The Global Economy Part I

Transcription

1 The Global Economy Part I We have global markets which make us extremely interdependent so that what goes on in individual countries is of consequence to us all. -George Soros

2 International Trade The flow of goods, labor and money across national borders makes countries economically interdependent.

3 Key Facts On Trade o The export goods and services 11% of American GDP. make up o Exports have doubled as a percent of GDP since o $435 Billion Trade Deficit in 2002 ($369 Billion in 2000)

4 Economic Basis for Trade o distribution of economic resources o different technologies and/or resources o Goods are differentiated as to quality and other non-price attributes. o labor-intensive goods o land-intensive goods o capital-intensive goods

5 Resource Distribution and Trade o Each country of the world possesses different types and quantities of land, labor and capital resources. o By specializing in the production of certain goods and services, nations can use their resources more efficiently. o Specialization and trade can benefit all nations.

6 Specialization To specialize is to do only one thing. For example, when a company specializes in the production of a good, it produces only that good.

7 Specialization

8 Example: Benefits of Specialization In this example, both Kate and Carl benefit from specialization. Benefits from Specialization and Trade for Carl and Kate Carl Specialization Trade Net Effect Kate Specialization Trade Net Effect Carl Kate Kate Carl Carl specializes, switching 2 hours from T-shirt production to birdhouse production. Carl trades 1 birdhouse for 2 T- shirts. Net effect is same number of T- shirts and 1 more birdhouse. Kate specializes, switching ½ hour from birdhouse to T- shirt production. Kate trades 2 T- shirts for 1 birdhouse. Net effect is same number of birdhouses and 1 more T- shirt.

9 Absolute and Comparative Advantage A person or nation has an absolute advantage when it can produce a particular good at a lower cost than another person or nation. Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation. The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative advantage in supplying.

10 Absolute Advantage Absolute advantage is the situation in which a country can produce more of a good then another country can produce with the same quantity of resources.

11 Example: Comparative Advantage Comparative advantage is the situation in which a country can produce a good at lower opportunity cost than another country. Country (half of resources allocated to each industry Freezers (hundreds / year) Dishwashers (hundreds / year) Germany 1, Italy Total Output 1,

12 Coffee (tons) Coffee (tons) Charts: Production Possibilities Curves For US and Brazil United States 30 Brazil A Wheat (tons) Wheat (tons) 5 0 B

13 Production Possibilities o Under the principle of comparative advantage: o Total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good. o US has a comparative advantage in wheat. o Brazil has a comparative advantage in coffee.

14 Coffee (tons) Coffee (tons) Charts: Trading Possibilities Lines: The Gains from Trade United States Brazil Trading possibilities line Trading possibilities line 10 A B Wheat (tons) Wheat (tons)

15 Coffee (tons) Coffee (tons) Charts: Trading Possibilities Lines: The Gains from Trade 45 United States Brazil Trading possibilities line The Case For Free Trade A Trading possibilities line A 10 B 5 B Wheat (tons) Wheat (tons)

16 Price (per pound; US dollars) Price (per pound; US dollars) Charts: Supply and Demand in the US US Domestic Aluminum Market US Export Supply and Import Demand $1.50 S d $ D d Quantity of Aluminum If the world price exceeds the US price by 25 cents Quantity of Aluminum

17 Price (per pound; US dollars) Price (per pound; U.S. dollars) Charts: Supply and Demand in the US US Domestic Aluminum Market US Export Supply and Import Demand S d $1.50 SURPLUS = 50 $1.50 EXPORTS = If the world price goes further up D d Quantity of Aluminum Quantity of Aluminum

18 Price (per pound; US dollars) Price (per pound; US dollars) Charts: Supply and Demand in the US US Domestic Aluminum Market US Export Supply and Import Demand $ SURPLUS = 100 SURPLUS = 50 S d $ EXPORTS = 100 EXPORTS = 50 US export supply If world prices fall below $ D d Quantity of Aluminum Quantity of Aluminum

19 Price (per pound; US dollars) Price (per pound; US dollars) Charts: Supply and Demand in the US US Domestic Aluminum Market US Export Supply and Import Demand $ SURPLUS = 100 SURPLUS = 50 S d $ EXPORTS = 100 EXPORTS = 50 US export supply.75 SHORTAGE = IMPORTS = D d Quantity of Aluminum Quantity of Aluminum

20 Price (per pound; U.S. dollars) Price (per pound; US dollars) Charts: Supply and Demand in the US US Domestic Aluminum Market US Export Supply and Import Demand $ SURPLUS = 100 SURPLUS = 50 SHORTAGE = 50 SHORTAGE = 100 D d Quantity of Aluminum S d $ EXPORTS = 100 EXPORTS = 50 IMPORTS = 50 IMPORTS = US export supply US import demand Quantity of Aluminum

