The United States and the Global Economy

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1 Unit 1 Chapter 5

2 5 The United States and the Global Economy

3 Chapter Objectives Key Facts About U.S. International Trade Comparative Advantage, Specialization, and International Trade How Exchange Rates are Determined in Currency Markets How and Why Government Sometimes Interferes with Free International Trade Role Played by Free-Trade Zones and the WTO in Promoting International Trade

4 International Linkages Trade Flows Goods & Services United States Economy Resource Flows Capital & Labor Information & Technology Flows Information & Technology Financial Flows Money Other National Economies

5 United States and World Trade Volume and Pattern Volume Dependence Trade Patterns Financial Linkages

6 Volume and Pattern Volume: U.S. is world s leading trading nation, but world trade has increased recently more rapidly for other nations than it has in the U.S. Dependence: U.S. almost entirely dependent on other nations for the production of several g/s, and many U.S. industries dependent on foreign markets. Trade patterns: trade deficits and trade surpluses Financial linkages: U.S. is world s largest borrower of foreign funds

7 United States and World Trade Volume and Pattern Exports of Goods & Services 2005 Selected Countries as a Percent of GDP Belgium Netherlands South Korea Germany Canada New Zealand Italy France United Kingdom Spain Japan United States 87% 71% 44% 40% 38% 28% 27% 26% 26% 25% 13% 11% Source: IMF, International Financial Statistics, 2005

8 Percentage of GDP United States and World Trade Volume and Pattern U.S. Trade as a Percentage of GDP Inflation Adjusted to Dollar Value in Exports Imports Source: Bureau of Economic Analysis

9 United States and World Trade Volume and Pattern Principal U.S. Exports & Imports 2005 in Billions of Dollars Exports Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Telecommunications $ Imports Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Semiconductors Telecommunications $ Source: Department of Commerce Data

10 United States and World Trade Volume and Pattern U.S. Exports & Imports 2005 in Goods by Area Exports to Value Billions Of Dollars Imports from Value Billions Of Dollars Industrial Countries $483 Industrial Countries $770 Developing Countries 410 Developing Countries 904 Total $893 Total Imports Exceed Exports by $781 Billion That s over 15,620,000 jobs at $50,000 each! Was $484 Billion in 2002 & $346 Billion in 1999 $1,674 Source: Survey of Current Business, April 2006

11 United States and World Trade Rapid Trade Growth Transportation Technology airplanes, ships, pipelines Communications Technology computers, Internet, fax enable exporters to access overseas markets and carry out trade deals General Decline in Tariffs since 1940s Multinational Corporations - firms with sizable production and distribution in other countries (Ex. Unilever, Nestle, Coca-Cola, Mitsubishi) New participants China, Singapore, S.Korea, Taiwan, Germany, former Soviet republics Read Quick Review 5.1

12 United States and World Trade Participants in International Trade Germany United States China Japan France Netherlands Italy United Kingdom Canada Belgium South Korea Mexico Russia Taiwan Singapore GLOBAL PERSPECTIVE Comparative Exports $358 $349 $347 $317 $307 $254 $189 $184 $183 $180 $449 $593 $566 Billions of Dollars $912 $819 Source: World Trade Organization

13 Specialization and Comparative Advantage Absolute Advantage Comparative Advantage O 5.1 Comparative Costs Specialization and Trade Terms of Trade W 5.1

14 Specialization and Comparative Advantage U.S. resources are shifted toward export industries and away from import industries Specialization and international trade increase the productivity of a nation s resources and allow for greater total output than would otherwise be possible. They result in greater output and income. Read Consider This on page 90.

15 Comparative Advantage: Production Possibilities Analysis See Table 5.4 and 5.5 U.S. has an absolute advantage in producing both soybeans and avocados, relative to Mexico (we can produce both more efficiently) Gains from trade are possible even under these circumstances. The comparative costs of producing these two items within the two nations must be considered. See Table 5.6 A nation has a comparative advantage when it can produce a product at a lower domestic opportunity cost than can a potential trading partner.

16 Terms of Trade Rate at which units of one product can be exchanged for units of another product Mutually beneficial to both countries, since each can do better by trading than through domestic production alone. In 5.6, the two nations agree on an exchange rate of 1 ton soybeans for 3.5 tons avocados.

17 Gains from Specialization and Trade See Table 5.7 on page 91 Both nations gain from specialization Specialization based on comparative advantage improves global resource allocation. Allows from consumption beyond production possibilities curve.

