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Chapter 5: The United States in the Global Economy

  • International economic linkages

    • Trade flows - Exports and imports of goods and services

    • Resource flows - Production facilities that cause movement of labor b/w nations

    • Information and technology flows - Transmits + receives information; incorporation of both foreign + domestic technology

    • Financial flows - Money transfers b/w US + other countries

  • Volume and pattern

    • Many countries import goods from other nations + export own products

    • Volume - Rapid growth of US exports + imports as percentages of GDP

    • Dependence - Imported goods compete w/ US goods in many domestic markets; many US industries depend on sales abroad for profitability

    • Trade patterns

      • Trade deficit - Imports > exports

      • Trade surplus - Imports < exports

      • US imports some of the same categories of goods it exports

      • US dependence on foreign oil

    • Financial linkages - Borrowing from foreigners or selling real assets (ex. factories, real estate, etc.)

  • Factors of rapid trade growth

    • Transportation technology - Better tech → Lowered cost of transportation

    • Communications technology - Link traders around the world

    • General decline in tariffs - Lowered excise taxes on imported products

  • Participants in international trade

    • All nations participate in international trade to some extent

  • Specialization + comparative advantage

    • Increase productivity of resources + allow for greater total output & income

    • Absolute advantage - Output per worker in one country exceeds that in the other country in producing both goods

    • Comparative advantage - When a nation can produce a product at a lower domestic opportunity cost than can a potential trading partner

    • If both nations specialize → Each can achieve a larger total output w/ the same input of resources

    • Terms of trade - Mutually beneficial; trade goods in order to do better than through domestic production alone

    • Benefits

      • Better global resource allocation

      • Overcome production constraints

  • Foreign exchange market - A market in which various national currencies are exchanged for one another

    • Exchange rates - The rate at which the currency of one nation can be exchanged for the currency of another

    • Links domestic prices w/ foreign prices

    • Ex. US firms exporting goods to Japan want payment in dollars → Japanese importer supply yen in exchange for dollars in foreign exchange market

  • Changing rates

    • Ex. Increase in US demand for Japanese goods → Increases demand for yen + raises dollar price of yen

    • Depreciation - When the international value of a currency declines

    • Appreciation - When the international value of a currency increases

  • Government and trade

    • Trade impediments + subsidies

      • Protective tariffs - Excise taxes or duties placed on imported goods; shields domestic producers from foreign competition

      • Import quotas - Limits on quantities of specific items that may be imported

      • Non-tariff barriers - Onerous licensing requirements, unreasonable product quality standards, bureaucratic delays in customs procedures, etc.

      • Export subsidies - Government payments to domestic producers of export goods

    • Why are there restrictions?

      • Trade can harm particular domestic industries + particular groups of resource suppliers

    • Costs to society

      • Domestic consumers pay higher-than-world prices

      • Hurt domestic firms that use imported goods as inputs

      • Reduce competition in protected industries

  • Multilateral trade agreements + free-trade zones

    • Smoot-Hawley Tariff Act - Meant to reduce imports + stimulate US production; caused other nations to retaliate with its own high tariffs

    • Reciprocal Trade Agreements Act - Aimed at reducing tariffs + started a downward trend of tariffs

    • Normal-trade-relations (NTR) status - Reduced US tariffs that result from negotiation apply equally to any nation that signed an original agreement

  • General Agreement on Tariffs and Trade (GATT) - Forum for negotiation of reduced trade barriers on a multilateral basis among nations

  • World Trade Organization (WTO) - Oversees trade agreements reached by member nations + rules on trade disputes among them

    • Doha Round - Negotiations aimed at further reducing tariffs, quotas, and agricultural subsidies

    • Very controversial

  • European Union (EU) - Regional free-trade zone including several European nations

    • Abolished tariffs + import quotas on nearly all products traded among participating nations

    • Trade bloc - A group of countries having a common identity, economic interests, and trade rules

    • Makes members better customers for US exports

    • Reduce members’ trade with non-bloc members

    • Euro - EU’s common currency; expected to raise standard of living for EU members over time

  • North American Free Trade Agreement (NAFTA) - Free-trade zone between Canada, Mexico, and the US

    • Increase employment in US

    • Enhanced standard of living

  • Trade-related issues

    • Trade Adjustment Assistance Act - Helps those hurt by shifts in international trade patterns

      • Cash assistance for displaced workers

      • Relocation allowances to help displaced workers move

      • Creates political support to reduce trade barriers + export subsidies

  • Offshoring - Shifting work previously done by American workers to workers located in other nations

    • Very profitable

    • Many Americans lose jobs

    • Reflects growing specialization + international trade in services

    • Increases demand for complementary jobs in US

  • Global competition

    • Globalization - Integration of industry, commerce, communication, travel, and culture among the world’s nations

