Econ Unit 4- World Economy

Absolute trade advantage

When a country can produce a good at a lower cost than another country

Comparative trade advantage

When a country can produce a good at an opportunity cost lower than another country (This determines what a country should specialize in)

EX: We specialize in fighter jets and Saudi Arabia specializes in oil

Top 5 US imports

Minerals

Pharmaceuticals

Medical equipment

Furniture

Plastic

Globalization

How trade and technology have made the world into a more connected and interdependent place

Causes of globalization

1. Transportation and communication

2. Expansion of the free market

3. Trade agreements

Transportation/Communication

Today- planes, ships, satellite communication via cell phones etc.

Back then- camels, compass, etc.

Expansion of the free market

• New markets that are now open to foreign investment

• Why have Russia, Eastern Europe, China, Vietnam, India, etc…been open to foreign investors in recent decades? BECAUSE it boosts their economy

Trade agreement

European Union

NAFTA

Trans Pacific Partnership

Closely linked financial markets

Computerization allows investors to invest in global markets

Multinational corporations

+ and - trade-offs

Migration

Developing nations out of the villages and into the cities

Brain drain

The top educated leave, relocate to US and Europe

Protecting the environment

The focus on combating poverty and building a modern economy trumps protecting the environment

Loss of jobs

Offshoring developed countries lose jobs

Offshoring

The practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs

The US and the global economy

Changing workplace

Pressure to compete

The need to innovate

Dependence on global supply chains

Changing workplace

Information economy, more education required

Pressure to compete

US companies must cut costs and increase profits to compete with global companies

The need to innovate

Must constantly reinvent left behind

Dependence on global supply chains

In times of crisis (COvid-19), vaccine production, semiconductor shortages etc..

Onshoring

Bringing the jobs overseas, back to the United States

The future of globalization

1. Onshoring the new trend

2. 2022-23 The Chips Act, Inflation Reduction Act, US-China Tech war

NAFTA

Established a free-trade zone in North America; it was signed in 1992 by Canada, Mexico, and the United States and took effect on Jan. 1, 1994. NAFTA immediately lifted tariffs on the majority of goods produced by the signatory nations

Why NAFTA is good

Created a large free-trade zone reducing or eliminating tariffs on imports and exports between the three participating countries. There was an increase in trade between the three countries, and real per-capita GDP also increased.

Why NAFTA is bad

Loss of United States manufacturing jobs. Many jobs shifted from the United States to Mexico, as higher-paying factory jobs moved to more cost-effective regions

Why tariffs?

Produce revenue on goods and services brought into the country

Strong US dollar

Means U.S. exports cost more in foreign markets

Weaks US dollar

Means imports are costlier for American consumers to buy

Trade defecit

The country is importing more goods and services than it is exporting

Why the US is in a trade defecit

An imbalance between a country's savings and investment rates

Dangers of trade defecits

Can facilitate a sort of economic colonization. If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation

US v India example

Why nations trade, is because of unequal distribution.

US has more developed things and India needs that

Japan v N Korea example

Japan developed robotics and electronics. Gained comparative advantage

N Korea isolated itself. They can’t trade with anyone because they don’t have anything to offer