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What Do You Know?In the first column, answer the questions based on what you know before you study. After this lesson, complete the last column.

Now... Later...

Why is it important to trade with other nations?

Trade Between NationsNations do not always have the resources they need to make the things their people want. To solve this problem of scarcity, nations trade with one another. They trade food, goods, services, and natural resources. Nations import, or bring into the country, goods produced in other nations. They export, or sell to other nations, goods they produce. For example the United States does not produce enough oil to meet its needs. To solve this problem, the U.S. imports oil from other countries.

The main reason countries trade is because of comparative advantage. Comparative advantage is the ability to produce something at a lower opportunity cost than another country can.

Vocabulary 1. Explain the

difference between an export and an import.

Terms to Know import to buy goods from another countryexport to sell goods to other countriescomparative advantage ability of one country to produce an item more efficiently than another countryprotectionism the use of tactics that make imported goods more expensive than domestic goods tariff a tax on an imported good

quota a limit on the amount of foreign goods imported into a countryfree trade the lack of trade restrictions among countriesintegrate to join many parts together into a functioning wholebalance of trade difference between the value of a nation’s imports and its exportsexchange rate the value of a nation’s money when compared to other nations' money

International Trade and Economic Systems

ESSENTIAL QUESTIONWhy do people trade?

GUIDING QUESTIONS1. Why do nations trade with one another?

2. How does a nation’s trade balance affect its economy?

Lesson 1: Why and How Nations Trade

Program: RESG Component: Chapter 23PDF Pages

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netw rksInternational Trade and Economic Systems

An example will explain how this works. Suppose that two countries, A and B, can produce only two goods, bread and bicycles. The opportunity cost of making one bicycle is the bread each country cannot produce while its resources are being used to make a bicycle. Country A can produce one bicycle or 10 loaves of bread. Country B can produce one bicycle or 15 loaves of bread. Country A has a lower opportunity cost. It has the comparative advantage in producing bicycles.

A country’s factors of production—natural resources, labor, capital, and entrepreneurs—usually decide its comparative advantage. China is a good example of this. China has a huge labor force. Most of these people earn low wages. This means that labor in China costs less than labor in many other countries. As a result, China has a comparative advantage in making goods that need lots of labor to produce. The United States and Brazil have a large amount of farm and ranch land. This gives them a comparative advantage in farm exports. They lead the world in farm exports.

Some less advanced economies produce only one product for export. These economies are called single resource economies. The danger of this is that if the price for that product goes down, the product makes less money, and the nation’s economy goes down, too.

Most people look for low prices when they shop. To give people the low prices they are looking for, many U.S. stores sell goods made in countries such as China. It costs less to make most goods in China than it costs to make them in the United States. Goods that cost less to make can be sold for lower prices. Lower prices are good for consumers, but not always for companies. When people buy cheaper products imported from other countries, U.S. manufacturers may lose money. This sometimes causes them to produce less, lay off workers, or even shut down.

When trading with another country hurts a nation, that nation may turn to protectionism. Protectionism means u sing tactics, or methods, to keep goods made at home cheaper than imported goods.

Lesson 1: Why and How Nations Trade, Continued

Prior Knowled ge

2. Define opportunity cost and give an example of one.

Vocabulary3. Give two examples

of countries that have a comparative advantage in producing something. Name the country and the product.

Paraphrasing4. Paraphrase the

paragraph that explains why the size of China’s labor force is a comparative advantage.



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The two most common kinds of trade barriers are tariffs and quotas. The diagram below shows this.

Trade barriers

Tariff—import tax raises price of imported goods.

Quota—limits quantities of imported items to keep prices higher at home.

A tariff is a tax on imports. This tax raises the price of imported goods. This makes them more costly than they would otherwise be. Tires are one example. Recently, many U.S. tire companies had to shut down because tires made in China cost less money. To help U.S. tire makers, President Obama placed a tariff on tires from China. This raised the price of Chinese tires.

A quota limits the amount of an item that is allowed to enter a country. The United States has placed quotas on sugar imports for years. Limiting sugar imports helps keep prices higher for sugar made at home.

A third way the government tries to help U.S. producers is with subsidies. A subsidy is a payment the government gives to help a domestic producer. The United States and other nations pay subsidies to farmers. These payments help farmers keep their prices competitive. These methods to limit imports have a major drawback. In exchange for protecting jobs, the prices of goods go up.

Many economists do not like trade barriers. They think barriers do more harm than good. Many countries try to have few or no trade barriers. This is called free trade. When countries try to increase trade, they join with trading partners and set up areas of free trade called free trade zones.

