The U.S. in the Global Economy

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The U.S. in the Global Economy

• Chapter 5

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In this chapter, you will learn

1. Some key facts about U.S. international trade
2. About comparative advantage, specialization, and
   international trade
3. How exchange rates are determined in currency
   markets
4. How why government sometimes interferes with
   free international trade
5. About trade-related topics such as the World
   Trade Organization (WTO), trade adjustment
   assistance, offshoring of jobs, and fair-trade
   products

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International Linkages (5.1)

• Goods services flow (trade flow)
• Capital labor (resource) flow
• Information technology flows
• Financial flows

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The U.S. World Trade

• Volume pattern
• Volume of international trade has been increasing
• The U.S. is almost entirely depending on other
  countries for products like bananas, cocoa,
  coffee, etc.

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Trade patterns

• Trade Deficit
• Imports exceed exports
• Trade Surplus
• Exports exceed imports
• Most important trading partner is Canada.

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Financial Linkages

• U.S. is worlds largest borrower of foreign funds
  
• Can be used to purchase foreign goods

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Rapid Trade Growth

• Transportation technology
• High transportation costs are a barrier to any
  type of trade
• Improvements in transportation have shrunk the
  globe fostered world trade
• Communications technology
• Dramatic improvements in communications
  technology have also advanced world trade
• Exporters can access overseas markets carry out
  trade deals
• General decline in tariffs
• U.S. tariffs as a percentage of imports are now
  5, down from 37 in 1940

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Specialization Comparative Advantage (5.2)

• U.S. labor other resources are shifted toward
  export industries away from import industries
• Specialization international trade increase the
  productivity of a nations resources allow for
  greater total output

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Production Possibilities Analysis

• Absolute advantage- When a country can produce
  more output than other country
• Comparative advantage- when a nation can produce
  a product at a lower opportunity cost
• Table 5.4 5.5

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Production Possibilities Tables (Mexico U.S.)
Avocados Mexico must give up ¼ ton of soybeans
to get 1 ton of avocados U.S. must give up 1/3
ton of soybeans to get 1 ton of avocados C.A.
Mexico for avocados
Mexico Production Alternatives
Product A B C D E
Avocados 0 20 24 40 60
Soybeans 15 10 9 5 0
Soybeans U.S. must give up 3 tons of avocados to
get 1 ton of soybeans Mexico must give up 4 tons
of avocados to get 1 ton of soybeans C.A. U.S.
for soybeans
U.S. Production Alternatives
Product A B C D E
Avocados 0 30 33 60 90
Soybeans 30 20 19 10 0
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Terms of Trade

• Through negotiation, the two nations can agree on
  an exchange rate thats mutually beneficial to
  both countries
• Each country can do better through such trade
  than through domestic production of both products

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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
• Exports rise imports become more expensive
• Appreciation Dollar gains value against another
  currency
• Imports rise exports fall because the dollar is
  now stronger than other currencies

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Trade impediments subsidies (5.3)

• 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

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Why Government Trade Interventions?

• Misunderstanding the gains from trade
• Not just higher employmentmore outputlower
  prices
• Political considerations
• Businesses that dont have a comparative
  advantage use political activity to achieve their
  goals
• Costs to society
• Benefits business but hurts consumers through
  higher prices

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Multilateral Trade Agreements Free-Trade Zones

• General Agreement on Tariffs Trade (GATT) 1947
• Negotiated reduced trade barriers among nations
• World Trade Organization (WTO)
• GATTs successor
• Oversees trade agreements rules on trade
  disputes among member nations

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European Union (EU)

• Abolished tariffs import quotas on nearly all
  products traded among the participating nations
• Free movement of capital labor throughout the
  zone
• Common identity
• Economic interests
• Trade rules

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Euro

• Common currency for European Union (EU)
• Ends inconvenience expense of exchanging
  currencies
• Enhanced free flow of goods, services,
  resources through EU

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North American Free Trade Agreement (NAFTA)

• Started a free trade zone in 1993 with Canada,
  Mexico, United States
• Some combined output as the EU but encompasses a
  much larger geographic area
• Eliminated tariffs other trade barriers
• Critics of NAFTA loss of U.S. jobs
• Lower wages weaker regulations on pollution
  worker safety in Mexico
• Employment has increased in the U.S. since
  NAFTAsome sectors have been negatively affected
  though

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Trade Adjustment Assistance Act (2002)

• Provides cash assistance for up to 78 weeks for
  workers displaced by imports or plant relocations
  abroad
• Workers must participate in job searches,
  training programs, or remedial education

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Offshoring of Jobs

• Shifting work previously done by American workers
  to workers located in other locations.
• Recent advances in technology have enabled U.S.
  firms to offshore service jobs