1. Copyright 2008 The McGraw-Hill Companies 5-1 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show 5 The United States and the Global Economy

2. Copyright 2008 The McGraw-Hill Companies 5-2 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show 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

3. Copyright 2008 The McGraw-Hill Companies 5-3 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show International Linkages United States Economy Other National Economies Goods & Services Capital & Labor Information & Technology Money Trade Flows Resource Flows Information & Technology Flows Financial Flows

4. Copyright 2008 The McGraw-Hill Companies 5-4 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Volume Dependence Trade Patterns Financial Linkages Volume and Pattern

5. Copyright 2008 The McGraw-Hill Companies 5-5 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show 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 Source: IMF, International Financial Statistics, 2005 11% 87% 71% 44% 40% 38% 28% 27% 26% 25% 13%

6. Copyright 2008 The McGraw-Hill Companies 5-6 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Volume and Pattern U.S. Trade as a Percentage of GDP Inflation Adjusted to Dollar Value in 2000 Source: Bureau of Economic Analysis Percentage of GDP Exports Imports

7. Copyright 2008 The McGraw-Hill Companies 5-7 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Volume and Pattern Principal U.S. Exports & Imports – 2005 in Billions of Dollars Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Telecommunications Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Semiconductors Telecommunications ExportsImports Source: Department of Commerce Data $68.6 53.5 52.9 47.2 45.5 33.2 30.4 29.1 27.6 25.6 $251.6 123.7 97.1 93.3 83.8 79.1 47.3 43.1 37.1 25.8

8. Copyright 2008 The McGraw-Hill Companies 5-8 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Volume and Pattern U.S. Exports & Imports – 2005 in Goods by Area Industrial Countries Developing Countries Total Industrial Countries Developing Countries Total Exports toImports from Source: Survey of Current Business, April 2006 Value Billions Of Dollars Value Billions Of Dollars $483 410 $893 $770 904 $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

9. Copyright 2008 The McGraw-Hill Companies 5-9 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Transportation Technology Communications Technology General Decline in Tariffs Multinational Corporations Rapid Trade Growth

10. Copyright 2008 The McGraw-Hill Companies 5-10 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show United States and World Trade Participants in International Trade Source: World Trade Organization Comparative Exports - 2004 Germany United States China Japan France Netherlands Italy United Kingdom Canada Belgium South Korea Mexico Russia Taiwan Singapore 0 100 200 300 400 500 600 700 800 900 $912 $819 $593 $566 $449 $358 $349 $347 $317 $307 $254 $189 $184 $183 $180 GLOBAL PERSPECTIVE Billions of Dollars

11. Copyright 2008 The McGraw-Hill Companies 5-11 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Specialization and Comparative Advantage Absolute Advantage Comparative Advantage –Comparative Costs Specialization and Trade Terms of Trade O 5.1 W 5.1

12. Copyright 2008 The McGraw-Hill Companies 5-12 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show The Foreign Exchange Market Exchange Rates Foreign Currency Per U.S. Dollar $1 Will Buy 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 March 2006 GLOBAL PERSPECTIVE

13. Copyright 2008 The McGraw-Hill Companies 5-13 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show The Foreign Exchange Market Exchange Rates Dollar – Yen Market P Q Quantity of yen Dollar price of 1 yen.01 QeQe DyDy SySy Exchange Rate: $.01=¥1 G 5.1

14. Copyright 2008 The McGraw-Hill Companies 5-14 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show The Foreign Exchange Market Exchange Rates Changing Rates: Depreciation and Appreciation Equals Dollar Price of Foreign Currency Rises International Value of Dollar Falls (Dollar Depreciates) Foreign Currency Price Of Dollar Falls International Value of Foreign Currency Rises (Foreign Currency Appreciates)

15. Copyright 2008 The McGraw-Hill Companies 5-15 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade Trade Impediments and Subsidies Protective Tariffs Import Quotas Nontariff Barriers Export Subsidies

16. Copyright 2008 The McGraw-Hill Companies 5-16 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade Why Government Trade Interventions? Misunderstanding the Gains from Trade Political Considerations Costs to Society

17. Copyright 2008 The McGraw-Hill Companies 5-17 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade Trade War Smoot-Hawley Tariff Act of 1930 Reciprocal Trade Agreements Act of 1934 –Negotiating Authority –Generalized Reductions –Most-Favored-Nation Clauses Multilateral Trade Agreements And Free-Trade Zones

18. Copyright 2008 The McGraw-Hill Companies 5-18 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade General Agreement on Tariffs and Trade (GATT) –Equal Trade Treatment –Reduction in Tariffs –Elimination of Import Quotas Uruguay Round Multilateral Trade Agreements And Free-Trade Zones

19. Copyright 2008 The McGraw-Hill Companies 5-19 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade World Trade Organization (WTO) Doha Round (Doha, Qatar) The European Union (EU) –EU Trade Bloc –The Euro Multilateral Trade Agreements And Free-Trade Zones

20. Copyright 2008 The McGraw-Hill Companies 5-20 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade North American Free Trade Agreement (NAFTA) –Canada, Mexico, and U.S. –Fears and Accomplishments –Job Creation –Higher Standard of Living Multilateral Trade Agreements And Free-Trade Zones

21. Copyright 2008 The McGraw-Hill Companies 5-21 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Government and Trade Top 12 Globalized Nations - 2005 Source: A. T. Kearney, Foreign Policy 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 GLOBAL PERSPECTIVE Global Competition

22. Copyright 2008 The McGraw-Hill Companies 5-22 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Petition of the Candlemakers 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 Last Word

23. Copyright 2008 The McGraw-Hill Companies 5-23 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Key Terms multinational corporationsmultinational corporations comparative advantagecomparative advantage terms of trade foreign exchange marketforeign exchange market exchange rates depreciation appreciation protective tariffs import quotas nontariff barriers export subsidies Smoot-Hawley Tariff ActSmoot-Hawley Tariff Act Reciprocal Trade Agreements ActReciprocal Trade Agreements Act most-favored-nation clausesmost-favored-nation clauses General Agreement on Tariffs and Trade (GATT)General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO)World Trade Organization (WTO) Doha Round European Union (EU) trade bloc euro North American Free Trade Agreement (NAFTA)North American Free Trade Agreement (NAFTA)

24. Copyright 2008 The McGraw-Hill Companies 5-24 International Linkages United States and World Trade Specialization and Comparative Advantage The Foreign Exchange Market Government and Trade Last Word Key Terms End Show Next Chapter Preview… Measuring Domestic Output and National Income