The United States & the Global Economy

Chapter 5Eco 2013

Fall 2007

Maria C Mari, CPA

International Linkages

U.S EconomyOther

National Economies

Capital and Labor

Good and Services

Information & Technology

Money

Imports – 16% of domestic output

Export – 11% of output

Competition with other countries

Trade Patterns

Trade deficit Imports > exports

Trade Surplus Imports < Exports

Rapid Trade Growth Transportation technology Communications technology

Law of Comparative Advantage

States that the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

Produce what has LOW opportunity cost

Trade for what has HIGH opportunity cost

Absolute Advantage

Absolute: The ability to produce something using fewer

resources than other producers useComparative

The ability to produce something at a lower opportunity cost than other producers face.

Absolute advantage focuses on who uses the fewest resources but comparative advantage focuses on what else those resources could have produced.

Foreign Exchange Market

Buyers, sellers use money to buy products

Different currencies Exchange rates are

equilibrium prices

Foreign Exchange Rate

Foreign currency price

of dollar falls

International \value of the dollar

falls

Dollar price of foreign currency rises

International value of foreign currency

rises

Equals

Equals

Equals

Equals

$ depreciates

Foreign

Currency

Appreciates

Government and Trade

Protective tariffs Are excise taxes or

duties placed on imported goods

Import quotas Limits on the quantities

or total value of specific items that may be imported

Non-tariff barriers Export subsidies

Multilateral Trade Agreements

Trade war When one nation

enacts barriers against imports

The nations whose exports suffer may retaliate with other trade barriers

Reciprocal Trade Agreements Act

Started the downward trend of tariffsNegotiating authority

President is authorized to negotiate Contingent on the actions of other nations

Generalized reductions Specific tariff reductions negotiated between

the US and any particular nation were generalized through the most-favored nation clause.

GATT

Three principles Equal, nondiscriminatory trade treatment for all

member nations Reduction of tariff by multilateral negotiations Elimination of import quotas

World Trade Organization

Established in 1995149 nations including ChinaOversees trade agreements

reached by the member nations

Rules trade disputes among them

Provides forum for trade talks

European Union (EU)

Free trade zoneStarted in 1958Called Common MarketAbolished tariffs and

import quotasLiberalized the movement

of capital and laborEURO

EU as of 1/1/07

Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany

Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland

Portugal Romania Slovakia Slovenia Spain Sweden United

Kingdom

http://europa.eu/abc/history/index_en.htm

European Union

The six founders are Belgium, France, Germany, Italy, Luxembourg and the Netherlands.

Founded in 1950 Denmark, Ireland and the United Kingdom join the

European Union on 1 January 1973, raising the number of member states to nine.

In 1987 the Single European Act is signed. This is a treaty which provides the basis for a vast six-year program aimed at sorting out the problems with the free-flow of trade across EU borders and thus creates the ‘Single Market’.

In 1993 the Single Market is completed with the the 'four freedoms' of: movement of goods, services, people and money.

European Union

The European Union (EU) is a family of democratic European countries, committed to working together for peace and prosperity.

It is not a State intended to replace existing States, nor is it just an organization for international cooperation.

The EU is, in fact, unique. Its member states have set up common

institutions to which they delegate some of their sovereignty so that decisions on specific matters of joint interest can be made democratically at European level.

How is it organized?

The European Parliament The Council of the European Union The European Commission The Court of Justice The Court of Auditors The European Economic and Social Committee The Committee of the Regions The European Central Bank The European Investment Bank  

NAFTA

US, Canada and MexicoGreatly reduced tariffs and other trade

barriers

Globalization

Integration of industry, commerce, communication, travel and culture among the world’s nations.