18 Foreign Exchange Markets market in which various currencies are exchanged for one another Exchange rates are equilibrium prices in foreign exchange markets Ex. Dollar-Yen market

19 The Foreign Exchange Market GLOBAL PERSPECTIVE Exchange Rates Foreign Currency Per U.S. Dollar $1 Will Buy 44.3 Indian rupees.57 British pounds 1.16 Canadian dollars 10.7 Mexican pesos 1.31 Swiss francs.83 European euros 117 Japanese yen 975 South Korean won 7.8 Swedish kronors March 2006

20 Dollar price of 1 yen The Foreign Exchange Market Exchange Rates Dollar Yen Market P G 5.1 Exchange Rate: $.01= 1 S y.01 D y Q e Quantity of yen Q

21 Changing Rates: Appreciation and Depreciation Changes in exchange rates caused by changes in supply and demand for various currencies. If, for example, dollar price of yen increases, the dollar had depreciated relative to the yen (international value of the dollar decreased) If the dollar price of yen decreases, the dollar had appreciated relative to the yen Read Quick Review p.94

22 The Foreign Exchange Market Exchange Rates Changing Rates: Depreciation and Appreciation Dollar Price of Foreign Currency Rises Equals Foreign Currency Price Of Dollar Falls Equals Equals International Value of Dollar Falls (Dollar Depreciates) Equals International Value of Foreign Currency Rises (Foreign Currency Appreciates)

23 Government and Trade Trade Impediments and Subsidies Protective Tariffs Import Quotas Nontariff Barriers Export Subsidies

24 Trade Impediments and Subsidies Protective tariffs excise taxes or duties placed on foreign goods, designed to protect domestic industries Import quotas limits on the quantities or total value of specific items that may be imported (prohibition of imports once quota filled) Nontariff barriers licensing requirements, product quality standards, lengthy customs procedures Export subsidies gov. payments to domestic producers of export goods in order to allow producers to lower prices and thus export greater quantities.

25 Government and Trade Why Government Trade Interventions? Misunderstanding the Gains from Trade true benefit of trade is that it allows an overall increase in output Political Considerations trade may harm particular domestic industries (politicians demanding protectionism) Costs to Society tariffs and quotas harm domestic consumers (higher prices) and domestic producers that use protected goods as inputs in their own productive processes.

26 Government and Trade Multilateral Trade Agreements And Free-Trade Zones Trade War escalating tariffs can choke world trade Smoot-Hawley Tariff Act of 1930 meant to stimulate U.S. production, but many nations retaliated with equally high tariffs Reciprocal Trade Agreements Act of 1934 Negotiating Authority president could negotiate trade agreements with foreign nations Generalized Reductions Most-Favored-Nation Clauses reductions of tariffs may automatically be applied to many nations

27 Government and Trade Multilateral Trade Agreements And Free-Trade Zones General Agreement on Tariffs and Trade (GATT) 1947 signed by 23 nations Equal Trade Treatment for all member nations Reduction in Tariffs Elimination of Import Quotas Uruguay Round (1995) established the WTO

28 Government and Trade Multilateral Trade Agreements And Free-Trade Zones World Trade Organization (WTO) oversees trade agreements reached by member nations and rules on trade disputed among them Doha Round (Doha, Qatar) The European Union (EU) abolished tariffs and quotas on majority of products traded b/w member nations EU Trade Bloc group of countries with common identity, economic interests, and trade rules The Euro used in 2006 as common currency

29 Government and Trade Multilateral Trade Agreements And Free-Trade Zones North American Free Trade Agreement (NAFTA) Canada, Mexico, and U.S. Fears and Accomplishments Job Creation Higher Standard of Living

30 Globalization Integration of industry, commerce, communication, travel and culture among the world s nations Has brought competition within the U.S. and across the globe Concerns about environment, culture, poverty Ultimately leads to greater efficiency

31 Government and Trade GLOBAL PERSPECTIVE Global Competition Top 12 Globalized Nations Singapore 2-Ireland 3-Switzerland 4-United States 5-Netherlands 6-Canada 7-Denmark 8-Sweden 9-Austria 10-Finland 11-New Zealand 12-United Kingdom Source: A. T. Kearney, Foreign Policy

32 Petition of the Candlemakers Problems with Protectionism Satire on Candlemakers 1845 Sought to Remove Competition from Trade on Light Sources The Sun is also a Light Source Close Out All Natural Light to Increase Demand for Candles and Raw Materials to Make Them Taken to Extreme, There is No Way to Remove Competition

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