1. Chapter 6: The United States in the Global Economy
Several economic flows link the US economy with that of other nations:
Goods & Services
Capital & Labor (Resource)
Information & Technology
Financial

2. U.S. & World Trade U.S. is the world’s leading trading nation
U.S. depends on imports for many food items; raw silk; diamonds; natural rubber; oil
U.S. exports agricultural, chemical, aircraft, machine tools, coal & computer products
U.S. imports >> exports: TRADE DEFICIT

3. U.S. Trading Partners Most U.S. trade is w/ industrialized countries
Canada is largest trading partner
Sizeable trade deficits:
Japan
China

4. U.S. Trade Deficits
Must be financed by borrowing or earning foreign exchange
Selling U.S. assets through foreign investment in the U.S.
U.S. borrows from citizens of other countries
U.S. is world’s largest debtor nation

5. Trade Growth Factors Transportation technology improvements
Communication technology allows traders to make deals in trade & global finance very easily
Trade barriers have decreased since WWII
Trend toward free trade continues

6. Comparative Advantage
David Ricardo: It benefits a person/country to specialize & exchange even if that person/nation is more productive than potential trading partners in all economic activities.
Specialization should take place if there are RELATIVE cost differences in production of different items
A nation has a comparative advantage in some product when it can produce that product at a lower opportunity cost than a potential trading partner
Specialization & trade can have the same effect as an increase in resources or technological progress

7. Government & Trade
Protective Tariffs: Excise taxes or duties on imported goods used to protect domestic producers, making foreign goods more expensive
Import Quotas: Maximum limits on number or total value of specific imports.
Nontariff Barriers: Licensing requirements; unnecessary, bureaucratic “red tape”
Export Subsidies: Promote sale of products abroad.

8. Why do governments enact trade barriers?
Misunderstanding the Gains from Trade
Don’t understand benefits from trade
Only see damage in domestic industries that can’t compete successfully w/ imports
Political considerations
Costs to Society: Harm domestic consumers with higher than world prices for protected goods.

9. World Trade Organization (WTO)
WTO oversees trade agreements & rules on trade disputes for 140 nations.
Criticized for having rules crafted to expand trade & investment at expense of workers & environment
Praised for promoting free trade as means of elevating output, income, and higher SOL

10. European Union Initiated as Common Market in 1958
Now has 25 member nations (as of May 2004)
Trade Bloc: Group of countries having common identity, economic interests, and trade rules
Euro: common currency among most EU countries

11. North American Free Trade Agreement (NAFTA)
Free Trade Zone established in 1993 between Canada, U.S. & Mexico
Critics feared loss of American jobs to cheaper Mexico
Results:
Increased domestic employment
Reduced unemployment
Increased SOL

12. Chapter 6 Study Questions
2: U.S. & World Trade
10: Multilateral Trade Agreements