    • Encourages competition

    • Breaks down monopoly power of existing firms

    • More efficiency + improved product quality

Chapter 5: The United States in the Global Economy

  • International economic linkages

    • Trade flows - Exports and imports of goods and services

    • Resource flows - Production facilities that cause movement of labor b/w nations

    • Information and technology flows - Transmits + receives information; incorporation of both foreign + domestic technology

    • Financial flows - Money transfers b/w US + other countries

  • Volume and pattern

    • Many countries import goods from other nations + export own products

    • Volume - Rapid growth of US exports + imports as percentages of GDP

    • Dependence - Imported goods compete w/ US goods in many domestic markets; many US industries depend on sales abroad for profitability

    • Trade patterns

      • Trade deficit - Imports > exports

      • Trade surplus - Imports < exports

      • US imports some of the same categories of goods it exports

      • US dependence on foreign oil

    • Financial linkages - Borrowing from foreigners or selling real assets (ex. factories, real estate, etc.)

  • Factors of rapid trade growth

    • Transportation technology - Better tech → Lowered cost of transportation

    • Communications technology - Link traders around the world

    • General decline in tariffs - Lowered excise taxes on imported products

  • Participants in international trade

    • All nations participate in international trade to some extent

  • Specialization + comparative advantage

    • Increase productivity of resources + allow for greater total output & income

    • Absolute advantage - Output per worker in one country exceeds that in the other country in producing both goods

    • Comparative advantage - When a nation can produce a product at a lower domestic opportunity cost than can a potential trading partner

    • If both nations specialize → Each can achieve a larger total output w/ the same input of resources

    • Terms of trade - Mutually beneficial; trade goods in order to do better than through domestic production alone

    • Benefits

      • Better global resource allocation

      • Overcome production constraints

  • Foreign exchange market - A market in which various national currencies are exchanged for one another

    • Exchange rates - The rate at which the currency of one nation can be exchanged for the currency of another

    • Links domestic prices w/ foreign prices

    • Ex. US firms exporting goods to Japan want payment in dollars → Japanese importer supply yen in exchange for dollars in foreign exchange market

  • Changing rates

    • Ex. Increase in US demand for Japanese goods → Increases demand for yen + raises dollar price of yen

    • Depreciation - When the international value of a currency declines

    • Appreciation - When the international value of a currency increases

  • Government and trade

    • Trade impediments + subsidies

      • Protective tariffs - Excise taxes or duties placed on imported goods; shields domestic producers from foreign competition

      • Import quotas - Limits on quantities of specific items that may be imported

      • Non-tariff barriers - Onerous licensing requirements, unreasonable product quality standards, bureaucratic delays in customs procedures, etc.

      • Export subsidies - Government payments to domestic producers of export goods

    • Why are there restrictions?

      • Trade can harm particular domestic industries + particular groups of resource suppliers

    • Costs to society

      • Domestic consumers pay higher-than-world prices

      • Hurt domestic firms that use imported goods as inputs

      • Reduce competition in protected industries

  • Multilateral trade agreements + free-trade zones

    • Smoot-Hawley Tariff Act - Meant to reduce imports + stimulate US production; caused other nations to retaliate with its own high tariffs

    • Reciprocal Trade Agreements Act - Aimed at reducing tariffs + started a downward trend of tariffs

    • Normal-trade-relations (NTR) status - Reduced US tariffs that result from negotiation apply equally to any nation that signed an original agreement

  • General Agreement on Tariffs and Trade (GATT) - Forum for negotiation of reduced trade barriers on a multilateral basis among nations

  • World Trade Organization (WTO) - Oversees trade agreements reached by member nations + rules on trade disputes among them

    • Doha Round - Negotiations aimed at further reducing tariffs, quotas, and agricultural subsidies

    • Very controversial

  • European Union (EU) - Regional free-trade zone including several European nations

    • Abolished tariffs + import quotas on nearly all products traded among participating nations

    • Trade bloc - A group of countries having a common identity, economic interests, and trade rules

    • Makes members better customers for US exports

    • Reduce members’ trade with non-bloc members

    • Euro - EU’s common currency; expected to raise standard of living for EU members over time

  • North American Free Trade Agreement (NAFTA) - Free-trade zone between Canada, Mexico, and the US

    • Increase employment in US

    • Enhanced standard of living

  • Trade-related issues

    • Trade Adjustment Assistance Act - Helps those hurt by shifts in international trade patterns

      • Cash assistance for displaced workers

      • Relocation allowances to help displaced workers move

      • Creates political support to reduce trade barriers + export subsidies

  • Offshoring - Shifting work previously done by American workers to workers located in other nations

    • Very profitable

    • Many Americans lose jobs

    • Reflects growing specialization + international trade in services

    • Increases demand for complementary jobs in US

  • Global competition

    • Globalization - Integration of industry, commerce, communication, travel, and culture among the world’s nations

    • Encourages competition

    • Breaks down monopoly power of existing firms

    • More efficiency + improved product quality

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