1. Chapter 6: The United States in the Global Economy
AP Macroeconomics
Chapter 6: The United States in the Global Economy

2. International Linkages

3. Trade Flows Goods and services flow Capital and labor flow
Information and tech flow

4. Dependence
Products we must import
Bananas, coffee, cocoa, tea…

5. GDP Gross Domestic Product
Market value of all goods and services produced in one country in a year

6. Trade Patterns US currently in a trade deficit
Current trade surplus in services

7. Trade Patterns Canada;US largest partner Largest deficit with China
US major dependence on foreign oil

8. Specialization and Comparative Advantage

9. Specialization US produces more exports and fewer imports
Example: More resources for aircraft, and wheat. Less for automobiles and clothes
“Do shifts in resources like these make economic sense? Do they enhance US total output and thus the US standard of living?”

10. YES! Specialization and exchange result in greater output
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” -Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

11. Comparative Advantage (CA)
A nation has a CA when it can produce a product at a lower domestic opportunity cost than a potential trading partner

12. Absolute Advantage
Ability to produce more of a good or service than competitors, using the same amount of resources

13. Comparative Cost
A nation must give up an amount of one product to secure another

14. Comparative Cost Example
Question: What are the comparative costs of avocados and soybeans in Mexico?
Answer: By comparing production alternatives A and B, we see that 5 tons of soybeans (=15-10) must be sacrificed to produce 20 tons of avocados (=20-0).
1S=4A

15. Comparative Cost Example
Meanwhile the US production alternatives R and S reveals it costs 10 tons of soybeans (=30-20) to obtain 30 tons of avocados (=30-0)
1S=3A
Which nation has a comparative advantage in soybeans?

16. Comparative Cost Example
The US has advantage over Mexico in soybeans
US forgoes 3 tons of avocados while Mex forgoes 4 tons
Who has the Comparative advantage in avocados?

17. Comparative Cost Example
1 ton of avocados costs 1/3 ton of soybeans in US, it is only ¼ ton of soybeans in Mexico
Soybeans
Avocados
Mexico: Must give up 4 tons of avocados to get 1 ton of soybeans.
United States: Must give up 3 tons of avocados to get 1 ton of soybeans
Comparative Advantage: United States
Mexico: Must give up ¼ ton of soybeans to get 1 ton of avocados.
United States: Must give up 1/3 ton of soybeans to get 1 ton of avocados.
Comparative Advantage: Mexico

18. Input Method
Deals with amount of resources needed to produce one unit of output
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 minutes
5 minutes
Nancy
30 minutes
15 minutes
Who has an absolute advantage in production of radios? Wheat?
Ted

19. Input Method ORIGINAL Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 minutes
5 minutes
Nancy
30 minutes
15 minutes
EQUATION
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 mins .
1 radio = mins = 4 bushels
5 mins .
1 wheat = 20 mins = ¼ radio
Nancy
30 mins .
1 radio = 15 mins = 2 bushels
15 mins .
1 wheat = 30 mins = ½ radio

20. Input Method Who has the comparative advantage in radios?
Who has the comparative advantage in wheat?
What should be the next stop for Ted and Nancy?
Nancy
Ted
EQUATION
Time required to produce one radio
Time required to produce one bushel of wheat
Ted
20 mins .
1 radio = mins = 4 bushels
5 mins .
1 wheat = 20 mins = ¼ radio
Nancy
30 mins .
1 radio = 15 mins = 2 bushels
15 mins .
1 wheat = 30 mins = ½ radio

21. Output Method
Amount of output that can be produced with a given amount of input (time)
Radios produced per hour
Wheat produced per hour
Ted
60 mins .
20 mins = 3 radios
60 minutes
5 minutes = 12 bushels
Nancy
60 minutes . = 2 radios
30 minutes
60 minutes . = 4 bushels
15 minutes
Who has the absolute advantage?
What about the OC to produce each item?
Ted

