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Chapter 5 Handout

Principles of Microeconomics + DiscoverEcon code card

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Chapter 5 The US in the Global Economy I. Linkages A. Several economic flows link the U.S. economy with the economies of other nations. B. These linkages are 1. Goods and services flows 2. Capital and labor (resource) flows 3. Information and technology flows 4. Financial flows II. U.S. and World Trade A. Volume B. Dependence 1. U.S. depends on imports for many food items (bananas, coffee, tea, spices); raw silk, diamonds, natural rubber, much petroleum. 2. On the export side, agriculture relies on foreign markets for one-fourth to one- half of sales; chemical, aircraft, auto, machine tool, coal, and computer industries also sell major portions of output in international markets (see Table 5.2). C. Trade pattern 1. The U.S. has a trade deficit in goods. In 2005, $782 billion. 2. U.S. export of services exceeds the import of services by $58 billion. 3. Slightly more than half of U.S. trade is with industrially advanced countries. 4. Canada is the United States’ most important trade partner quantitatively. 5. The U.S. has sizable trade deficits with Japan ($85b) and China ($202b). 6. OPEC – US Imports $125b and exports $31b. D. Financial Linkages: (International trade implies complex financial linkages among nations.) Trade deficits must be financed by borrowing or earning foreign exchange, 1
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Chapter 5 The US in the Global Economy which is accomplished by selling U.S. assets through foreign investment in the U.S. The U.S. borrows from citizens of other nations; the U.S. is the world’s largest debtor nation. E. Facilitating factors that explain the growth of trade 1. Transportation technology has improved over the years. 2. Communications technology allows traders to make deals in global trade and finance very easily. 3. Trade barriers declined dramatically since 1940. III. Specialization and Comparative Advantage A. The U.S. is referred to as an “open economy” when it is placed in the global economy. B. Adam Smith observed in 1776 that specialization and trade increase the productivity of a nation’s resources. His observation related to the principle of absolute advantage whereby a country should buy goods from other countries if they can supply it cheaper than we can.
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Chapter 5 Handout - Chapter 5 The US in the Global Economy...

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