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Chapter 6: The United States
in the Global Economy
Several economic flows link the US
economy with that of other nations:
Goods & Services
Capital & Labor (Resource)
Information & Technology
U.S. & World Trade
U.S. is the world’s leading trading nation
U.S. depends on imports for many food
items; raw silk; diamonds; natural rubber; oil
U.S. exports agricultural, chemical, aircraft,
machine tools, coal & computer products
U.S. imports >> exports: TRADE DEFICIT
U.S. Trading Partners
Most U.S. trade is w/ industrialized
Canada is largest trading partner
Sizeable trade deficits:
U.S. Trade Deficits
Must be financed by borrowing or
earning foreign exchange
Selling U.S. assets through foreign
investment in the U.S.
U.S. borrows from citizens of other
U.S. is world’s largest debtor nation
Trade Growth Factors
Transportation technology
Communication technology allows
traders to make deals in trade & global
finance very easily
Trade barriers have decreased since
Trend toward free trade continues
Comparative Advantage
David Ricardo: It benefits a person/country to
specialize & exchange even if that person/nation is
more productive than potential trading partners in all
economic activities.
Specialization should take place if there are RELATIVE
cost differences in production of different items
A nation has a comparative advantage in some
product when it can produce that product at a lower
opportunity cost than a potential trading partner
Specialization & trade can have the same effect as an
increase in resources or technological progress
Government & Trade
Protective Tariffs: Excise taxes or duties on
imported goods used to protect domestic
producers, making foreign goods more
Import Quotas: Maximum limits on number
or total value of specific imports.
Nontariff Barriers: Licensing requirements;
unnecessary, bureaucratic “red tape”
Export Subsidies: Promote sale of products
Why do governments enact
trade barriers?
Misunderstanding the Gains from Trade
Don’t understand benefits from trade
Only see damage in domestic industries
that can’t compete successfully w/ imports
Political considerations
Costs to Society: Harm domestic
consumers with higher than world
prices for protected goods.
World Trade Organization
WTO oversees trade agreements &
rules on trade disputes for 140 nations.
Criticized for having rules crafted to
expand trade & investment at expense
of workers & environment
Praised for promoting free trade as
means of elevating output, income, and
higher SOL
European Union
Initiated as Common Market in 1958
Now has 25 member nations (as of May
Trade Bloc: Group of countries having
common identity, economic interests,
and trade rules
Euro: common currency among most
EU countries
North American Free Trade
Agreement (NAFTA)
Free Trade Zone established in 1993
between Canada, U.S. & Mexico
Critics feared loss of American jobs to
cheaper Mexico
Increased domestic employment
Reduced unemployment
Increased SOL
Chapter 6 Study Questions
2: U.S. & World Trade
10: Multilateral Trade Agreements