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Transcript
The U.S. in the Global Economy Chapter 5 8/2/2017 1 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 8/2/2017 2 International Linkages (5.1) Goods & services flow (trade flow) Capital & labor (resource) flow Information & technology flows Financial flows 8/2/2017 3 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. 8/2/2017 4 Trade patterns Trade Deficit Imports exceed exports Trade Surplus Exports exceed imports Most important trading partner is Canada. 8/2/2017 5 Financial Linkages U.S. is world’s largest borrower of foreign funds Can be used to purchase foreign goods 8/2/2017 6 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 8/2/2017 7 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 8/2/2017 8 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 8/2/2017 9 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 8/2/2017 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 10 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 8/2/2017 11 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 8/2/2017 12 Trade impediments & subsidies (5.3) Protective tariffs Import quotas Limit on the amount that can be imported Nontariff barriers Taxes placed on imported goods Protects domestic producers from foreign competition I.E. licensing requirements, unreasonable standards on quality, or red tape Export subsidies 8/2/2017 Government payments to domestic producers who export 13 Why Government Trade Interventions? Misunderstanding the gains from trade Political considerations 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 8/2/2017 Benefits business but hurts consumers through higher prices 14 Multilateral Trade Agreements & Free-Trade Zones General Agreement on Tariffs & Trade (GATT) 1947 Negotiated reduced trade barriers among nations World Trade Organization (WTO) 8/2/2017 GATT’s successor Oversees trade agreements & rules on trade disputes among member nations 15 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 8/2/2017 16 Euro Common currency for European Union (EU) Ends inconvenience & expense of exchanging currencies Enhanced free flow of goods, services, & resources through EU 8/2/2017 17 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 8/2/2017 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 18 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 8/2/2017 19 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 8/2/2017 20