In 1994 the United States, Canada, and Mexico joined together to create the largest free trade zone in the world. Under the North American Free Trade Agreement (NAFTA), the three countries agreed to remove most trade barriers. Since then, trade among the three nations has more than tripled. This increase in trade has brought lower prices and a greater variety of goods to consumers in all three countries. Many companies hurt by these imports lost sales, however, and had to close factories. As a result, thousands of jobs have been lost.

5. Place a two-tab

Foldable along the line to cover the text. Write Trade Barriers on the anchor. Label the two tabs Tariff and Quota. On the front define each term. On the reverse, write an example of each.

Reading Check

6. Why do nations sometimes impose tariffs?

Visualizing7. Do quotas keep

prices at home higher or push prices down? Draw an arrow to show your answer.

Comparing and Contrasting

8. What is the relationship between trade barriers and free trade?


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The benefits of free trade encouraged 27 European nations to integrate, or join, their economies. They formed the European Union (EU), one of the largest economies in the world. Most EU nations use the same currency, the euro. Using the euro makes trade easier. The EU also creates a large free trade zone. Goods, services, and workers can travel freely among EU nations. Other free trade zones include the African Union (AU) and the Asia-Pacific Economic Cooperation (APEC).

The World Trade Organization (WTO) helps regulate international trade. The WTO has 153 member nations. It makes trade rules and settles disagreements between members. One of its goals is to help countries that are trying to build their economies.

Balance of Trade The difference between the value of a nation’s imports and the value of its exports is its balance of trade. If a nation exports more than it imports, it has a trade surplus. If a nation imports more than it exports, it has a trade deficit. The example below shows a country that has a trade surplus of $30 billion.

$100 billion – $70 billion = $30 billion (value of exports) (value of imports) (positive balance of trade)

Trade deficits can slow down an economy. If a country imports more than it exports, production slows and jobs may be lost. It also leads to debt. When a country’s exports are low, it must borrow money from other countries to pay for the goods it imports. A trade deficit can also make a country’s currency, or money, go down in value.

The value of one currency when exchanged, or traded, for another is its exchange rate. The value of one currency to another is set by supply and demand.

Mark the Text9. Underline the

sentences that describe the role of the WTO.

Vocabulary10. What is the term

for the difference between the value of a nation’s imports and exports? What phrase is used when a nation’s trade is not in balance?

Prior Knowled ge

11. How might other countries’ trade barriers affect a nation’s balance of trade? Why?

Reading Check

12. What is the exchange rate?




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Suppose the United States wants to import goods from Japan. Japan’s currency is the yen. The United States must sell dollars and buy yen to buy Japanese goods. Selling dollars makes more dollars available in the markets where currency is bought and sold. The larger supply of dollars drives down the value of dollars, and thus the dollar itself. This is how heavy imports can hurt a nation by lowering the value of its currency.

The lower currency value might not be all bad. It should help the country to export more. Because its currency is worth less than before, its goods are cheaper for other countries to buy.

Check for UnderstandingFor what two reasons does the United States

import goods and services?

1. __________________________________________

__________________________________________

2. __________________________________________

__________________________________________

What is a trade surplus and why is it good for a nation’s economy?

3. __________________________________________

__________________________________________

Paraphrasing13. Paraphrase the

paragraphs that explain how the value of a nation's currency can decrease and how that affects its exports.

14. Place a two-tab

Foldable along the line. Write Balance of Trade on the anchor tab. Label the first tab Trade Surplus and draw an up arrow next to it. Label the second tab Trade Deficit and draw an arrow going down next to that. On the tabs, write one fact about each term.



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What Do You Know?In the first column, answer the questions based on what you know before you study. After this lesson, complete the last column.

Now... Later...

What is a market economy?

Why might a mixed economy work best for some countries?

Market EconomiesThere are different kinds of economies. All decide what to produce, how to produce it, and for whom to produce it. The type of economic system a society uses is decided by how it answers these questions. In a market economy, the individuals are the ones who provide the answers.

In market economies, the people, not the government, make economic decisions. The people own and decide how to use the factors of production. Those factors are natural resources, capital, labor, and entrepreneurship. No central power runs the economy.

In a market economy, prices are determined by supply and demand. Supply is the amount of a good that is made. Demand is the amount of a good consumers want.

One trait of a market economy is individual freedom. For a market economy to work, people must be free to own property and control their own labor. Another characteristic is high GDP per capita.

Reading Check

1. Who owns the factors of production in a market economy?

Terms to Know privatization the process of changing from state-owned businesses, factories, and farms to ones owned by private citizensmixed economy a system combining characteristics of more than one type of economy orient to tend toward a certain directiondeveloped country a country with a high standard of living and high levels of industrialization and per capita income developing country a country with low per capita incomes in which a large number of people have a low standard of living


ESSENTIAL QUESTIONWhy and how do people make economic choices?