22. Opportunity Cost of Production
ORIGINAL
Radios produced per hour
Wheat produced per hour
Ted
60 mins .
20 mins = 3 radios
60 minutes
5 minutes = 12 bushels
Nancy
60 minutes . = 2 radios
30 minutes
60 minutes . = 4 bushels
15 minutes
OC of Production
OC of producing one radio
OC of producing one bushel of wheat
Ted
3 radios = 1 hour = 12 bushels
1 radio = 12/3 = 4 bushels
12 bushels = 1 hour = 3 radios
1 bushel= 3/12 = ¼ radio
Nancy
2 radios = 1 hour = 4 bushels
1 radio = 4/2 = 2 bushels
4 bushels = 1 hour = 2 radios
1 bushel = 2/4 = ½ radio

23. Opportunity Cost of Production
Who has the CA in radios?
Who has the CA in wheat?
Nancy
Ted
OC of Production
OC of producing one radio
OC of producing one bushel of wheat
Ted
3 radios = 1 hour = 12 bushels
1 radio = 12/3 = 4 bushels
12 bushels = 1 hour = 3 radios
1 bushel= 3/12 = ¼ radio
Nancy
2 radios = 1 hour = 4 bushels
1 radio = 4/2 = 2 bushels
4 bushels = 1 hour = 2 radios
1 bushel = 2/4 = ½ radio

24. Please make a Production Possibilities Frontier from the data listed
GRAPH TIME!
Please make a Production Possibilities Frontier from the data listed
ORIGINAL
Radios produced per hour
Wheat produced per hour
Ted
60 mins .
20 mins = 3 radios
60 minutes
5 minutes = 12 bushels
Nancy
60 minutes . = 2 radios
30 minutes
60 minutes . = 4 bushels
15 minutes

25. Terms of Trade Allows nations to grow beyond their own means
Improves global resource allocation

26. The Foreign Exchange Market
The Multiple Currency Issue

27. Foreign Exchange Market
Various currencies are exchanged for one another
Exchange rate: rate one currency is exchanged for another

28. Linkages to Domestic and Foreign Prices
Multiply the product price by the exchange rate
Example: Dollar to yen rate is $.01 per yen, therefore ¥20,000 costs $200

29. Changing Rates Depreciation: Dollar loses value to other currency
Appreciation: Dollar gains value

30. Government and Trade

31. Trade Impediments and Subsidies (1/4)
Protective Tariffs
Designed to shield domestic producers from foreign competition

32. Trade Impediments and Subsidies (2/4)
Import Quotas (more effective than tariffs)
Limits quantities of specific products

33. Trade Impediments and Subsidies (3/4)
Nontariff Barriers
Custom limitations by bureaucratic red tape through licenses and standards

34. Trade Impediments and Subsidies (4/4)
Export Subsidies
Government payments to domestic producers of export goods
Reduces production costs, enables more product to sell

35. Why Interventions? Misunderstandings Political considerations
Cost to society

36. Multilateral Trade Agreements
And Free Trade Zones

37. Trade Wars When one nation intervenes others may reciprocate
Example: Smoot-Hawley Act of 1930 placed high tariffs which other nations raised theirs, one cause of Great Depression

38. Reciprocal Trade Agreements Act (1934)
Lowered US tariffs by
Negotiating authority: Authorized President to negotiate agreements
Generalized reductions: “most-favored-nation clause” favored trade with close allies

39. World Trade Organization (WTO)
145 nations
Rules on trade disputes
Advises on environmental and wage issues

40. The European Union (EU)
Created Euro trade bloc (free-trade zone)
Brings together common identity, economic interests, trade rules

41. The Euro Common currency used in participating nations
Helps consumers and businesses to conduct trade

42. North American Free Trade Agreement (NAFTA)
Free-trade zone between Canada, Mexico, and US
Elimination of tariffs
Critics fear loss of US jobs

44. Global Competition Globalization
Trend to integrate industry, commerce, communication, travel and culture throughout the world
Critics worry about impact on environment, workers, poor, competition