The United States and the Global Economy How do countries trade in the global economy?

Why is global trade growing in importance? Definition of “global economy”: the system of markets and trade that link the countries of the world. Dramatic growth in the last half of the 20th century: Result of advancements in transportation, communication, and shift of types of goods being produced and traded. EXAMPLES? Comparative advantage: Country has an advantage when it can produce a good or service at a lower opportunity cost than competitors. Advantage is based on factors such as climate, factors of production, and technology. EXAMPLES?

What goods and services do countries trade? United States is the world’s largest importer and a top exporter! Top trading partners for U.S. (2009) Canada, China and Mexico Japan, Germany, UK, South Korea, France, Netherlands, Taiwan 65% of US trade North American Free Trade Agreement (NAFTA), 1994 US, Canada, Mexico – tariff barriers to agriculture Advantages of foreign trade: Great consumer access to goods and services Cheaper products Improves standard of living Exchange of ideas Negative effects of foreign trade: Outsourcing

How and why do countries regulate trade? Protectionists versus Non-Protectionists Debate the concept of “free trade” Unrestricted movement of goods are services across borders Most countries are “protectionist” Restriction of imports to shield domestic markets from foreign competition Protective Tariffs Designed to protect an aspect of a country’s economy Taxes Import quotas VER (Voluntary export restraints) GATT (General Agreement on Tariffs and Trade, 1949-1993) Japanese cars? History in the United States?

How is global trade financed? Foreign exchange is the process of converting one currency to another. Exchange rates (a value in terms of another currency Depreciation: occurs when one currency loses value relative another Appreciation: occurs when one currency gains value relative to another Example: China’s devaluation of the Yuan Strong or weak dollars Strong means higher exchange rate and will trade for more foreign currency than a weak dollar (will buy more) Fluctuation of exchange rates When rates are tied to supply and demand, exhange is “floating” Non-floating is when countries measures its currency against a major currency Balance of trade The difference btw the values of a country’s exports and imports Trade surplus: exports more than imports Trade deficit: imports more than exports