International economic linkages

• Trade flows - Exports and imports of goods and services

• Resource flows - Production facilities that cause movement of labor b/w nations

• Information and technology flows - Transmits + receives information; incorporation of both foreign + domestic technology

• Financial flows - Money transfers b/w US + other countries

Volume and pattern

• Many countries import goods from other nations + export own products

• Volume - Rapid growth of US exports + imports as percentages of GDP

• Dependence - Imported goods compete w/ US goods in many domestic markets; many US industries depend on sales abroad for profitability

• Trade patterns

  • Trade deficit - Imports > exports

  • Trade surplus - Imports < exports

  • US imports some of the same categories of goods it exports

  • US dependence on foreign oil

• Financial linkages - Borrowing from foreigners or selling real assets (ex. factories, real estate, etc.)

Factors of rapid trade growth

• Transportation technology - Better tech → Lowered cost of transportation

• Communications technology - Link traders around the world

• General decline in tariffs - Lowered excise taxes on imported products

Participants in international trade

• All nations participate in international trade to some extent

Specialization + comparative advantage

• Increase productivity of resources + allow for greater total output & income

• Absolute advantage - Output per worker in one country exceeds that in the other country in producing both goods

• Comparative advantage - When a nation can produce a product at a lower domestic opportunity cost than can a potential trading partner

• If both nations specialize → Each can achieve a larger total output w/ the same input of resources

• Terms of trade - Mutually beneficial; trade goods in order to do better than through domestic production alone

• Benefits

  • Better global resource allocation

  • Overcome production constraints

Foreign exchange market - A market in which various national currencies are exchanged for one another

• Exchange rates - The rate at which the currency of one nation can be exchanged for the currency of another

• Links domestic prices w/ foreign prices

• Ex. US firms exporting goods to Japan want payment in dollars → Japanese importer supply yen in exchange for dollars in foreign exchange market

Changing rates

• Ex. Increase in US demand for Japanese goods → Increases demand for yen + raises dollar price of yen

• Depreciation - When the international value of a currency declines

• Appreciation - When the international value of a currency increases

Government and trade

• Trade impediments + subsidies

  • Protective tariffs - Excise taxes or duties placed on imported goods; shields domestic producers from foreign competition

  • Import quotas - Limits on quantities of specific items that may be imported

  • Non-tariff barriers - Onerous licensing requirements, unreasonable product quality standards, bureaucratic delays in customs procedures, etc.

  • Export subsidies - Government payments to domestic producers of export goods

• Why are there restrictions?

  • Trade can harm particular domestic industries + particular groups of resource suppliers

• Costs to society

  • Domestic consumers pay higher-than-world prices

  • Hurt domestic firms that use imported goods as inputs

  • Reduce competition in protected industries

Multilateral trade agreements + free-trade zones

• Smoot-Hawley Tariff Act - Meant to reduce imports + stimulate US production; caused other nations to retaliate with its own high tariffs

• Reciprocal Trade Agreements Act - Aimed at reducing tariffs + started a downward trend of tariffs

• Normal-trade-relations (NTR) status - Reduced US tariffs that result from negotiation apply equally to any nation that signed an original agreement

General Agreement on Tariffs and Trade (GATT) - Forum for negotiation of reduced trade barriers on a multilateral basis among nations

World Trade Organization (WTO) - Oversees trade agreements reached by member nations + rules on trade disputes among them

• Doha Round - Negotiations aimed at further reducing tariffs, quotas, and agricultural subsidies

• Very controversial

European Union (EU) - Regional free-trade zone including several European nations

• Abolished tariffs + import quotas on nearly all products traded among participating nations

• Trade bloc - A group of countries having a common identity, economic interests, and trade rules

• Makes members better customers for US exports

• Reduce members’ trade with non-bloc members

• Euro - EU’s common currency; expected to raise standard of living for EU members over time

North American Free Trade Agreement (NAFTA) - Free-trade zone between Canada, Mexico, and the US

• Increase employment in US

• Enhanced standard of living

Trade-related issues

• Trade Adjustment Assistance Act - Helps those hurt by shifts in international trade patterns

  • Cash assistance for displaced workers

  • Relocation allowances to help displaced workers move

  • Creates political support to reduce trade barriers + export subsidies

Offshoring - Shifting work previously done by American workers to workers located in other nations

• Very profitable

• Many Americans lose jobs

• Reflects growing specialization + international trade in services

• Increases demand for complementary jobs in US

Global competition

• Globalization - Integration of industry, commerce, communication, travel, and culture among the world’s nations

• Encourages competition

• Breaks down monopoly power of existing firms

• More efficiency + improved product quality