5 The United States and the Global Economy

Chapter Objectives Key Facts About U.S. International Trade Comparative Advantage, Specialization, and International Trade How Exchange Rates are Determined in Currency Markets How and Why Government Sometimes Interferes with Free International Trade Role Played by Free-Trade Zones and the WTO in Promoting International Trade

International Linkages United States Economy Trade Flows Other National Economies Goods & Services Resource Flows Capital & Labor Information & Technology Flows Information & Technology Financial Flows Money

United States and World Trade Volume and Pattern Volume Dependence Trade Patterns Financial Linkages

United States and World Trade Volume and Pattern Exports of Goods & Services – 2005 Selected Countries as a Percent of GDP Belgium Netherlands South Korea Germany Canada New Zealand Italy France United Kingdom Spain Japan United States 11% 87% 71% 44% 40% 38% 28% 27% 26% 25% 13% Source: IMF, International Financial Statistics, 2005

United States and World Trade Volume and Pattern U.S. Trade as a Percentage of GDP Inflation Adjusted to Dollar Value in 2000 Exports Percentage of GDP Imports Source: Bureau of Economic Analysis

United States and World Trade Volume and Pattern Principal U.S. Exports & Imports – 2005 in Billions of Dollars Exports Imports Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Telecommunications $68.6 53.5 52.9 47.2 45.5 33.2 30.4 29.1 27.6 25.6 Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Semiconductors Telecommunications $251.6 123.7 97.1 93.3 83.8 79.1 47.3 43.1 37.1 25.8 Source: Department of Commerce Data

United States and World Trade Volume and Pattern U.S. Exports & Imports – 2005 in Goods by Area Value Billions Of Dollars Value Billions Of Dollars Exports to Imports from Industrial Countries Developing Countries Total $483 Industrial Countries Developing Countries Total $770 410 904 $893 $1,674 Imports Exceed Exports by $781 Billion That’s over 15,620,000 jobs at $50,000 each! Was $484 Billion in 2002 & $346 Billion in 1999 Source: Survey of Current Business, April 2006

United States and World Trade Rapid Trade Growth Transportation Technology Communications Technology General Decline in Tariffs Multinational Corporations

United States and World Trade Participants in International Trade GLOBAL PERSPECTIVE Comparative Exports - 2004 0 100 200 300 400 500 600 700 800 900 Germany United States China Japan France Netherlands Italy United Kingdom Canada Belgium South Korea Mexico Russia Taiwan Singapore $912 $819 $593 $566 $449 $358 $349 $347 Billions of Dollars $317 $307 $254 $189 $184 $183 $180 Source: World Trade Organization

Specialization and Comparative Advantage Absolute Advantage Comparative Advantage Comparative Costs Specialization and Trade Terms of Trade O 5.1 W 5.1

The Foreign Exchange Market GLOBAL PERSPECTIVE Exchange Rates Foreign Currency Per U.S. Dollar $1 Will Buy March 2006 44.3 Indian rupees .57 British pounds 1.16 Canadian dollars 10.7 Mexican pesos 1.31 Swiss francs .83 European euros 117 Japanese yen 975 South Korean won 7.8 Swedish kronors

The Foreign Exchange Market Exchange Rates G 5.1 Dollar – Yen Market P Sy Exchange Rate: $.01=¥1 .01 Dollar price of 1 yen Dy Qe Q Quantity of yen

The Foreign Exchange Market Exchange Rates Changing Rates: Depreciation and Appreciation International Value of Dollar Falls (Dollar Depreciates) Dollar Price of Foreign Currency Rises Equals Equals Equals Foreign Currency Price Of Dollar Falls International Value of Foreign Currency Rises (Foreign Currency Appreciates) Equals

Trade Impediments and Subsidies Protective Tariffs Import Quotas Government and Trade Trade Impediments and Subsidies Protective Tariffs Import Quotas Nontariff Barriers Export Subsidies

Government and Trade Why Government Trade Interventions? Misunderstanding the Gains from Trade Political Considerations Costs to Society

Government and Trade Trade War Smoot-Hawley Tariff Act of 1930 Multilateral Trade Agreements And Free-Trade Zones Trade War Smoot-Hawley Tariff Act of 1930 Reciprocal Trade Agreements Act of 1934 Negotiating Authority Generalized Reductions Most-Favored-Nation Clauses

Government and Trade General Agreement on Tariffs and Trade (GATT) Multilateral Trade Agreements And Free-Trade Zones General Agreement on Tariffs and Trade (GATT) Equal Trade Treatment Reduction in Tariffs Elimination of Import Quotas Uruguay Round

Government and Trade World Trade Organization (WTO) Multilateral Trade Agreements And Free-Trade Zones World Trade Organization (WTO) Doha Round (Doha, Qatar) The European Union (EU) EU Trade Bloc The Euro

Government and Trade North American Free Trade Agreement (NAFTA) Multilateral Trade Agreements And Free-Trade Zones North American Free Trade Agreement (NAFTA) Canada, Mexico, and U.S. Fears and Accomplishments Job Creation Higher Standard of Living

Government and Trade Global Competition GLOBAL PERSPECTIVE Global Competition Top 12 Globalized Nations - 2005 1-Singapore 2-Ireland 3-Switzerland 4-United States 5-Netherlands 6-Canada 7-Denmark 8-Sweden 9-Austria 10-Finland 11-New Zealand 12-United Kingdom Source: A. T. Kearney, Foreign Policy

Petition of the Candlemakers Last Word Problems with Protectionism Satire on Candlemakers 1845 Sought to Remove Competition from Trade on Light Sources The Sun is also a Light Source Close Out All Natural Light to Increase Demand for Candles and Raw Materials to Make Them Taken to Extreme, There is No Way to Remove Competition

Key Terms multinational corporations comparative advantage terms of trade foreign exchange market exchange rates depreciation appreciation protective tariffs import quotas nontariff barriers export subsidies Smoot-Hawley Tariff Act Reciprocal Trade Agreements Act most-favored-nation clauses General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) Doha Round European Union (EU) trade bloc euro North American Free Trade Agreement (NAFTA)

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