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