Chapter 6: The US in the Global Economy

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Chapter 6 The US in the Global Economy

• Content and Visuals taken from McConnell/Brues
  Economics

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We Trade Alot

• US 1 in world in both imports and exports, even
  though we have smaller percentages than others
• Recently seen HUGE TRADE DEFICITS vs TRADE
  SURPLUSES
• Canada 1, but China growing quickly
• 660 billion trade deficit in 2005

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China is Scary

• Averaging nearly double digit growth since 1980s
• Currently 2 in world (6 t to 13 t) but
  expected to overtake us in next 15 years

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David Ricardo

• Idea that trade could be mutually beneficial even
  if one guy is better at making both things
• Comparative vs Absolute Advantage
• Absolutesimply make more (US 1)
• Comparativecheaper opportunity cost (US high
  wagesChina better)

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Where is our Comparative Advantage?

• What do we have a comparative advantage in here
  in the US?
• What are our jobs based around?
• With foreign trade, both sides can and DO benefit

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Exchange Rates

• The cost of buying someone elses money with
  yours
• Must pay them with their money so in order to buy
  their products must first buy their currency
• Appreciationyour money gains value
• Depreciationyour money loses value

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drawkcab steg ti erehw sereH

• If your money appreciates, foreign products cost
  less
• If their money appreciates, foreign products cost
  more
• If your money appreciates, you buy more of their
  stuff, they buy less of yours, your economy gets
  smaller while theirs grows

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What!!! HOW?

• How can our currency appreciating actually shrink
  our economy? That seems like a good thing
  (appreciation)
• Most important macro measure is GDP (gross
  domestic product)total value of all goods and
  services produced in 1 year
• If we buy more imports we add to their GDP while
  deducting from ourswe get cheap stuff but
  technically the measure for our economy doesnt
  grow because of it

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Where are we now?

• Does our money have a high value or low value
  right now?
• US currency closer to all-time low versus major
  currencies worldwide
• Why? We have the worlds strongest economy?
• Answer Buying their stuff makes our money worth
  less

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Its all comparative!

• Exchange rates compare the value of one currency
  to another
• Buying their goods first creates a demand for
  their currency which shifts the demand curve to
  the right (vertical supply)
• Price of buying their money goes up, which means
  that it gains value compared to ours

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Huge US Trade Deficit

• If we are buying more of their stuff (their
  meaning pretty much everyone) it means their
  currency is gaining value versus our US dollar
• Even Canadas gain 25 cents / US dollar

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FOREIGN TRADE HELPS ALL

• As a rule, foreign trade always helps everybody
  receive more than they could produce on their own
• We may not be fond of outsourcing, but as long as
  you keep your job it doesnt bother you too much
• Why government try PROTECTIONIST stance then at
  times?

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Ways to keep our Industries

• PROTECTIVE TARIFFStaxesmake our products seem
  cheaper
• IMPORT QUOTASlimits on importsforce us to
  produce rest (sugar)
• NONTARIFF BARRIERScomplications meant to
  reduce trade without taxes (licenses or
  inspections)
• EXPORT SUBSIDIESgovt pays for part of export to
  allow lower foreign prices (hurt others)

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Again Govt Screws it UP

• The rule comes back that anytime the govt tries
  to intervene in the market economy they offset
  the natural equilibrium and efficiency
• Anytime they act in such a manner it is to
  protect one person at the expense of another
  (sugar cane)

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Overall, Favor Free Trade

• GATTearly agreement after WWII with 23expanded
  to 123 by 1993
• WTOfollowed GATTnow 145
• EU
• NAFTA

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Like it or not here it comes

• Every year that passes sees our world become more
  and more of one big economy
• GLOBALIZATION is here to stay
• Increased competition, efficiency through
  comparative advantage, and broad range of
  products make foreign trade such a good idea even
  though it seems we may lose jobs in the process