Chapter 6: The United States in the Global Economy

1. Chapter 6: The United States in the Global Economy • Several economic flows link the US economy with that of other nations: • Goods & Services • Capital & Labor (Resource) • Information & Technology • Financial

2. U.S. & World Trade • U.S. is the world’s leading trading nation • U.S. depends on imports for many food items; raw silk; diamonds; natural rubber; oil • U.S. exports agricultural, chemical, aircraft, machine tools, coal & computer products • U.S. imports >> exports: TRADE DEFICIT

3. U.S. Trading Partners • Most U.S. trade is w/ industrialized countries • Canada is largest trading partner • Sizeable trade deficits: • Japan • China

4. U.S. Trade Deficits • Must be financed by borrowing or earning foreign exchange • Selling U.S. assets through foreign investment in the U.S. • U.S. borrows from citizens of other countries • U.S. is world’s largest debtor nation

5. Trade Growth Factors • Transportation technology improvements • Communication technology allows traders to make deals in trade & global finance very easily • Trade barriers have decreased since WWII • Trend toward free trade continues

6. Comparative Advantage • David Ricardo: It benefits a person/country to specialize & exchange even if that person/nation is more productive than potential trading partners in all economic activities. • Specialization should take place if there are RELATIVE cost differences in production of different items • A nation has a comparative advantage in some product when it can produce that product at a lower opportunity cost than a potential trading partner • Specialization & trade can have the same effect as an increase in resources or technological progress

7. Government & Trade • Protective Tariffs: Excise taxes or duties on imported goods used to protect domestic producers, making foreign goods more expensive • Import Quotas: Maximum limits on number or total value of specific imports. • Nontariff Barriers: Licensing requirements; unnecessary, bureaucratic “red tape” • Export Subsidies: Promote sale of products abroad.

8. Why do governments enact trade barriers? • Misunderstanding the Gains from Trade • Don’t understand benefits from trade • Only see damage in domestic industries that can’t compete successfully w/ imports • Political considerations • Costs to Society: Harm domestic consumers with higher than world prices for protected goods.

9. World Trade Organization (WTO) • WTO oversees trade agreements & rules on trade disputes for 140 nations. • Criticized for having rules crafted to expand trade & investment at expense of workers & environment • Praised for promoting free trade as means of elevating output, income, and higher SOL

10. European Union • Initiated as Common Market in 1958 • Now has 25 member nations (as of May 2004) • Trade Bloc: Group of countries having common identity, economic interests, and trade rules • Euro: common currency among most EU countries

11. North American Free Trade Agreement (NAFTA) • Free Trade Zone established in 1993 between Canada, U.S. & Mexico • Critics feared loss of American jobs to cheaper Mexico • Results: • Increased domestic employment • Reduced unemployment • Increased SOL

12. Chapter 6 Study Questions • 2: U.S. & World Trade • 10: Multilateral Trade Agreements