Comparing Economic Systems Chapter 26 International Trade Section 1 Why Nations Trade No country produces everything it needs to survive. Every country depends on another country. Exports= Goods sold to another country. Imports= Goods purchased from another country. Obtaining Scarce Goods Trade is one way nations solve the problem of scarcity. Comparative advantage Comparative advantage= the ability of a country to produce a good at a relatively lower cost than another country can. The U.S. can make color televisions, but other countries can make them at a lower cost. Specialization Because of comparative advantage nations can specialize Produce the things your country can produce better than other countries. Factors of Production Saudi Arabias comparative advantage is its huge deposits of oil. So it exports oil. The U.S. has a comparative advantage in making expensive items such as airplanes and weapons. Creating Jobs By exporting goods to other countries, your business could grow, which leads to the hiring of more workers. Restrictions and Integration Tariffs= a tax on imported goods. If the U.S. wants to protect its steel industry, it can put a 20% tariff on all imported steel, thus adding 20% to the price. Goal: Make the price of imported goods higher than the price of the same goods produced domestically. Restrictions and Integration Quotas= Limits on the amount of foreign goods imported. Ex: Quotas on Japanese-made automobiles of the 1970s. Free Trade Free Trade= to increase trade, countries can join together with a few key trading partners to set up zones of free trade. No Quotas or tariffs. Trade Agreements The European Union= No trade barriers among the European Nations. WTO= World Trade Organization Organizes negotiations about trade rules NAFTA= North American Free Trade Agreements. U.S., Mexico, and Canada. Pros and Cons Financing trade Exchange Rate= What the price of your nations currency is in terms of another nations currency. The Balance of Trade Balance of Trade= the difference between the value of a nations exports and its imports. If a nations currency depreciates, the nations will likely export more goods because its products will become cheaper for other nations to buy. Trade Trade surplus= When a nation is bringing in more money than it is paying out. Trade Deficit= The value of goods coming into a country is greater than the value of those going out. Effects of a Trade Deficit A trade imbalance tends to erode the value of a countrys currency on foreign exchange markets. This affects income and employment. Economic Systems Section 2 Market Economies What to Produce, How to produce, and whom to produce. The decisions are made in free markets on the interaction of supply and demand. Capitalism is another name for Market Economies. Characteristics of a Market Economy Individual freedom Consumers decide what to buy Producers decide what to produce Market runs itself Competition Competition keeps prices low. Government ensures competition Characteristics of a Market Economy Dealing with Externalities Higher Per Capita GDPs= The total GDP divided by the country's population. Expresses GDP in terms of each person. Command Economies The individual has little, if any, influence over how the basic economy functions. Tells producers what to produce. Also called a controlled economy. Characteristics of a Command Economy Socialism= the belief that the means of production should be owned and controlled by society Distribute wealth among all citizens. Characteristics of a Command Economy Communism=A classless society in which all property would be common, and there would be no need for government. Karl Marxclass struggle Characteristics of a Command Economy Government Control Most productive resources are owned by government, not individuals. Makes all economic decisions Slow Growth Attain lower per capita GDP than market economies. Cuba and North Korea Mixed Economies Individuals carry on their economic affairs freely, but are subject to some government intervention. The U.S., free enterprise is combined with and supported by government decisions in the marketplace. U.S. government provides services to consumers and businesses. Government acts as an umpire to make sure the economy runs smoothly. Economies in Transition Section 3 Failure of Command Economies Became increasingly unattractive. Unable to achieve economic growth that market economies could. Soviet Union and China began to change by 1991. Russia In 1991 the Soviet Union collapsed and began to try to incorporate elements of a market economy. State-owned factories became in the hands of private ownership. Stock markets had to be created so that people could own the factories. People had to learn how to make decisions based on supply and demand. China By the 1980s China began to fall behind its neighbors economically. Converted state-owned factories to privately owned. China continues to grow! Farmers find it hard to compete with cheaper foreign food. About 160 million Chinese are unemployed. Developing Countries U.S., Japan, Australia, Republic of China, and Spain are all developed countries. Developing Countries= Countries whose average per capita income is only a fraction of that in more industrialized countries. Developing Countries Many developing countries have traditional economies= Economic decisions are based on custom or habit. Problems Developing Countries Face High rate of population growth leads to low GDP. Also leads to lack of food and housing Geography and natural resources Many developing countries to not have access to ocean trade routes War, Debt, and Corruption During wars thousands of people lost their lives. If countries continue to borrow money to spur economic growth they will not be able to pay it off. Corruption of government officials. Ex. Nigeria oil Growth and Development Suggestions Government countries need to invest more in peopleeducation, family planning, nutrition, health care. Competitive marketsnot government officialsshould make the what, how, and for whom decisions. Free Trade No quotas and tariffs.