1. The United States and the Global Economy COI1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. COI1-2 International Linkages United States Economy Other National Economies Goods & Services Capital & Labor Information & Technology Money LO1

3. COI1-3 World Trade Volume as a percentage of GDP Larger for small countries Larger for countries with restricted resources Dependence on world market Lack key resource Sell surplus goods LO2

4. COI1-4 Trade deficit Imports exceed exports Borrow from foreigners Sell real assets to foreigners Trade surplus Exports exceed imports Lend to foreigners World Trade LO2

5. COI1-5 Rapid Trade Growth Transportation technology Communications technology General decline in tariffs All nations participate LO2

6. COI1-6 Exports of Goods and Services Belgium Netherlands South Korea Germany New Zealand Canada Italy France Spain United Kingdom United States Japan Source: IMF, International Financial Statistics, 2012 13% 92% 72% 47% 41% 26% 25% 21% 19% 14% Exports of Goods and Services as a Percentage of GDP, 2012 LO2

7. COI1-7 United States Trade LO2

8. COI1-8 U.S. Imports and Exports Energy Products Agricultural Products Metals Chemicals Consumer Durables Aircraft Computers Pharmaceuticals Semiconductors Generating Equipment Petroleum Household Appliances Metals Apparel Computers Automobiles Pharmaceuticals Chemicals Generating Equipment Telecommunications Equipment Exports Imports Source: Bureau of Economic Analysis $167.1 145.0 128.9 118.8 99.3 94.1 49.2 47.9 42.4 38.3 $424.3 141.3 128.4 126.9 122.2 101.4 87.2 75.6 65.0 52.8 LO2

9. COI1-9 Canada European Union Mexico China Japan OPEC countries All other TOTAL Canada European Union Mexico China Japan OPEC countries All other TOTAL Exports to Imports from Value $294 270 217 112 72 81 518 $1564 $329 384 283 427 149 182 545 $2299 Imports Exceed Exports by $735 Billion U.S. Imports and Exports LO2

10. COI1-10 Exports of Goods LO2

11. COI1-11 Specialization Shift resources to export industry Achieve higher overall output and income Absolute advantage Higher output per worker for a good Comparative advantage Lower domestic opportunity cost for a good LO3

12. COI1-12 Comparative Advantage Avocados020244060 Soybeans1510950 Mexico’s Production Possibilities Table (in Tons) Avocados030336090 Soybeans302019100 ProductABCDE U.S.’s Production Possibilities Table (in Tons) Production Alternatives LO3 Production Alternatives

13. COI1-13 Comparative Advantage LO3

14. COI1-14 Mexico will produce avocados U.S. will produce soybeans U.S. gives up 3 A for 1 S Mexico gains 4 A for 1 S Terms of trade 3.5 A for 1 S Both countries benefit Comparative Advantage LO3

15. COI1-15 Gains from trade Mexico starts at C (24 A and 9S) Move to E (60 A and 0 S) Trade 35 A for 10 S U.S. starts at T (33 A and 19 S) Move to R (0 A and 30 S) Trade 10 S for 35 A Overall gains? Comparative Advantage LO3

16. COI1-16 Exchange Rates One U.S. dollar will buy 54.54 Indian rupees 1.54 British pounds 1.01 Canadian dollars 12.01 Mexican pesos 0.95 Swiss francs 1.30 European euro 100.94 Japanese yen 1,087 South Korean won 6.58 Swedish kronors May 2013 LO4 Source: International Monetary Fund

17. COI1-17 The Foreign Exchange Market Dollar – Yen Market P Q Quantity of yen Dollar price of 1 yen.01 QeQe DyDy SySy Exchange Rate: $.01=¥1 LO4

18. COI1-18 Changing Exchange Rates Shifts in demand for currency Shifts in supply of currency Rise in dollar price of yen Dollar depreciates Currency appreciation LO4

19. COI1-19 Trade Barriers Protective tariffs Import quotas Nontariff barriers Export subsidies LO5

20. COI1-20 Reasons for Trade Barriers Misunderstanding gains from trade Political considerations Costs to society LO5

21. COI1-21 Multilateral Trade Agreements Trade Wars Long history of U.S. tariffs Smoot-Hawley Tariff Act of 1930 Reciprocal Trade Agreements Act of 1934 Reduce tariffs Negotiating Authority Most-Favored-Nation Clause LO6

22. COI1-22 Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) Equal trade treatment Reduction in tariffs Elimination of import quotas Uruguay Round 1995 LO6

23. COI1-23 Multilateral Trade Agreements World Trade Organization (WTO) Successor to GATT 151 nations belong Doha Round (Doha, Qatar) Trade negotiation Latest round 2001 LO6

24. COI1-24 Free Trade Zones European Union (EU) Established 1958 The euro zone North American Free Trade Agreement (NAFTA) Established 1993 Canada, Mexico, and U.S. LO6

25. COI1-25 Trade-Related Issues Trade adjustment assistance Offshoring of jobs Outsourcing Benefits and costs Fair-trade products The purpose LO7