Chapter 6: The United States in the Global Economy

Several economic flows link the US economy with that of other nations:

1. Goods & Services2. Capital & Labor (Resource)3. Information & Technology4. Financial

U.S. & World Trade

U.S. is the world’s leading trading nationU.S. depends on imports for many food items; raw silk; diamonds; natural rubber; oilU.S. exports agricultural, chemical, aircraft, machine tools, coal & computer productsU.S. imports >> exports: TRADE DEFICIT

U.S. Trading Partners

Most U.S. trade is w/ industrialized countriesCanada is largest trading partnerSizeable trade deficits: Japan China

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

Trade Growth Factors

Transportation technology improvementsCommunication technology allows traders to make deals in trade & global finance very easilyTrade barriers have decreased since WWIITrend toward free trade continues

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 itemsA nation has a comparative advantage in some product when it can produce that product at a lower opportunity cost than a potential trading partnerSpecialization & trade can have the same effect as an increase in resources or technological progress

Government & Trade

Protective Tariffs: Excise taxes or duties on imported goods used to protect domestic producers, making foreign goods more expensiveImport 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.

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.

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 & environmentPraised for promoting free trade as means of elevating output, income, and higher SOL

European Union

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

North American Free Trade Agreement (NAFTA)

Free Trade Zone established in 1993 between Canada, U.S. & MexicoCritics feared loss of American jobs to cheaper MexicoResults: Increased domestic employment Reduced unemployment Increased SOL

Chapter 6 Study Questions

2: U.S. & World Trade10: Multilateral Trade Agreements