488 C H A P T E R 1 9
Perhaps our best hope to reduce our trade defi cit lies with the rapidly expanding Internet, which makes it much easier to provide services of all types—banking, educa- tion, consulting, retai l ing, and even gambling—through websites that are globally acces- sible. Since the United States has long had a positive trade balance in services, there is good reason to expect the Internet to continue pushing up our export of services.
Economics in Action 1: Buy American?
Our nation has long been committed to free trade, but a growing number of Americans believe that we need to curb our imports, largely to keep jobs from being offshored as well as to preserve our economic independence. For much of the time since World War II, Japanese consumers willingly paid more for domestically produced goods than they would have for foreign imports. They did this not just to help Japanese manufacturers through their long recovery from the devastation caused by American bombing during the war, but also in the sometimes misguided belief that somehow Japanese products better met their needs. This practice was best exemplifi ed by the widely a c cepted claim that Japanese- made skis were better suited than imported skis for the unique Jap a nese snow. But the American consumer has never been very susceptible to calls for patriotic bu y ing.
Today there’s a good deal of China bashing for running $300 billion trade surpluses with us, fl ooding our stores with low-cost TVs, DVD players, microwave ovens, toys, fur- niture, and textiles. But all that bad feeling toward the Chinese has not hurt business at Walmart, which sells more Chinese exports than any other company in the world. Back in the early 1970s, when we began running large trade defi cits with Japan, our leading Japan basher was Treasury Secretary John Connally, who declared that as far as he was concerned, the Japanese could sit in their Datsuns on the docks of Yokohoma, watching their Sony TVs.
Still, through the next two decades, our trade defi cit with Japan continued to mount.
The bottom line is that Americans are consumers fi rst, while paying just lip service to ec o nomic nationalism. No nation of economic nationalists would run up our long string of record-setting trade defi cits. So pass the freedom fries and, in the words of the old Beach Boys song, “I better turn on the lights, so we can ride my Honda tonight.”
Economics in Action 2: Globalization
While globalization is a relatively new term, it is a process that has been going on for hundreds of years. But it has sped up over the last three decades as we have been mov- ing from hundreds of national economies to a worldwide economy.
A decline in shipping costs, vast improvements in communications, the opening and deve l opment of the Chinese economy, and the end of the cold war have all accelerated the pace of globalization. As a result, billions of people around the globe have become active participants in a free enterprise world economy.
We can defi ne globalization as the unimpeded fl ow of goods and services, labor, and cap i tal across national borders. It ensures a more effi cient allocation of resources, which is what ec o nomics is all about.
What makes globalization so controversial is the offshoring of millions of jobs and the dec i mation of our manufacturing base. In theory, these jobs will be replaced by oth- ers—mainly high value-added and high-tech jobs. There’s just one problem: We are still waiting for those jobs to be created. And in the meanwhile, hundreds of thousands of high-tech jobs have been offshored.
Those living in the Midwest have seen fi rsthand how our industrial heartland turned into a Rust Belt. But that Rust Belt extends well beyond the borders of Wisconsin, Michigan, Illinois, Indiana, and Ohio. It also runs through most of western and central Pennsylvania, much of u p state New York, as well as the old textile towns of the south- eastern states and the steel mills of Birmingham.
Globalization is the integration of national economies into a worldwide economy.
International Trade 489 Trying to reverse the forces of globalization would be no more successful than try-
ing to hold back the tides. The American consumer buys imported goods if they are at least as good as d o mestic goods and are cheaper. American business fi rms shift produc- tion overseas if they can cut costs. And fi nally, foreign savers invest their money in the United States when they can earn a higher return here than elsewhere.
But globalization is one tide that has not raised all boats. As Senator John McCain told Michigan voters during his 2008 presidential campaign: all those automotive indus- try jobs would not be coming back. Indeed, just a few months later General Motors and Chrysler went bankrupt.
The question we must answer is not how to stop, or even slow, globalization; rather, it is how to best deal with its consequences. Clearly we cannot bring back the millions of manufactu r ing jobs that have migrated to low-wage countries.
Perhaps the most promising effort so far is sending hundreds of thousands of laid-off blue collar workers to local community colleges to be trained for jobs in expanding industries such as renewable energy and health care. For example, three out of fi ve nurses are educated at comm u nity colleges.
