The u.s. and the global economy

Global economy continues to expand International trade Transfer of money, resources and technology Human capital has developed as a result of the growth of a global economy World has become more interconnected due to growth of communication and transportation

Free market economics and free trade Most countries place restrictions on trade. What are the benefits of free trade? Global trade lowers the price of goods – consumer benefit.

Why do countries place restrictions on international trade? Support for infant industries Increase domestic employment Prevent dumping Foster self-sufficiency for military and other reasons Avoid overspecialization Diversify for stability

protectionist Believe that free trade forces domestic companies to cut costs or go out of business.

protectionism The policy of erecting trade barriers to shield domestic markets from foreign competition.

What are some of the ways that countries restrict trade? Ban or trade embargo Tariff – a tax on imported goods designed to protect domestic producers from foreign competition Quota – limit on quantity of a good allowed to be imported to or exported from a country. Voluntary export restriction (VER) Excessive standard requirement – requirement that a country observe health, safety or other requirements or a good wont be imported. Subsidies provided to domestic industries

Disadvantages of protectionism Higher cost for domestic consumers Support for otherwise inefficient domestic industries Possible retaliation by other countries Loss of social welfare

How do international trade payments occur? Electronic transfer of money Correspondent banks and national clearinghouses pay a major role in facilitating international transactions.

Foreign exchange The trading of one national currency for another. Countries can have either fixed or floating exchange rates. If a country has a fixed exchange rate, it determines what the rate of exchange will be for its currency. If a country has a floating exchange rate, it allows private traders in the currency exchange markets to determine the rate.

Recent history of the exchange rate system Gold standard: 1879 -1934 (fixed exchange rate system) Bretton Woods: 1944-1971 (fixed exchange rate system indirectly tied to gold) Managed float: 1971 to present (dependence on foreign exchange markets with occasional government intervention)

Look up the exchange rate Look up the value of the U.S. dollar to the following countries: Canada Mexico China European Union

terms in foreign exchange transactions Purchasing power parity (PPP) Appreciation = an increase in the value of a currency relative to another currency Depreciation = a fall in the value of one currency relative to another Revaluation = an increase in the value of a currency relative to other currencies in a fixed exchange rate system Devaluation = a decrease in the value of a currency relative to other currencies in a fixed exchange rate system

Why would china manipulate their currency?

Why does the relationship between one currency to another matter? When the dollar is “weak,” U.S. exports become cheaper and thus easier to sell abroad At the same time, U.S. consumers aren’t able to buy as many goods as when the dollar is “strong”

Balance of trade balance of trade = the difference between a country’s exports and the value of its imports When a country exports more than it imports, it has a trade surplus. When imports exceed exports, it has a trade deficit.

What does the U.S. currently have – a trade surplus or a trade deficit? The U.S. currently has a trade deficit It is very large and has been so for many years Causes of trade deficit? 1. High aggregate demand in U.S. (consumption patterns) 2. Cheaper foreign goods 3. Exorbitant price of oil (at least, up until fairly recently) 4. Low U.S. saving rate 5. Currency manipulation Implications of the trade deficit? 1. Increased domestic consumption 2. Increased indebtedness

U.S. Balance of Trade from 1960 to 2010

Foreign direct investment (Fdi) Foreign Direct Investment (FDI) = an investment made by a business or company based in one country, in a company of business found in another country Many countries need foreign capital to fund economic activity but FDI is sometimes controversial because it gives foreigners economic power in the home country

The world trade organization (wto) The WTO has over 150 member nations It aims to reduce trade barriers between nations It also tries to curb controversial trade practices such as dumping, by which one country sells a good in one country for less than it costs to produce it in the exporting country.

Protests against the WTO at Seattle during its annual meeting (1999) Main protest groups: labor unions, environmentalists, socialists, anarchists, opponents of big government Key issues for the protestors: labor protection and environmental standards https://www.youtube.com/watch?v=pFam vR9CpYw

Why do people protest the WTO? Write a paragraph explaining the issues people have/had with the WTO.