The U.S. in the Global Economy Chapter 5 Unit Test after this chapter 2/18/2019

International Linkages Goods & services flow U.S. exports g&s to other nations and imports g&s from them. Capital & labor (resource) flow U.S. firms establish production facilities in foreign countries & foreign firms do the same here. Labor also moves between nations Information & technology flows U.S. transmits information to other nations about U.S. products, prices, interest rates, & investment opportunities Financial flows Money is transferred between the U.S. & other countries for several purposes (i.e. paying for imports, paying interest on debt, & providing foreign aid) 2/18/2019

The U.S. & World Trade Volume & pattern Volume of international trade has increased greatly for many countries. Dependence Trade patterns Trade Deficit - Imports exceed exports Trade Surplus - Export exceed imports See Table 5.1 on page 86. 1a. There are some products that the U.S. is dependent on receiving from foreign countries. 1b. In 2005, the U.S. had a $782 billion trade deficit 3. Export exceed imports…In 2005, the U.S. exports of services exceeded U.S. imports of services by $58 billion From a volume perspective, Canada is our most important trading partner…we export more to Canada than anyone else (24%) and our imports from Canada are only exceeded by Western Europe. Our trade deficits are largest with China & Japan. But we also have a large deficit with members of OPEC due to our dependence on foreign oil 2/18/2019

Rapid Trade Growth Transportation technology Communications technology Fast transport of items to other countries Communications technology Internet, phone, & fax has advanced world trade General decline in tariffs U.S. tariffs as a % of imports is down to 5% down from 37% in 1940 First…several factors have propelled the rapid growth of international trade since WWII… Improvement in technology have shrunk the globe & have fostered world trade. Airplanes now transport low-weight, half-value items quickly from one nation to another. Dramatic improvements in communications technology have also advanced world trade. Computers, the Internet, telephones, & fax machines now directly link traders around the world Since 1940, tariffs have fallen…U.S. tariffs as a percentage of imports is down to 5% down from 37% in 1940. Many nations still maintain barriers to free trade, but, on average, tariffs have fallen significantly, thus increasing international trade 2/18/2019

Participants in International Trade Germany, United States, China, & Japan Top participants in world trade by total volume Many multinational corporations provide headquarters in these major countries New Participants Since 1978, China has grown approx. 9% per year Other Asian economies are growing as well….Singapore, South Korea, & Taiwan 1. The top participants in world trade by total volume are Germany, U.S., China, & Japan. Many multinational corporations provide headquarters in these major countries 2. Since 1978, China has grown on an average of 9% per year. Other Asian economies are also active traders…in particular Singapore, South Korea, & Taiwan 2/18/2019

Specialization & Comparative Advantage Absolute advantage Producing more than another country Comparative advantage Lower opportunity cost than that of another country Terms of trade “exchange rate” at which units of one product can be exchanged for units of another product Gains from specialization & trade Improves global resource allocation and results in a larger global output Use Tables 5.4 & 5.5 for #1&2…The U.S. has an absolute advantage in both avocados & soybeans. U.S. has a comparative adv in soybeans over Mexico. Mexico has the ca in producing avocados. (See column #1 on page 91). 3) Both countries can agree on an “exchange rate” of soybeans/avocados that is mutually beneficial so they focus on producing the product that has a comparative advantage for them. 4. See table 5.7 page 92 2/18/2019

Mexico’s Production Possibilities A B C D E Avocados 20 24 40 60 Soybeans 15 10 9 5 2/18/2019

U.S. Production Possibilities A B C D E Avocados 30 33 60 90 Soybeans 20 19 10 2/18/2019

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 Appreciation – Dollar gains value against another currency 3) I.E. when a business chooses to export goods to another country (i.e. Japan), they want payment in their country’s currency so Japan has to buy dollars in the foreign exchange market and pay with Yen 2/18/2019

Government & Trade Trade impediments & subsidies Protective tariffs Taxes placed on imported goods Protects domestic producers from foreign competition Import quotas Limit on the amount that can be imported Nontariff barriers I.E. licensing requirements, unreasonable standards on quality, or red tape Export subsidies Government payments to domestic producers who export First…four ways that governments commonly interfere with free trade 1a) makes foreign goods more expensive. This increases demand for domestic goods who in turn raise prices so the customer loses 1c) this slows down imports and helps domestic producers 1d) this reduces production costs which allows firms to charge lower prices to consumers 2/18/2019

Why Government Trade Interventions? Misunderstanding the gains from trade Not just higher employment…more output=lower prices Political considerations Businesses that don’t have a comparative advantage use political activity to achieve their goals Costs to society Benefits business but hurts consumers 2/18/2019

Multilateral Trade Agreements & Free-Trade Zones World Trade Organization (WTO) Oversees trade agreements & rules on disputes between countries European Union (EU) Trade bloc Euro North American Free Trade Agreement (NAFTA) Global Competition 2/18/2019