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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. U.S. & World Trade. U.S. is the world’s leading trading nation

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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

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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

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U.S. Trading Partners

  • Most U.S. trade is w/ industrialized countries

  • Canada is largest trading partner

  • Sizeable trade deficits:

    • Japan

    • China

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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

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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

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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

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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.

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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.

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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

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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

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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

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Chapter 6 Study Questions

  • 2: U.S. & World Trade

  • 10: Multilateral Trade Agreements