One may ask if, on the whole, globalization has been good or bad for the American eco n omy. The easy answer is that it has been a great boon to consumers, but a disaster to workers whose jobs have been offshored. My view is that while most Americans are better off because of globalization, it has contributed substantially to our long-term eco- nomic decline. I believe that America is a fading economic power, and, at the end of the next—and last—chapter, I’ve summed up the reasons for such a pessimistic prognosis.
Key Terms and Concepts
balance of trade 467 specialization 469 absolute advantage 470 production possibilities frontier 470
comparative advantage 471 tariff 477
quotas 477
free trade 486 globalization 488
Questions for Further Thought and Discussion
1. Explain what comparative advantage is. Make up an example to illustrate this concept.
2. What is wrong with having tariffs and quotas? Which is the lesser of the two evils, and why?
3. Explain why globalization is good for the United States. What are the drawbacks of globa l ization for our economy?
4. What would you suggest we do to reduce our trade defi cit?
5. We run huge trade imbalances with two countries. Explain the cause of the imbalances.
6. Should we be worried about our trade defi cit? Explain why or why not.
7. What is the economist’s case for free trade?
8. Practical Application: Can you think of any valid reason for tariff protection? Try to make a case for it.
9. Web Activity: How much were our imports, exports, and trade defi cit during the last year? Go to www.bea.gov, click on “Survey of Current Business” at the left, then go to “National Data,” “National Income and Product Accounts,” “NIPA tables,”
“Domestic Product and Income,” and fi nally, “Gross Domestic Product.”
491
Multiple-Choice Questions
Circle the letter that corresponds to the best answer.
1. Our balance of trade . (LO2) a) has always been positive
b) turned negative in the mid-1970s c) turned negative in the mid-1980s d) has always been negative
2. Which makes the most sense economically? (LO2) a) individual self-suffi ciency
b) national self-suffi ciency c) national specialization d) none of the above
3. Which statement do you agree with? (LO6)
a) There are several problems causing our huge trade defi cit; there are no easy solutions to these problems.
b) We could quickly eliminate our trade defi cit by raising tariffs.
c) The main reason we have a large trade defi cit is that foreigners refuse to buy American goods and services.
d) The main reason for our large trade defi cit is our relatively low rate of economic growth.
4. The Chinese economic expansion since the early 1980s and the Japanese economic e x pansion from the late 1940s through the 1980s were
. (LO7) a) virtually identical
b) both dependent on the American market c) based in the economic principles of Karl Marx d) based on closing their domestic markets to
American goods and services
5. Which statement is false? (LO3)
a) No nation will engage in trade with another nation unless it will gain by that trade.
b) The terms of trade will fall somewhere between the domestic exchange equations of the two trading nations.
c) Most economists advocate free trade.
d) None of the above.
6. Our largest trade defi cit is with . (LO7) a) Japan d) Mexico
b) Canada e) Germany c) China
7. Which of the following does not contribute to our huge trade defi cit? (LO6)
a) our dependence on automobile travel b) our addiction to consumer goods c) our shrinking manufacturing base d) our huge oil imports
e) none of the above
8. The least applicable argument for protecting American industry from foreign competition would be the argument. (LO4)
a) national security c) low-wage b) infant industry d) employment 9. Imports would be lowered by . (LO5)
a) tariffs only b) import quotas only
c) both tariffs and import quotas d) neither tariffs nor import quotas
10. Of these three choices—tariffs, quotas, and free trade—economists like the most and
the least. (LO5)
a) tariffs, quotas d) free trade, quotas b) tariffs, free trade e) quotas, free trade c) free trade, tariffs f) quotas, tariffs
W orkbook for Chapter 19
Name Date
economics
492
17. Of the following, our imports of
contribute most to our trade defi cit. (LO6) a) oil c) textiles
b) clothing d) consumer electro nics 18. Which of the following would best describe our trading
relationship with China fi ve years from now? (LO7) a) Our trade defi cit will be higher and we will be
importing a higher proportion of “low-skill”
products.
b) Our trade defi cit will be higher and we will be importing a higher proportion of “high-skill”
products.
c) Our trade defi cit will be lower and we will be importing a higher proportion of “low-skill”
products.
d) Our trade defi cit will be lower and we will be importing a higher proportion of “high-skill”
products.
