This chapter treats the U.S. involvement in the world economy. The United States is, of course, becoming increasingly internationalized.
After describing U.S. participation, the principles of absolute and comparative advantage are discussed. A two country-two good example is used to illustrate those principles.
Three impediments to international trade--tariffs, quotas, and voluntary export restraints--are discussed. The cases for and against free trade are then presented.
The U.S. balance of payments is discussed and the current account deficit is described. The effects of this deficit are considered.
Exchange rate determination is discussed in terms of the demand for and supply of foreign exchange. It is emphasized that GDP, inflation rates, and interest rates are important in the determination of exchange rates.
| Finally, various way to reduce the current account deficit--increased U.S. competitiveness, contractionary monetary and fiscal policy, imposition of trade restrictions, and depreciation of the dollar--are discussed.
| Instructional Objectives |
| After completing this chapter, your students should know:
1. That U.S. participation in the world economy is increasing.
2. That trade among nations is based on comparative, not absolute, advantage.
3. That international trade is advantageous in that it allows countries to specialize in the production of goods in which they have a comparative advantage and exchange those goods for goods in which they have a comparative disadvantage.
4. That tariffs, quotas, and voluntary export restraints serve as impediments to international trade.
5. That society as a whole benefits from free trade, but some individuals are worse off.
6. That the large and persistent current account deficit is undesirable.
7. That reducing the large current account deficit will not be easy.
8. That exchange rates are determined by the demand for and supply of foreign exchange.
9. That GDP, inflation rates, and interest rates are important in determining exchange rates.
| Terms from Previous Chapters |
| You should review the terms in this section at the beginning of your discussion of the chapter.
exports (Chapter 11)
imports (Chapter 11)
opportunity cost (Chapter 1)
comparative advantage (Chapter 1)
comparative disadvantage (Chapter 1)
absolute advantage (Chapter 1)
absolute disadvantage (Chapter 1)
monetary policy (Chapter 11)
fiscal policy (Chapter 11)
structural unemployment (Chapter 12)
demand curve (Chapter 1)
supply curve (Chapter 1)
equilibrium (Chapter 1)
real GDP (Chapter 11)
inflation rate (Chapter 13)
contractionary monetary policy (Chapter 11)
contractionary fiscal policy (Chapter 11)
| Key Terms |
| These terms are introduced in this chapter:
tariff
quota
voluntary export restraints (VERs)
balance of payments
exchange rate
flexible (floating) exchange rates
depreciation
appreciation
| Additional References |
| In addition to the references in the text, instructors may wish to read or assign one or more of the following:
1. Linda M. Aguilar, "NAFTA: A Review of the Issues," Federal Reserve Bank of Chicago, Economic Perspectives 17 (January/February 1993), pp. 12-20.
2. Robert E. Baldwin, "Are Economists' Traditional Trade Policy Views Still Valid?" Journal of Economic Literature 30 (June 1992), pp. 804-829.
3. Thomas Bennett and Craig S. Hakkio, "Europe 1992: Implications for U.S. Firms," Federal Reserve Bank of Kansas City, Economic Review 74 (April 1989), pp. 3-17.
4. K. Alec Chrystal and Geoffrey E. Wood, "Are Trade Deficits a Problem?" Federal Reserve Bank of St. Louis, Review 70 (January/February 1988), pp. 3-11.
5. Cletus C. Coughlin, K. Alec Chrystal, and Geoffrey E. Wood, "Protectionist Trade Policies: A Survey of Theory, Evidence and Rationale," Federal Reserve Bank of St. Louis, Review 70 (January/February 1988), pp. 12-29.
6. Robert C. Feenstra, "How Costly is Protectionism?" Journal of Economic Perspectives 6 (Summer 1992), pp. 159-178.
7. Robert F. Graboyes, "International Trade and Payments Data: An Introduction," Federal Reserve Bank of Richmond, Economic Review (September/October 1991), pp. 20-31.
8. Jane Sheddon Litfie, "Foreign Investment in the United States: A Cause for Concern?" Federal Reserve Bank of Boston, New England Economic Review (July/August 1988), pp. 51-58.
9. Mack Ott, "Is America Being Sold Out?" Federal Reserve Bank of St. Louis, Review 71 (March/April 1989), pp. 47-64.
10. "Studies on U.S. External Imbalances," Federal Reserve Bank of New York, Quarterly Review 13/14 (Winter-Spring 1989), pp. 1-82.
11. "Symposia: Europe in 1992," Journal of Economic Perspectives 6 (Fall 1992), pp. 7-52.
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