The United States and the Global Economy

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1 World 5 The the Global Economy 5-1 Chapter Objectives World Key Facts About U.S..,,. How Rates are Determined in Currency s. How Why Sometimes Interferes with Free. Role Played by Free- Zones the WTO in Promoting. 5-2 World United States Economy Flows Goods & Services Resource Flows Capital & Labor Information & Technology Flows Information & Technology Financial Flows Money Other National Economies 5-3

2 World World Volume Pattern Volume. Dependence. U.S. depends on imports for many food items (bananas, coffee, tea, spices); raw silk, diamonds, natural rubber, much petroleum. On the export side, agriculture relies on foreign markets for one- fourth to one- half of sales; chemical, aircraft, auto, machine tool, coal, computer industries also sell major portions of output in international markets. 5-4 World World Volume Pattern Patterns. Financial. deficits must be financed by borrowing or earning foreign exchange, which is accomplished by selling U.S. assets through foreign investment in the U.S. The U.S. borrows from citizens of other nations; the U.S. is the world s largest debtor nation. 5-5 World 5-6 World Volume Pattern Exports of Goods & Services 2005 Selected Countries as a Percent of GDP Belgium Netherls South Korea Germany Canada New Zeal Italy France United Kingdom Spain Japan 87% 71% 44% 40% 38% 28% 27% 26% 26% 25% 13% 11% Source: IMF, Financial Statistics, 2005

3 World 5-7 World Volume Pattern U.S. as a Percentage of GDP Inflation Adjusted to Dollar Value in 2000 Percentage of GDP Exports Imports Source: Bureau of Economic Analysis World World Volume 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 $251.6 Automobiles Household Appliances 97.1 Computers 93.3 Metals 83.8 Clothing 79.1 Consumer Electronics 47.3 Generating Equipment 43.1 Semiconductors 37.1 Telecommunications Source: Department of Commerce Data World 5-9 World Volume Pattern U.S. Exports & Imports 2005 in Goods by Area Exports to Industrial Countries Developing Countries Total Value Billions Of Dollars $ $893 Imports from Industrial Countries Developing Countries Total Value Billions Of Dollars $ $1,674 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 Source: Survey of Current Business, April 2006

4 World World Rapid Growth Transportation Technology. Communications Technology. General Decline in Tariffs. Multinational Corporations World 5-11 World Participants in Germany China Japan France Netherls Italy United Kingdom Canada Belgium South Korea Mexico Russia Taiwan Singapore Exports Global Perspective $593 $566 $449 $358 $349 $347 $317 $307 $254 $189 $184 $183 $180 Billions of Dollars $912 $819 Source: World Organization World Absolute. Adam Smith observed in 1776 that specialization trade increase the productivity of a nation s resources. His observation related to the principle of absolute advantage whereby a country should buy a good from other countries if they can supply it cheaper than we can.. The principle of comparative advantage was first observed explained in early 1800s by David Ricardo. This principle says that it pays for a person or a country to specialize exchange even if that person or nation is more productive than potential trading partners in all economic activities. 5-12

5 World. If the two nations specialize according to comparative advantage, then to get the other product they must trade. Terms of. The rate of exchange of these two products will be determined through negotiation; the outcome is called the terms of trade World advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity Cost The highest valued alternative that must be given up to engage in an activity. in An Example of Japanese Workers Being More Productive Than American Workers OUTPUT PER HOUR OF WORK CELL PHONES DIGITAL MUSIC PLAYERS JAPAN 12 6 UNITED STATES World Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. The Opportunity Costs of Producing Cell Phones Digital Music Players JAPAN UNITED STATES OPPORTUNITY COSTS CELL PHONES 0.5 digital music player 2 digital music players DIGITAL MUSIC PLAYERS 2 cell phones 0.5 cell phone 5-15

