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ECO 2013
Chapter 5: The United States and the Global Economy
International Linkages
 Several economic flows link the US economy and the
economies of other nations.
o Goods and services flows
 Trade flows
 Export and importation of goods
o Capital and labor flows
 Resource flows
 US firms operate in foreign countries
 Foreign firms operate in the US
o Information and technology glows
 U.S. transmit information to other nations
about US products, prices, interest rates, and
investment opportunities
 Other countries do the same
o Financial flows
 Money is transferred between the U.S. and
other countries for several purposes
Goods and services
Capital and Labor
U.S.
Economy
Other
National
Economies
Information & Technology
Money
The United States and World Trade
 Volume and Pattern
o Many countries with restricted resources and
limited domestic markets, cannot efficiently
produce the variety of goods their citizens want,
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Chapter 5: The United States and the Global Economy
 So they must import goods from other
nations
o Other countries produce more than their citizens
want
 So they must export goods to other nations
o US exports 11% of its domestic production and
imports about 16%.
 We are depend on other countries for
 Bananas
 Cocoa
 Coffee
 Spices
 Tea
 Raw silk
 nickel
 tin
 natural rubber
 diamonds
 Competition with US produced goods
 Cars
 Wine cameras
 Watches
 Skis
 Baseball gloves and balls
 Exportation
 Agriculture – 25% of output is exported
 Chemicals
 Computers
o Trade Patterns
 Trade deficit
 Imports > exports
 Trade surplus
 Imports < Exports
 Rapid Trade Growth
o Transportation technology
o Communications technology
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Chapter 5: The United States and the Global Economy
Comparative Advantage, Specialization, and Exchange
o Law of Comparative Advantage:
o States that the individual, firm, region, or country
with the lowest opportunity cost of producing a
particular good should specialize in that good.
o Absolute advantage
 The ability to produce something using fewer
resources than other producers use
o Comparative advantage
 The ability to produce something at a lower
opportunity cost than other producers face.
o Example:
o Firms: Apple and Orange produce two products A
and B. Apple takes half an hour to produce A and
1/6 of an hour to produce B. Orange takes 1 hr to
produce A and 1/12 of an hour to produce B. If
the firms only have one hour to produce output of
both products.
o
Firm
Product A
Product B
Apple
1 unit
3 units
Orange
1 unit
Zero
Orange
0
12 units
o Apple has the absolute advantage in producing Product
A since he only needs ½ hour to Orange’s one hour.
o Orange has the absolute advantage in producing
Product B since he only needs 1/12 hour to Apple’s 1/6
of an hour.
o Apple and Orange can work together to produce more.
o If Apple produces only Product A, it can produce two
units.
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Chapter 5: The United States and the Global Economy
o If Orange produces only Product B, it can produce 12
units.
o Thus increasing total output in the economy.
o Why: because Apple has a comparative advantage in
producing A and Orange has comparative advantage in
B
Absolute advantage focuses on who uses the fewest
resources, but comparative advantage focuses on what else
those resources could have produced, that is on the
opportunity cost of those resources.
Resources are allocated most efficiently across the country
and around the world when production and trade conform to
the law of comparative advantage.
Foreign Exchange Market
 Buyers, sellers, whether individuals, firms, or nations,
use money to buy products or to pay for the use of
resources.
 International markets: buyers and seller have different
currencies
 Foreign exchange market
o A market in which various national currencies are
exchanged for one another
o Exchange rates are equilibrium prices
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Chapter 5: The United States and the Global Economy
Dollar
price of
foreign
currency
rises
Equals
Equals
Foreign
currency
price of
dollar
falls
Dollar
depreciates
International
value of the
dollar falls
Equals
Equals
Internation
al value of
foreign
currency
rises
Government and Trade
 Trade impediments and subsidies
o Protective tariffs
 Are excise taxes or duties placed on imported
goods.
 Designed to shield domestic producers from
foreign competition
 Impede free trade by causing a rise in the
prices of imported goods and shifting demand
toward domestic goods
o Import quotas
 Limits on the quantities or total value of
specific items that may be imported
o Nontariff barriers
 Include onerous licensing requirements,
unreasonable standards pertaining to product
quality, or simply bureaucratic red tape in
customs procedures
o Export subsidies
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Foreign
currency
appreciates
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Chapter 5: The United States and the Global Economy
 Consist of government payments to domestic
producers of export goods.
 Enable producers to charge lower prices and
thus to sell more exports in world markets.
 Why government trade invention?
o Misunderstanding the gains from trade
o Political considerations
o Costs to society
Multilateral Trade Agreements
 Trade war – when one nation enacts barriers against
imports, the nations whose exports suffer may retaliate
with other trade barriers.
 Reciprocal Trade Agreements Act
o 1934
o started the downward trend of tariffs
o aimed at reducing tariffs this act had two main
features
 Negotiating authority
 it authorized the president to negotiate
with foreign nations agreements that
would reduce existing U.S. tariffs by up
to 50%.
o Contingent on the actions of other
nations
 Generalized reductions
 The specific tariff reductions negotiated
between the U.S. and any particular
nation were generalized through the
most-favored-nation clauses.
o Stipulates that any subsequently
reduced U.S. tariff, resulting from
negotiation with any other nation,
would apply equally to any nation
that signed the original agreement.
 General Agreement on Tariffs and Trade (GATT)
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Chapter 5: The United States and the Global Economy
o Signed in 1947 between 23 nations. Now 128
o Three principles
 Equal, nondiscriminatory trade treatment for
all member nations
 The reduction of tariff by multilateral
negotiations
 The elimination of import quotas
o Provides a forum for the negotiation of reduced
trade barriers on a multilateral basis among
nations.
o Uruguay Round ( 1995)
 Tariffs on thousands of products were
eliminated or reduced, with overall tariffs
dropping by 33%
 World Trade Organization
o Established in 1995
o 149 nations including China
o oversees trade agreements reached by the
member nations and rules on trade disputes
among them
o provides forums for further rounds of trade
negotiations
 European Union
o Free trade zone called trade blocs
o 1958 – Common Market
o 2004 – 20 countries
o abolished tariffs and import quotas on nearly all
products traded among the participating countries
o liberalized the movement of capital and labor
within the EU
o created common policies in other economic
matters of joint concern
o common currency – Euro
 North American Free Trade Agreement
o NAFTA
o US, Canada, and Mexico
o Greatly reduced tariffs and other trade barriers
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Chapter 5: The United States and the Global Economy
Globalization
 The integration of industry, commerce,
communication, travel, and culture among the
world’s nations
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