19. Which statement is the most accurate? (LO11) a) Globalization has made some people winners and
others losers.
b) Globalization has been good for everyone involved.
c) Globalization has been bad for everyone involved.
d) Virtually all economists believeồ that globalization has almost no downside.
20. Which statement is true about how globalization has affected American workers? (LO4, 1)
a) The only jobs that have been lost or will be lost are blue-collar factory jobs.
b) Most workers who have lost their jobs because of globalization have ended up in better paying jobs.
c) Until now a relatively high proportion of
Americans performed high-skill, well-paying jobs, while a relatively high proportion of Chinese performed low-skill, poorly paying jobs.
d) Globalization cannot be considered a threat to the livelihoods of highly skilled, well-paid American workers.
21. Which statement is the most accurate? (LO1) a) The United States can be described as a purely
free trading nation.
b) The United States is one of the most protectionist nations in the world.
c) The rich nations provide hundreds of billions of dollars in agricultural subsidies to the poorer nations.
d) The United States provides smaller agricultural subsidies than does Japan and the Eur o pean Union.
11. Our biggest annual trade defi cit in our history was more than billion. (LO2)
a) $ 300 d) $600 b) $400 e) $700 c) $500
12. Which country regularly counterfeits American goods and services, a practice that costs American industry over $200 billion a year? (LO6)
a) M exico c) China b) Canada d) Japan
13. Which is the most accurate statement with respect to our chemical industry? (LO6)
a) It is on the decline and now contributes to our balance of trade defi cit.
b) It is large and growing.
c) It generally provides a trade surplus of about
$20 billion a year.
d) It will almost completely disappear before 2020.
14. Which statement is the most accurate? (LO8) a) Globalization, on balance, has been very bad for
the U.S. economy.
b) All the effects of globalization have been very good for the U.S. economy.
c) The best way to reduce our trade defi cit is for Congress to pass a law requiring that we buy only American products.
d) Each of our recent presidents has basically supported the concept of free trade.
15. Our trade defi cit with China in 2012 was . (LO7)
a) under $100 billion
b) between $100 billion and $200 billion c) between $200 billion and $300 billion d) over $300 billion
16. Statement 1: Our trade defi cit with China is larger than our trade defi cit with Japan.
Statement 2: Americans pay lower taxes on gasoline than do the citizens of most of the n a tions in Western Europe. (LO7)
a) Statement 1 is true, and statement 2 is false.
b) Statement 2 is true, and statement 1 is false.
c) Both statements are true.
d) Both statements are false.
493 27. What accounts for the sharp fall in our trade defi cit
in 2009? (LO1)
a) Our imports fell more than our exports.
b) Our exports fell more than our imports.
c) The recession was much worse in the rest of the world than in the United States.
d) The American consumer made a much greater effort to buy American products to keep jobs in the United States.
Fill-In Questions
1. The basis for international trade is . (LO2)
Use Figure 1 to answer questions 2 and 3.
22. Which statement is true? (LO3)
a) Comparative advantage is not necessary for trade to take place, but absolute advantage is.
b) Absolute advantage is not necessary for trade to take place, but comparative advantage is.
c) Both absolute and comparative advantage are necessary for trade to take place.
d) Neither absolute nor comparative advantage is necessary for trade to take place.
23. Which statement is true? (LO4)
a) There are basically no arguments that can be made on behalf of trade protection.
b) The arguments for trade protection are more valid than the arguments for free trade.
c) The United States has had a record of fully supporting free trade since the early 20th ce n tury.
d) Much of what we import has been produced by
“sweatshop labor.”
24. In order for trade between two countries to take place, . (LO3)
a) absolute advantage is necessary b) comparative advantage is necessary
c) both absolute and comparative advantage are necessary
d) neither absolute nor comparative advantage is necessary
25. Which statement is the most accurate? (LO2, 10) a) Americans are very willing to buy domestically
produced goods, even if they are more e x pensive than imported goods.
b) We import more foreign goods than we did 40 years ago, but merchandise imports are still about the same percentage of our GDP.
c) In the decades following World War II, the Japanese consumer has strongly favored d o mestically manufactured goods over imports.
d) America has maintained its technological lead.
