1. The U.S. in the Global Economy
Chapter 5
Unit Test after this chapter
2/18/2019

2. International Linkages
Goods & services flow
U.S. exports g&s to other nations and imports g&s from them.
Capital & labor (resource) flow
U.S. firms establish production facilities in foreign countries & foreign firms do the same here. Labor also moves between nations
Information & technology flows
U.S. transmits information to other nations about U.S. products, prices, interest rates, & investment opportunities
Financial flows
Money is transferred between the U.S. & other countries for several purposes (i.e. paying for imports, paying interest on debt, & providing foreign aid)
2/18/2019

3. The U.S. & World Trade Volume & pattern
Volume of international trade has increased greatly for many countries.
Dependence
Trade patterns
Trade Deficit - Imports exceed exports
Trade Surplus - Export exceed imports
See Table 5.1 on page 86.
1a. There are some products that the U.S. is dependent on receiving from foreign countries.
1b. In 2005, the U.S. had a $782 billion trade deficit
3. Export exceed imports…In 2005, the U.S. exports of services exceeded U.S. imports of services by $58 billion
From a volume perspective, Canada is our most important trading partner…we export more to Canada than anyone else (24%) and our imports from Canada are only exceeded by Western Europe.
Our trade deficits are largest with China & Japan. But we also have a large deficit with members of OPEC due to our dependence on foreign oil
2/18/2019

4. Rapid Trade Growth Transportation technology Communications technology
Fast transport of items to other countries
Communications technology
Internet, phone, & fax has advanced world trade
General decline in tariffs
U.S. tariffs as a % of imports is down to 5% down from 37% in 1940
First…several factors have propelled the rapid growth of international trade since WWII…
Improvement in technology have shrunk the globe & have fostered world trade. Airplanes now transport low-weight, half-value items quickly from one nation to another.
Dramatic improvements in communications technology have also advanced world trade. Computers, the Internet, telephones, & fax machines now directly link traders around the world
Since 1940, tariffs have fallen…U.S. tariffs as a percentage of imports is down to 5% down from 37% in Many nations still maintain barriers to free trade, but, on average, tariffs have fallen significantly, thus increasing international trade
2/18/2019

5. Participants in International Trade
Germany, United States, China, & Japan
Top participants in world trade by total volume
Many multinational corporations provide headquarters in these major countries
New Participants
Since 1978, China has grown approx. 9% per year
Other Asian economies are growing as well….Singapore, South Korea, & Taiwan
1. The top participants in world trade by total volume are Germany, U.S., China, & Japan. Many multinational corporations provide headquarters in these major countries
2. Since 1978, China has grown on an average of 9% per year. Other Asian economies are also active traders…in particular Singapore, South Korea, & Taiwan
2/18/2019

6. Specialization & Comparative Advantage
Absolute advantage
Producing more than another country
Comparative advantage
Lower opportunity cost than that of another country
Terms of trade
“exchange rate” at which units of one product can be exchanged for units of another product
Gains from specialization & trade
Improves global resource allocation and results in a larger global output
Use Tables 5.4 & 5.5 for #1&2…The U.S. has an absolute advantage in both avocados & soybeans. U.S. has a comparative adv in soybeans over Mexico. Mexico has the ca in producing avocados. (See column #1 on page 91).
3) Both countries can agree on an “exchange rate” of soybeans/avocados that is mutually beneficial so they focus on producing the product that has a comparative advantage for them.
4. See table 5.7 page 92
2/18/2019

7. Mexico’s Production PossibilitiesA B C D E
Avocados 20 24 40 60
Soybeans 15 10 9 5
2/18/2019

8. U.S. Production PossibilitiesA B C D E
Avocados 30 33 60 90
Soybeans 20 19 10
2/18/2019

9. Foreign Exchange Market
Market where various national currencies are exchanged for one another
Exchange rates
Rate at which the currency of one nation can be exchanged for the currency of another nation
Changing Rates:
Depreciation – Dollar loses value against another currency
Appreciation – Dollar gains value against another currency
3) I.E. when a business chooses to export goods to another country (i.e. Japan), they want payment in their country’s currency so Japan has to buy dollars in the foreign exchange market and pay with Yen
2/18/2019

10. Government & Trade Trade impediments & subsidies Protective tariffs
Taxes placed on imported goods
Protects domestic producers from foreign competition
Import quotas
Limit on the amount that can be imported
Nontariff barriers
I.E. licensing requirements, unreasonable standards on quality, or red tape
Export subsidies
Government payments to domestic producers who export
First…four ways that governments commonly interfere with free trade
1a) makes foreign goods more expensive. This increases demand for domestic goods who in turn raise prices so the customer loses
1c) this slows down imports and helps domestic producers
1d) this reduces production costs which allows firms to charge lower prices to consumers
2/18/2019

11. Why Government Trade Interventions?
Misunderstanding the gains from trade
Not just higher employment…more output=lower prices
Political considerations
Businesses that don’t have a comparative advantage use political activity to achieve their goals
Costs to society
Benefits business but hurts consumers
2/18/2019

12. Multilateral Trade Agreements & Free-Trade Zones
World Trade Organization (WTO)
Oversees trade agreements & rules on disputes between countries
European Union (EU)
Trade bloc
Euro
North American Free Trade Agreement (NAFTA)
Global Competition
2/18/2019