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CHAPTER SIX NOTES I. INTRODUCTION A. WE DEPEND ON FOREIGN PRODUCTS FOR MANY OF OUR ACTIVITIES SUCH AS SUVs, COFFEE, COMPUTERS, FOODS, ETC. B. EVEN MANY “AMERICAN” PRODUCTS ARE MADE WITH FOREIGN COMPONENTS. WE CANNOT LIVE IN ISOLATION, WE DEPEND ON FOREIGN GOODS AND LABOR. II. LINKAGES A. SEVERAL ECONOMIC FLOWS LINK THE U.S. ECONOMY WITH THE ECONOMIES OF OTHER NATIONS. B. THESE ARE: 1. GOODS AND SERVICES FLOWS 2. CAPITAL AND LABOR (RESOURCE) FLOWS 3. INFORMATION AND TECHNOLOGY FLOWS 4. FINANCIAL FLOWS III. US AND WORLD TRADE A. VOLUME AND PATTERN 1. CURRENTLY, US EXPORTS AND IMPORTS ARE 12% AND 17% OF GDP WHICH IS DOUBLE THEIR IMPORTANCE OF TWENTY FIVE YEARS AGO. 2. THE U.S. IS WORLD’S LEADING TRADING NATION, ALTHOUGH ITS SHARE HAS DIMINISHED SINCE WWII B. DEPENDENCE 1. THE U.S. DEPENDS ON IMPORTS FOR MANY FOOD ITEMS SUCH AS BANANAS, COFFEE, TEA AND SPICES 2. ON THE EXPORTS SIDE, AGRICULTURE RELIES ON FOREIGN MARKETS FOR ONE-FOURTH TO ONE-HALF OF SALES. CHEMICAL, AIRCRAFT, AUTO, MACHINE TOOL, COAL AND COMPUTER INDUSTRIES SELL MAJOR PORTIONS OF OUTPUT IN INTERNATIONAL MARKETS. C. TRADE PATTERN 1. THE U.S. HAS A TRADE DEFICIT IN GOODS. IN 1999, U.S. IMPORTS EXCEEDED EXPORTS OF GOODS BY $346 BILLION 2. WHILE WE HAVE DEFICIT IN GOODS TRADE, U.S. EXPORTS OF SERVICES EXCEEDS THE IMPORT OF SERVICES BY $81 BILLION 3. THE U.S. IMPORTS SOME OF THE SAME CATEGORIES IT EXPORTS. SPECIFICALLY, AUTOMOBILES, COMPUTERS, CHEMICALS AND SEMICONDUCTORS. 4. MOST OF U.S. TRADE IS WITH INDUSTRIALLY ADVANCED NATIONS. 5. CANADA IS THE U.S. MOST IMPORTANT TRADE PARTNER QUANTITATIVELY. TWENTY-FOUR PERCENT OF U.S. EXPORTS SOLD WENT TO CANADIANS.WHO IN TURN PROVIDED 20 PERCENT OF U.S. IMPORTS 6. THE U.S. HAS SIZABLE TRADE DEFICITS WITH JAPAN AND CHINA. 7. THE TRADE DEFICIT WITH OPEC NATIONS IS $12 BILLION. $24 BILLION IN IMPORTS AND $12 BILLION IN EXPORTS D. LINKAGES: (INTERNATIONAL TRADE IMPLIES COMPLEX FINANCIAL LINKAGES AMONG NATIONS). TRADE DEFICITS MUST BE FINANCED BY BORROWING OR EARNING FOREIGN EXCHANGE WHICH IS ACCOMPLISHED BY SELLING U.S. ASSETS THROUGH FOREIGN INVESTMENT IN THE U.S. THE U.S. BORROWS FROM CITIZENS OF OTHER NATIONS; THE U.S. IS IS THE WORLD’S LARGEST DEBTOR NATION. E. FACILITATING FACTORS, WHICH EXPLAIN THE GROWTH OF TRADE 1. TRANSPORTATION TECHNOLOGY HAS IMPROVED OVER THE YEARS. 2. COMMUNICATIONS TECHNOLOGY ALLOWS TRADERS TO MAKE DEALS IN TRADE AND GLOBAL FINANCE VERY EASILY. 3. TRADE BARRIERS HAVE DECLINED VERY DRAMATICALLY SINCE 1940 AND THIS TREND TOWARD FREE TRADE CONTINUES. 4. PEACEFUL RELATIONS HAVE BEEN MAINTAINED AMONG MOST OF THE INDUSTRIAL NATIONS. F. PARTICIPANTS: 1. GLOBAL PARTICIPANTS HAVE CHANGED OVER THE YEARS. 2. NEW PARTICIPANTS HAVE BECOME IMPORTANT, ESPECIALLY ASIAN COUNTRIES LIKE HONG KONG, SINGAPORE, SOUTH KOREA AND TAIWAN. CHINA IS ALSO EMERGING AS IMPORTANT IN GLOBAL TRADE. COLLAPSE OF COMMUNISM HAS LED TO THE EMERGENCE OF FORMER SOVIET REPUBLICS AND EASTERN BLOC NATIONS AS WORLD TRADE PARTICIPANTS. 3. MODIFICATIONS OF THE CIRCULAR FLOW DIAGRAM TO INCLUDE FOREIGN SECTOR. SEE CIRCULAR FLOW NEXT SLIDE U.S. RESOURCE MARKETS G&S U.S. BUSINESSES G&S TAXES U.S. GOV’T TAXES U.S. HOUSEHOLDS U.S. PRODUCT MARKETS U.S. IMPORTS U.S. EXPORTS FOREIGN EXPENDITURES U.S. EXPENDITURES REST OF THE WORLD