Download The U.S. in the Global Economy

The U.S. in the
Global Economy
Chapter 5
8/2/2017
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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.
5.
How & why government sometimes interferes with free international
trade
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

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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

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Imports exceed exports
Trade Surplus

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Exports exceed imports
Most important trading partner is Canada.
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Financial Linkages


U.S. is world’s largest borrower of foreign
funds
Can be used to purchase foreign goods
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Rapid Trade Growth


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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 nation’s
resources & allow for greater total output
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Production Possibilities Analysis


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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
Avocados
(Mexico & U.S.)
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
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U.S.
Production
Alternatives
Product
A
B
C
D
E
Avocados
0
30
33
60
90
Soybeans
30
20
19
10
0
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
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Terms of Trade


Through negotiation, the two nations can
agree on an “exchange rate” that’s
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

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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

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Import quotas
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Limit on the amount that can be imported
Nontariff barriers

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Taxes placed on imported goods
Protects domestic producers from foreign competition
I.E. licensing requirements, unreasonable standards on quality, or
red tape
Export subsidies

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Government payments to domestic producers who export
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Why Government Trade
Interventions?

Misunderstanding the gains from trade

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Political considerations

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Not just higher employment…more output=lower
prices
Businesses that don’t have a comparative advantage
use political activity to achieve their goals
Costs to society

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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

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Negotiated reduced trade barriers among nations
World Trade Organization (WTO)
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GATT’s 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


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Lower wages & weaker regulations on pollution & worker safety
in Mexico
Employment has increased in the U.S. since NAFTA…some
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
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