Global trade profoundly impacts the U.S. economy, influencing prices, job markets, and economic growth. It creates opportunities for American companies to expand into foreign markets while also increasing competition from abroad, leading to shifts in domestic industries and employment patterns.

The balance of trade, currency exchange rates, and international agreements all play crucial roles in shaping America's economic landscape. These factors affect everything from consumer prices to job creation, highlighting the complex interplay between global commerce and national prosperity.

Global Trade and the U.S. Economy

Impact of global trade on U.S. economy

• Increased competition from foreign firms leads to lower prices and improved quality for consumers (automobiles, electronics)
• Domestic companies may face job losses in less competitive industries (manufacturing, textiles)
• Expanded market opportunities allow U.S. companies to sell goods and services to foreign markets (agricultural products, technology)
  • Increases potential for growth and job creation in export-oriented industries (aerospace, pharmaceuticals)
• Countries specialize in producing goods and services they can make most efficiently based on comparative advantage (U.S. in high-tech goods, China in labor-intensive manufacturing)
  • Leads to increased productivity and economic growth
• Job creation occurs in export-oriented industries (services, advanced manufacturing)
• Shifts in labor demand based on changes in trade patterns impact employment (decline in low-skilled manufacturing jobs, increase in high-skilled service jobs)
• Exports contribute positively to GDP by increasing domestic production (agricultural products, industrial goods)
• Imports are subtracted from GDP and represent domestic demand met by foreign production (consumer goods, raw materials)
• Net exports directly impact GDP
  1. Positive net exports increase GDP
  2. Negative net exports (trade deficit) decrease GDP
• Global supply chains influence production and distribution of goods across borders

Key measures of international trade

• Exports are goods and services produced domestically and sold to foreign countries (soybeans, aircraft)
  • Contribute positively to a country's GDP and employment
• Imports are goods and services purchased from foreign countries for domestic consumption (oil, apparel)
  • Provide consumers with a wider variety of products and can help control inflation
  • Subtract from a country's GDP
• Balance of trade is the difference between a country's exports and imports of goods and services
  • Trade surplus occurs when exports exceed imports
  • Trade deficit occurs when imports exceed exports
• Balance of payments is a record of all international transactions of a country over a specific period
  • Current account includes trade in goods and services, income, and current transfers
  • Capital account involves transactions of non-financial assets (land, intellectual property)
  • Financial account involves transactions of financial assets and liabilities (foreign direct investment, portfolio investment)

Currency exchange rates in trade

• Currency exchange rates represent the price of one currency in terms of another
  • Determined by supply and demand in foreign exchange markets (forex)
• Appreciation of a country's currency makes its exports more expensive and less competitive (U.S. dollar strengthens against euro)
  • Depreciation of a country's currency makes its exports cheaper and more competitive (Chinese yuan weakens against U.S. dollar)
• Appreciation of a country's currency makes imports cheaper, increasing demand for foreign goods (Japanese yen strengthens, making U.S. imports more affordable)
  • Depreciation of a country's currency makes imports more expensive, decreasing demand for foreign goods (Mexican peso weakens, making U.S. imports costlier)
• Exchange rates influence a country's ability to compete in international markets
  • Overvalued currency can lead to trade deficits and reduced competitiveness (U.S. dollar in the 1980s)
  • Undervalued currency can boost exports and improve competitiveness, but may lead to inflation and other economic imbalances (Chinese yuan in the 2000s)
• Some countries intervene in foreign exchange markets to manage their currency's value (China, Japan)
  • Aim to maintain a favorable exchange rate for their exports or to control inflation

Trade Agreements and Policies

• Trade agreements facilitate international commerce by reducing barriers between countries (NAFTA, now USMCA)
• Trade policy shapes a country's approach to international trade, including tariffs and regulations
• International trade law governs cross-border commercial transactions and disputes
• Economic sanctions can be used as a tool to influence foreign policy or address international issues