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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