The United States and The United States and the Global Economythe Global Economy

How do countries trade in the global How do countries trade in the global economy?economy?

Why is global trade growing Why is global trade growing in importance?in importance?

Definition of “global economy”:Definition of “global economy”: the system of the system of markets and trade that link the countries of the world.markets and trade that link the countries of the world.

Dramatic growth in the last half of the 20Dramatic growth in the last half of the 20thth century: century: Result of advancements in transportation, communication, and Result of advancements in transportation, communication, and

shift of types of goods being produced and traded. shift of types of goods being produced and traded. EXAMPLES?EXAMPLES?

Comparative advantage:Comparative advantage: Country has an advantage when it can produce a good or Country has an advantage when it can produce a good or

service at a lower opportunity cost than competitors. service at a lower opportunity cost than competitors. Advantage is based on factors such as climate, factors of Advantage is based on factors such as climate, factors of production, and technology. EXAMPLES?production, and technology. EXAMPLES?

What goods and services What goods and services do countries trade?do countries trade?

United States is the world’s largest importer and a top exporter!United States is the world’s largest importer and a top exporter! Top trading partners for U.S. (2009)Top trading partners for U.S. (2009)

Canada, China and MexicoCanada, China and Mexico Japan, Germany, UK, South Korea, France, Netherlands, TaiwanJapan, Germany, UK, South Korea, France, Netherlands, Taiwan 65% of US trade65% of US trade North American Free Trade Agreement (NAFTA), 1994North American Free Trade Agreement (NAFTA), 1994

US, Canada, Mexico – tariff barriers to agricultureUS, Canada, Mexico – tariff barriers to agriculture Advantages of foreign trade:Advantages of foreign trade:

Great consumer access to goods and servicesGreat consumer access to goods and services Cheaper productsCheaper products Improves standard of living Improves standard of living Exchange of ideasExchange of ideas

Negative effects of foreign trade:Negative effects of foreign trade: OutsourcingOutsourcing

How and why do How and why do countries regulate trade?countries regulate trade?

Protectionists versus Non-ProtectionistsProtectionists versus Non-Protectionists Debate the concept of “free trade”Debate the concept of “free trade”

Unrestricted movement of goods are services across bordersUnrestricted movement of goods are services across borders Most countries are “protectionist”Most countries are “protectionist”

Restriction of imports to shield domestic markets from foreign Restriction of imports to shield domestic markets from foreign competitioncompetition

Protective TariffsProtective Tariffs Designed to protect an aspect of a country’s economyDesigned to protect an aspect of a country’s economy

TaxesTaxes Import quotasImport quotas VER (Voluntary export restraints)VER (Voluntary export restraints)

GATT (General Agreement on Tariffs and Trade, 1949-1993)GATT (General Agreement on Tariffs and Trade, 1949-1993) Japanese cars?Japanese cars?

History in the United States?History in the United States?

How is global trade How is global trade financed?financed?

Foreign exchange is the process of converting one currency to another.Foreign exchange is the process of converting one currency to another. Exchange rates (a value in terms of another currencyExchange rates (a value in terms of another currency

Depreciation: occurs when one currency loses value relative anotherDepreciation: occurs when one currency loses value relative another Appreciation: occurs when one currency gains value relative to anotherAppreciation: occurs when one currency gains value relative to another Example: China’s devaluation of the YuanExample: China’s devaluation of the Yuan

Strong or weak dollarsStrong or weak dollars Strong means higher exchange rate and will trade for more foreign currency Strong means higher exchange rate and will trade for more foreign currency

than a weak dollar (will buy more)than a weak dollar (will buy more) Fluctuation of exchange ratesFluctuation of exchange rates

When rates are tied to supply and demand, exhange is “floating”When rates are tied to supply and demand, exhange is “floating” Non-floating is when countries measures its currency against a major currencyNon-floating is when countries measures its currency against a major currency

Balance of tradeBalance of trade The difference btw the values of a country’s exports and importsThe difference btw the values of a country’s exports and imports

Trade surplus: exports more than importsTrade surplus: exports more than imports Trade deficit: imports more than exportsTrade deficit: imports more than exports