26. Which statement is the most accurate? (LO11) a) Our economy would be much better off if the
entire globalization process were reversed.
b) The globalization process creates billions of winners and no losers.
c) The process of globalization could easily be reversed if Congress and the president were willing to act.
d) Globalization ensures a more effi cient allocation of resources throughout the world.
Tons of steel
Tons of wheat 2
2 4
4 6 8 10 A. Brazil
2 1
Tons of steel
Tons of wheat
2 4 6 8 10
B. Argentina
Figure 1
2. Brazil is better at producing than at
producing .
Argentina is better at producing than at producing . (LO3)
3. If 1 ton of steel could be traded for 1 ton of wheat, Brazil would trade its for A r gentina’s
. (LO3)
4. is the country with which we have the largest trade imbalance. (LO6, 7)
5. It would greatly reduce our trade defi cit the most if we could curb our import of . (LO6) 6. Our trade defi cit in 2012 was $ . (LO2, 6)
494
1. Bolivia has a comparative advantage in the production of which metal? (LO3)
2. Chile has a comparative advantage in the production of which metal? (LO3)
3. Bolivia will trade for . (LO3)
4. Chile will trade for . (LO3) 5. Paraguay exports $21 billion of goods and imports
$25 billion of goods. It exports $15 billion of services and imports $13 billion of services. Find the nation’s (a) balance of goods, (b) balance of services, and (c) balance of trade. (LO1)
6. Nigeria has a positive trade balance of $10 billion.
If it has a negative balance of services of $8 billion, how much is its balance of goods? (LO1)
7. Algeria has a negative trade balance of $7 billion. If it has a positive balance of goods of $10 billion, how much is its balance of services? (LO1)
7. If our trade defi cit with China and Japan were 0, our
total trade defi cit would be reduced by almost
$ billion. (LO7)
8. The law of comparative advantage states that total output is greatest when each product is made by the country that has the . (LO3)
9. A tariff is a tax on ; a quota is a limit on . (LO5)
10. was the last year in which we ran a trade surplus. (LO2)
Problems
Assume Bolivia and Chile use the same amount of resources to produce tin and copper. Figure 2 represents their production possibilities curves. Use it to answer problems 1 through 4.
Tons of tin
Tons of copper A. Bolivia
2 2
4 4
6 6
8 8
10 10
12
Tons of tin
Tons of copper B. Chile
2 4 6 8 10
2 4 6 8 10 12 14 16
Figure 2
495
International Finance
T he United States is the world’s largest economy and the world’s largest trading nation. We import more than any other nation and we also run the world’s largest negative trade balance—averaging nearly $600 billion between 2003 and 2012.
How do we fi nance all this trading, and how do we fi nance our negative balance in trade? International trade is just one part of international fi nance. The other part encom- passes foreign investment, capital infl ows and outfl ows, exchange rates, and other inter- national transactions, as well as the fi nance of international trade.
One consequence of our mounting trade defi cits is that foreigners are buying up American assets. How much of America is foreign owned today, and will most of this country one day be owned by foreigners? Will foreigners soon have enough fi nancial leverage to infl uence—or even dictate—our economic and foreign policies? Stay tuned, and by the end of the chapter you will learn the answers to these important questions.
C hapter 20
1. Explain how international trade is
fi nanced.
2. Defi ne and measure our balance of
payments.
3. List and discuss the different
exchange rate systems.
4. Summarize how we became a debtor
nation.
5. Explain American exceptionality from
a historical perspective.
LEARNING OBJECTIVES
After reading this chapter you should be able to:
The Mechanics of International Finance
Think of international trade and fi nance as an extension of our nation’s economic activ- ities beyond our borders. Instead of buying microchips from a fi rm in California, we buy them from a fi rm in J a pan. Instead of selling Cadillacs in Miami, we sell them in Rio de Janeiro. And rather than building a factory in Chicago, we build one in China.
Financing International Trade
When an American importer buys $2 million of wine from a French merchant, how does she pay? In dollars? In euros? In gold? Gold is used only by governments, and then only on very rare occasions, to settle international transactions. Dollars, although sometimes
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