21 Price (per pound; US dollars) Price (per pound; US dollars) Charts: Supply and Demand in Canada $1.50 Canada s Domestic Aluminum Market SURPLUS = 100 S d Canada s Export Supply and Import Demand $1.50 Canadian export supply 1.25 SURPLUS = SHORTAGE = 50 D d Quantity of Aluminum Canadian import demand Quantity of Aluminum

22 Price (per pound; US dollars) Chart: Equilibrium World Price and Quantity of Exports and Imports $ US export supply Canadian export supply Equilibrium US import demand Canadian import demand Quantity of Aluminum

23 US Imports and Exports o The US is the world s largest exporter. o The US is also the world s largest importer. o The US s main trading partners are Canada, Mexico and Japan.

24 Chart: Balance of Trade Balance of trade is the difference between the value of a nation s exports and the value of its imports.

25 Exports A nation s exports is the dollar value of the products sold in foreign countries.

26 Example: US Export Transaction Assume $2 = 1 o $300,000 in American computers purchased by a British buyer for 150,000 o 150,000 check drawn on British bank to pay for computers o 150,000 check exchanged for $300,000 at NY bank o NY bank sends 150,000 check to London bank for future sale to buyers who need pounds

27 Imports A nation s imports is the dollar value of products brought into a country from other countries.

28 Example: US Import Transaction Assume $2 = 1 o 150,000 in British compact discs is purchased by a US buyer for $300,000 o o o 150,000 check purchased from US bank to pay for CDs for $300, ,000 check is exchanged for CDs purchased from supplier CD firm deposits 150,000 check to British bank

29 Keep in Mind: o American exports create a foreign demand for dollars which creates a supply of foreign currencies available to American buyers. o Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply.

30 Balance of Payments o current account o balance of goods and services o balance of current account trade deficits and surpluses o capital account o balance of capital account o official reserves o balance of payment deficits and surpluses

31 Trade Imbalances A trade surplus is the amount by which the value of exports exceeds the value of imports in a given time period (positive net exports).

32 Trade Imbalances A trade deficit is the amount by which the value of imports exceeds the value of exports in a given time period (negative net exports).

33 Macro Effects o A trade deficit permits domestic living standards to exceed domestic output. o A trade deficit represents a net leakage that may frustrate government policies. o Import leakages require larger fiscal injections to reach any particular spending goal.

34 Causes of the US Trade Deficit o The US has run a deficit since the early 1970s. o Causes: o o o o Imports of foreign oil Americans enjoyment of imported goods US economic growth Declining US savings rates o Implications: o o Increased current consumption Increased US indebtedness

35 Diagram: US Trade Balances in Goods (Selected Nations, 2001) China Australia Belgium Canada Germany Japan Mexico Netherlands Source: Department of Commerce

36 Productivity and Competitiveness It is very much to our advantage to participate in the global economy.

37 Specialization o Imported goods and services broaden our consumption possibilities. o Specialization among countries increases world productivity and output, making all nations richer.

38 Competitiveness o Trade stimulates improvements in productivity. o Productivity output per unit of input for example, output per labor hour

39 Competitiveness o The presence of foreign producers keeps domestic producers on their toes. o Domestic producers must reduce costs and increase efficiency to compete in international markets.

40 International Coordination The desire for coordination grows as all countries begin to acknowledge the international dimensions of their economies.

41 International Cooperation o Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements. o In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade. o In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements and to resolve trade disputes.

42 Examples: Global Trade Agreements Many nations have formed regional trade organizations that establish free-trade zones in which a group of countries agree to reduce trade barriers among themselves.

43 Examples: Global Trade Agreements

44 The New Euro o On January 1, 1999 eleven European nations adopted a simple currency, the Euro. o A common currency facilitates trade and capital flows across national borders. o It eliminates the uncertainties and added costs of diverse currencies.

45 Macro Coordination o To maintain a common currency, nations must maintain common macro policies. o The euro nations will have to find a middle ground for monetary policy.

46 The World Trade Organization oworld Trade Organization (WTO) o reductions in tariffs worldwide o new rules to promote trade in services o reduction in agricultural subsidies o intellectual property protections o phasing out textile quotas and tariffs

47 IMF o The most visible institution for global coordination is the International Monetary Fund (IMF). o The IMF uses funds contributed by all nations to assist nations whose currency is in trouble.

48 Group of Eight o The eight largest industrial countries the United States, Japan, Canada, Germany, France, Italy, Great Britain and Russia attempt to coordinate macro policy. o Any informal agreements they reach can have a substantial effect on global trade and capital flow.

49 CONTINUED IN THE GLOBAL ECONOMY PART II