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The U.S. in the Global Economy

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The U.S. in the Global Economy Chapter 5 * * – PowerPoint PPT presentation

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Title: The U.S. in the Global Economy


1
The U.S. in the Global Economy
  • Chapter 5

2
In this chapter, you will learn
  1. Some key facts about U.S. international trade
  2. About comparative advantage, specialization, and
    international trade
  3. How exchange rates are determined in currency
    markets
  4. How why government sometimes interferes with
    free international trade
  5. About trade-related topics such as the World
    Trade Organization (WTO), trade adjustment
    assistance, offshoring of jobs, and fair-trade
    products

3
International Linkages (5.1)
  • Goods services flow (trade flow)
  • Capital labor (resource) flow
  • Information technology flows
  • Financial flows

4
The U.S. World Trade
  • Volume pattern
  • Volume of international trade has been increasing
  • The U.S. is almost entirely depending on other
    countries for products like bananas, cocoa,
    coffee, etc.

5
Trade patterns
  • Trade Deficit
  • Imports exceed exports
  • Trade Surplus
  • Exports exceed imports
  • Most important trading partner is Canada.

6
Financial Linkages
  • U.S. is worlds largest borrower of foreign funds
  • Can be used to purchase foreign goods

7
Rapid Trade Growth
  • Transportation technology
  • High transportation costs are a barrier to any
    type of trade
  • Improvements in transportation have shrunk the
    globe fostered world trade
  • Communications technology
  • Dramatic improvements in communications
    technology have also advanced world trade
  • Exporters can access overseas markets carry out
    trade deals
  • General decline in tariffs
  • U.S. tariffs as a percentage of imports are now
    5, down from 37 in 1940

8
Specialization Comparative Advantage (5.2)
  • U.S. labor other resources are shifted toward
    export industries away from import industries
  • Specialization international trade increase the
    productivity of a nations resources allow for
    greater total output

9
Production Possibilities Analysis
  • Absolute advantage- When a country can produce
    more output than other country
  • Comparative advantage- when a nation can produce
    a product at a lower opportunity cost
  • Table 5.4 5.5

10
Production Possibilities Tables (Mexico U.S.)
Avocados Mexico must give up ¼ ton of soybeans
to get 1 ton of avocados U.S. must give up 1/3
ton of soybeans to get 1 ton of avocados C.A.
Mexico for avocados
Mexico Production Alternatives
Product A B C D E
Avocados 0 20 24 40 60
Soybeans 15 10 9 5 0
Soybeans U.S. must give up 3 tons of avocados to
get 1 ton of soybeans Mexico must give up 4 tons
of avocados to get 1 ton of soybeans C.A. U.S.
for soybeans
U.S. Production Alternatives
Product A B C D E
Avocados 0 30 33 60 90
Soybeans 30 20 19 10 0
11
Terms of Trade
  • Through negotiation, the two nations can agree on
    an exchange rate thats mutually beneficial to
    both countries
  • Each country can do better through such trade
    than through domestic production of both products

12
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
  • Exports rise imports become more expensive
  • Appreciation Dollar gains value against another
    currency
  • Imports rise exports fall because the dollar is
    now stronger than other currencies

13
Trade impediments subsidies (5.3)
  • 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

14
Why Government Trade Interventions?
  • Misunderstanding the gains from trade
  • Not just higher employmentmore outputlower
    prices
  • Political considerations
  • Businesses that dont have a comparative
    advantage use political activity to achieve their
    goals
  • Costs to society
  • Benefits business but hurts consumers through
    higher prices

15
Multilateral Trade Agreements Free-Trade Zones
  • General Agreement on Tariffs Trade (GATT) 1947
  • Negotiated reduced trade barriers among nations
  • World Trade Organization (WTO)
  • GATTs successor
  • Oversees trade agreements rules on trade
    disputes among member nations

16
European Union (EU)
  • Abolished tariffs import quotas on nearly all
    products traded among the participating nations
  • Free movement of capital labor throughout the
    zone
  • Common identity
  • Economic interests
  • Trade rules

17
Euro
  • Common currency for European Union (EU)
  • Ends inconvenience expense of exchanging
    currencies
  • Enhanced free flow of goods, services,
    resources through EU

18
North American Free Trade Agreement (NAFTA)
  • Started a free trade zone in 1993 with Canada,
    Mexico, United States
  • Some combined output as the EU but encompasses a
    much larger geographic area
  • Eliminated tariffs other trade barriers
  • Critics of NAFTA loss of U.S. jobs
  • Lower wages weaker regulations on pollution
    worker safety in Mexico
  • Employment has increased in the U.S. since
    NAFTAsome sectors have been negatively affected
    though

19
Trade Adjustment Assistance Act (2002)
  • Provides cash assistance for up to 78 weeks for
    workers displaced by imports or plant relocations
    abroad
  • Workers must participate in job searches,
    training programs, or remedial education

20
Offshoring of Jobs
  • Shifting work previously done by American workers
    to workers located in other locations.
  • Recent advances in technology have enabled U.S.
    firms to offshore service jobs
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