examines the many shades of capitalism that exist, in countries such as Japan, the "Asian Tigers"—Singapore, Taiwan, Hong Kong, and South Korea—and even Sweden. Rapid economic growth in Asia was interrupted by a financial crisis that began in 1997, but most economies were recovering by late 1999. The recession showed that many nations, especially Japan, needed further restructuring of their economies, including the introduction of more transparency—in order for growth to resume. Likewise, Korea needs to weaken the ties between the chaebol and the ruling political parties. Capitalism has many faces and, since World War II, many nations have moved toward capitalism with varying degrees of success.

Click here for Problem Solving activity: Problem Six