McConnellBrue 16e

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Check on project status
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The United States in theGlobal Economy
Examine trade flows and the financial flows That
pay for them. What is the extent and pattern of
International trade? How much has it grown?
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Topics

• International trade linkages
• Exports and imports
• Trade growth
• Comparative advantage
• Foreign exchange market
• Trade impediments and government intervention
• Related topics growth of China,

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INTERNATIONAL LINKAGES
UNITEDSTATESECONOMY
OTHERNATIONALECONOMIES
Goods and Services
Trade Flows
Capital and Labor
Resource Flows
Information and Technology
Money - financial flows
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THE UNITED STATES WORLD TRADE
Exports - Percent of GDP, 2002
Netherlands 62 Canada 41 Germany 36 New
Zealand 33 Spain 29 Italy 28 France
27 United Kingdom 26 Japan 12 United
States 11
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THE UNITED STATES WORLD TRADE
Principal U.S. Exports Imports, 2002
Chemicals 49.8 Semiconductors 42.3 Consumer
Durables 40.1 Computers 38.6 Generating
Equipment 27.6 Aircraft 26.7 Telecommunications 22
.2 Automobiles 20.5 Grains 14.4 Nonferrous
Metals 12.2
Automobiles 114.1 Petroleum 103.6 Computers 75.3
Household Appliances 66.4 Clothing 64.3 Chemicals
33.1 Consumer Electronics 32.8 Semiconductors 26.0
Telecommunications 23.2 Iron and Steel 17.7
We depend on foreign markets for - Rice, wheat,
cotton, tobacco We depend on others for
bananas, cocoa, coffee, nickel, tin, natural
rubber
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THE UNITED STATES WORLD TRADE
U.S. Exports Imports of Goods, 2002
Exports to
Value (Billions of Dollars)
Imports from
Value (Billions of Dollars)
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THE UNITED STATES WORLD TRADE
U.S. Exports Imports of Goods, 2002
Exports to
Value (Billions of Dollars)
Imports from
Value (Billions of Dollars)
Imports Exceeded Exports by 346 Billion in 1999
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Why the rapid trade growth?

• Transportation and Communications Technology
• General Decline in Tariffs
• Participants
• United States, Japan, and Western Europe (G8)
• Multinational Corporations
• Growing Participants China, Taiwan, South
  Korea, Singapore, Indonesia
• Collapse of Communism

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GLOBAL PERSPECTIVE
COMPARATIVE EXPORTS, 2001
IN BILLIONS OF DOLLARS
0 100 200 300 400 500 600 700
United States Germany Japan France United
Kingdom China Canada Italy Netherlands Belgium-Lux
. Mexico South Korea Taiwan Singapore Spain
Source World Trade Organization
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SPECIALIZATION AND COMPARATIVE ADVANTAGE

• Basic Principle specialization helps nations
  reduce the cost of getting the goods services
  they desire.
• Comparative Advantage producing a product at
  lower opportunity cost than a trading partner
• Gains from Specialization Trade economic
  growth and improved resource allocation

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GLOBAL PERSPECTIVE
Foreign Currency per U.S. Dollar
1 will buy
EXCHANGE RATES
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THE FOREIGN EXCHANGE MARKET

• A Competitive Market large of sellers and
  buyers, standard product
• Linkages to All Domestic and Foreign Prices
• Dollar-Yen Market you want to be paid in your
  own currency.
• Dollar price of yen
• Yen price of dollars
• Changing Rates
• Increased US demand for Japanese goods increases
  the demand for yen and raise the dollar price of
  yen.

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THE FOREIGN EXCHANGE MARKET
The Market for Yen
P
Exchange Rate .01 1
Sy
.01
Dollar Price of 1 Yen
Dy
0
Q
Qe
Quantity of Yen
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THE FOREIGN EXCHANGE MARKET

• Depreciation of the dollar vs. the yen
• Increase in demand for Japanese goods services
  leads to increased demand for yen
• Dollar price of yen rises (depreciation of the
  dollar)
• Takes more dollars to buy yen.
• International value of the dollar declines
• Japanese goods become more expensive
• US consumers shift spending to less expensive
  sources
• US goods become cheaper to Japan and
• Their purchases of US goods go up

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THE FOREIGN EXCHANGE MARKET

• Appreciation of the dollar vs. the yen
• An increased Japanese demand for US goods leads
  to increased supply of yen to pay for the goods.
• The dollar price of yen declines (appreciation of
  the dollar)
• Takes fewer dollars to buy yen
• Japanese goods become less expensive to US
• US imports of Japanese products go up
• US exports to Japan go down.

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THE FOREIGN EXCHANGE MARKET
Currency Appreciation and Depreciation
International value of dollar falls
(dollar depreciates)
Equals
Dollar price of foreign currency rises
Equals
Equals
Foreign currency price of dollar falls
International value of foreign currency
rises (foreign currency appreciates)
Equals
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GOVERNMENT TRADE
Trade Impediments Subsidies

• Protective Tariffs
• Shield domestic producers from foreign
• Competition.
• Import Quotas
• Limits on quantities imported
• Nontariff Barriers
• Licensing requirements, product quality
  standards, red tape
• Export Subsidies
• Government pays domestic producers
• Lower their costs so they can lower their prices
  and sell more exports. Farmers

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GOVERNMENT TRADE
Why Government Trade Interventions?

• Misunderstanding of the Gains From Trade
• Export sector new jobs
• Import sector lost jobs
• More about using resources efficiently to
  maximize output and increase growth.
• Political Considerations
• Protect domestic industries
• Costs To Society
• Tariffs and quotas help producers and hurt
  consumers.

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GOVERNMENT TRADE
Trade issues

• Multilateral Trade Agreements
• Free-trade Zones
• Smoot-Hawley Tariff Act - 1930

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GOVERNMENT TRADE
The growth of trade

• Reciprocal Trade Agreements Act, 1934
• Negotiating Authority
• Generalized Reductions
• Most-Favored-Nation Clauses
• General Agreement on Tariffs and Trade (GATT)
  1947 23 nations
• A forum for trade negotiations
• Uruguay Round, World Trade Organization (WTO) 145
  nations

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GOVERNMENT TRADE
The growth of trade

• The Doha Round (Qatar)
• The European Union (EU)
• The EU Trade Bloc Free trade zone
• The Euro
• North American Free Trade Agreement (NAFTA)
  Canada, US, Mexico free trade zone
• Increased Global Competition
• Globalization good or bad thing?

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Key Terms
Reciprocal Trade Agreements Act most-favored-natio
n clauses General Agreement on Tariffs Trade
(GATT) World Trade Organization (WTO) Doha
Round European Union (EU) trade bloc euro North
American Free Trade Agreement (NAFTA)
multinational corporations comparative
advantage terms of trade foreign exchange
market exchange rates depreciation appreciation pr
otective tariffs import quotas nontariff
barriers export subsidies Smoot-Hawley Tariff Act