ECO 2013 Macroeconomics
The United States in the Global Economy
Chapter 6
Global Economy:
 International linkages:
o Good and services or simply trade flows
o Capital and labor flows or simply resource flows
o Information and technology flows
o Financial flows
 US and World Trade
o The US is the largest trading nation
o The US is almost dependent on other countries for some
products: bananas, cocoa, coffee, spices, tea, raw silk,
nickel, tin, natural rubber and diamonds.
o Trade deficit in goods
o Trade surplus is services
o Imports some of the same goods that it exports
 Rapid trade growth
o Transportation technology
o Communications technology
o General decline in tariffs
 Participants in International trade
o US, Japan and Western Europe
 Specialization and Comparative Advantage
o Specialization and international trade increase the
productivity of a nation’s resources and allow for greater
total output then would otherwise be possible.
o Results in more efficient production
o Comparative advantage exists
 A nation’s comparative advantage in some product
when it can produce that product at a lower domestic
opportunity cost than can a potential trading partner.
 Specialization based on comparative advantage
improves global resource allocations.
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ECO 2013 Macroeconomics
 The same total inputs of world resources and
technology results in a larger global output.
 Foreign exchange market
o A market in which various national currencies are
exchanged for one another
 Equilibrium prices are the exchange rates
 RATE that one currency can be exchanged to
another
 Two points
o A competitive market: characterized by
large number of buyers and sellers
o Linkages to all domestic and foreign
prices
 Allows consumers in one country
to translate prices of foreign
goods into units of their own
currency
 Government and Trade
o Trade impediments
 Protective tariffs
 Import quotas
 Nontariff barriers
 Export subsidies
o Results in trade war
 Multilateral Trade Agreements and Free Trade Zones
o When one nation enacts barriers against imports, the nations
whose exports suffer may retaliate with trade barriers of
their own.
 Trade wars – escalating tariffs choke world trade and
reduce everyone’s economic well-being.
 Smoot-Hawley Tariff Act – the act was meant to
reduce imports and stimulate US production, the high
tariffs equally high. International trade fell, lowering
the output and income of all nations.
o Reciprocal Trade Agreement Act – started downward trend
on tariffs
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ECO 2013 Macroeconomics
 Negotiating authority – it authorized the president to
negotiate with foreign nations agreements that would
reduce existing US tariffs by up to 50%. Those
reductions were contingent on the actions other
nations took to lower tariffs on US exports.
 Generalized reductions –the specific tariff reductions
negotiated between the US and any particular nation
was generalized through most favored nation clauses,
which often accompany such agreements.
o General Agreement on Tariffs and Trade (GATT)
 Equal, nondiscriminatory trade treatment for all
member nations
 The reduction of tariffs
 The eliminations of import quotas\
o World Trade Organization (WTO) –
 Results of the GATT meetings
 Overseas trade agreements reached by the member
nations and rules on trade disputes among them.
o European Union
 15 nations
 Abolished tariffs and import quotas on nearly all
products traded among the participating nations
 Common tariffs applicable to all goods received from
nations outside the EU
 Euro – common currency
o NAFTA
 Canada, Mexico and US
 Established a free trade zone
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