6 World Production without Autarky A situation in which a country does not trade with other countries. PRODUCTION AND CONSUMPTION CELL PHONES JAPAN 9,000 1,500 UNITED STATES 1,500 1,000 Increasing Consumption through DIGITAL MUSIC PLAYERS Terms of trade The ratio at which a country can trade its exports for imports from other countries The Gains from for Japan the World WITHOUT TRADE WITH TRADE Production Consumption CELL PHONES MP3 PLAYERS Japan 9,000 1,500 1,500 1,000 Production with Consumption with CELL PHONES MP3 PLAYERS CELL PHONES MP3 PLAYERS CELL PHONES Japan 12,000 0 Export 1,500 Import 1,500 10,500 1, ,000 Import 1,500 Export 1,500 1,500 2,500 GAINS FROMTRADE With trade, the Japan specialize in the good they have a comparative advantage in producing... Increased Consumption... export some of thatgood in exchange for the good the other country has a comparative advantage in producing. Japan 1,500 Cell Phones The increased consumption madepossible by trade represents thegains from trade. 1,500 MP3 Players MP3 PLAYERS 5-17 PRODUCTION AND CONSUMPTION World CLOTH 18,000 WINE 123,000 Portugal WITH TRADE Engl 63,000 18,000 PRODUCTION WITH TRADE CONSUMPTION WITH TRADE TRADE CLOTH WINE CLOTH WINE CLOTH WINE PORTUGAL 0 150,000 Import 18,000 Export 18,000 18, ,000 ENGLAND 90,000 0 Export 18,000 Import 18,000 72,000 18,000 The Gains from WITHOUT TRADE GAINS FROM TRADE INCREASED CONSUMPTION Portugal Engl 9,000 wine 9,000 cloth 5-18

7 World 5-19 Global Perspective Rates Foreign Currency Per U.S. Dollar $1 Will Buy 44.3 Indian rupees 0.57 British pounds 1.16 Canadian dollars 10.7 Mexican pesos 1.31 Swiss francs 0.83 European euros 117 Japanese yen 975 South Korean won 7.8 Swedish kronors March 2006 World Rates Dollar price of 1 yen P 0.01 Dollar Yen Rate: $0.01= 1 S y D y 5-20 Q e Quantity of yen Q World 5-21 Rates Changing Rates: Depreciation Appreciation Dollar Price of Foreign Currency Rises Equals Foreign Currency Price Of Dollar Falls Equals Equals Value of Dollar Falls (Dollar Depreciates) Equals Value of Foreign Currency Rises (Foreign Currency Appreciates)

8 World 5-22 Impediments Subsidies. Protective Tariffs. Protective tariffs are excise taxes or duties on imported goods. s enact these tariffs to protect domestic producers by making foreign goods more expensive. Import Quotas. Import quotas are maximum limits on the number or total value of specific imports. Once quotas are filled, no more imports are allowed into the country. Nontariff Barriers. Nontariff barriers include licensing requirements, unreasonable stards, unnecessary bureaucratic red tape. Export Subsidies. s have used export subsidies to promote the sale of products aboard. World Why Interventions? Misundersting the Gains from. Political Considerations. Costs to Society World Multilateral Agreements And Free- Zones War. barriers can cause a trade war, in which all nations retaliate with trade barriers of their own. Smoot-Hawley Tariff Act of Reciprocal Agreements Act of Negotiating Authority. Generalized Reductions. Most-Favored-Nation Clauses. 5-24

9 World Multilateral Agreements And Free- Zones General Agreement on Tariffs (GATT). Equal Treatment. Reduction in Tariffs. Elimination of Import Quotas. Uruguay Round World Multilateral Agreements And Free- Zones World Organization (WTO). Doha Round (Doha, Qatar). The European Union (EU). EU Bloc. The Euro World Multilateral Agreements And Free- Zones North American Free Agreement (NAFTA). Canada, Mexico, U.S. Fears Accomplishments. Job Creation. Higher Stard of Living. 5-27

10 World 5-28 Global Perspective Global Competition Top 12 Globalized Nations Singapore 2-Irel 3-Switzerl 4-5-Netherls 6-Canada 7-Denmark 8-Sweden 9-Austria 10-Finl 11-New Zeal 12-United Kingdom Source: A. T. Kearney, Foreign Policy Key Terms World 5-29 Multinational corporations advantage Terms of trade Foreign exchange market rates Depreciation Appreciation Protective tariffs Import quotas Nontariff barriers Export subsidies Smoot-Hawley Tariff Act Reciprocal Agreements Act Most-favored-nation clauses General Agreement on Tariffs (GATT) World Organization (WTO) Doha Round European Union (EU) bloc Euro North American Free Agreement (NAFTA) Next Chapter Preview World Measuring Domestic Output National Income Chapter

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