The United States & the
Global Economy
Chapter 5
Eco 2013
Fall 2007
Maria C Mari, CPA
International Linkages
Good and Services
Capital and Labor
U.S Economy
Information & Technology
Money
Other
National
Economies
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 use
Comparative
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
Dollar
price of
foreign
currenc
y rises
Equals
Equals
Foreign
currenc
y price
of dollar
falls
Internationa
l \value of
the dollar
falls
Equals
Equals
Internatio
nal value
of foreign
currency
rises
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 tariffs
Negotiating 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 1995
149 nations including China
Oversees trade agreements
reached by the member
nations
Rules trade disputes among
them
Provides forum for trade talks
European Union (EU)
Free trade zone
Started in 1958
Called Common Market
Abolished tariffs and
import quotas
Liberalized the movement
of capital and labor
EURO
EU as of 1/1/07
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Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
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Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
http://europa.eu/abc/history/index_en.htm
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Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United
Kingdom
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 freeflow 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?
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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 Mexico
Greatly reduced tariffs and other trade
barriers
Globalization
Integration of industry, commerce,
communication, travel and culture among
the world’s nations.