GUIDING QUESTIONS1. What characteristics do market

economies share?

2. Who makes the basic economic decisions in a command economy?

3. Why do most countries have a mixed economy?

4. What kinds of challenges do developing countries face?

Lesson 2: Economic Systems and Development



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The GDP per capita is the total value of goods produced in a country, divided by the country’s population. It is the best way to measure economic success.

Characteristics of a Market Economy

people are free to own

property

people make own economic decisions

based on supply and

demand

Market economies do have some drawbacks.

• They do not grow steadily. Sometimes the economy rises and sometimes it falls.

• They are profit-driven—the main goal of most businesses is to make money, so the workers may not have good working conditions or fair pay.

• They can result in negative externalities, harmful side effects that affect third parties. Pollution is one example.

Command EconomiesAnother type of economy is called a command economy. People in a command economy have little say as to how the economy should work. The government owns the factors of production. It also decides, or commands, what is produced, how it is produced, and for whom it will be produced. It even sets wages and prices. Under this system, the government controls the supply of goods.

Command economies have planning agencies with a lot of power. They decide how different parts of the economy will work. This system is called a command system because the government tells producers what to do. It is also called a central planning system.

Lesson 2: Economic Systems and Development, Continued

Prior Knowledge

2. Explain the difference between the GDP and GDP per capita.

Mark the Text3. Finish the chart with

the characeristics of a market economy.

Examining Details

4. List two positive and two negative characteristics of market economies.

Reading Check

5. What is the government’s role in a command economy?



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Command economies have pros and cons. Central planning helped the Soviet Union’s economy rebuild quickly after World War II. But it also can mean that there is not enough food or goods. Command economies grow slowly. They have low GDPs per capita.

These problems caused many countries with command economies to make the switch to market economies. Around 1990, Russia and Eastern European countries began moving toward market economies. This was not easy. First, nations had to change from having state-owned businesses and farms to ones owned by private citizens. This is called privatization.

works well in national

emergencies

can result in fast growth

of some parts of the economy

inefficient

Drawbacks of a Command

Economy

lower GDP per capita

than market economies

grow slower than market economies

Advantages of a Command

Economy

Newly private businesses had to learn to be more efficient, or organized. Some countries are still waiting for their economies to improve.

China started using some features of a market economy in the 1970s. China has been successful. Both its GDP and GDP per capita have grown. China’s economy is now one of the largest in the world. This major benefit does come with some problems. One is pollution. Another is a growing gap between income groups.

Mixed Economies Mixed economies combine parts of a market economy with parts of a centrally-planned economy.

Most countries have mixed economies. Both the market and the government are important in this type of economy.The United States has a mixed economy.

Prior Knowledge

6. How are shortages in a command economy related to supply and demand?

Vocabulary7. Explain what the

word privatization means in economic terms.

Mark the Text8. Find and underline

the phrases that identify consequences of China’s economic reforms.

Identifying9. What two things are

mixed in a mixed economy?




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Here, private citizens own the factors of production and make the economic choices. This means the U.S. economy is market-oriented, or directed by the market. At the same time, the government does play a role. It provides some goods and services, such as public schools and roads; it encourages competition; and regulates, or watches over, businesses. For example, the government has passed laws that set a minimum wage for workers and make sure products are safe.

Developed and Developing CountriesCountries that have a high standard of living and a lot of industry are called developed countries. Only about 35 countries are considered developed. Examples include the United States, Canada, Japan, and Germany.

Other countries have started taking steps to become developed countries. These nations are building their export businesses to help their economies grow. They are called newly industrialized countries. China and India are examples.

Countries that are not very productive and have low GDP per capita are called developing countries. They are struggling to develop market economies. The diagram below shows some things that get in the way of that goal.

poor government

corruption

debt

wars

trade barriers

high population

growth

Obstacles to Development

One thing that gets in the way of development is high population growth. Often when a country’s population is growing fast, the economy cannot keep up.

Reading Check

10 . What are signs that the United States does not have a pure market economy?

Contrasting11. Explain the

difference between developed countries and developing countries.




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Each person then gets a smaller and smaller share of what the economy is making. The country’s GDP per capita goes down.

Some countries have too many trade barriers. The barriers sometimes protect poorly run, unproductive businesses.

A country’s location can make it hard for its economy to grow. Landlocked countries cannot use ocean trade routes that make trading much easier. They have difficulty getting their goods to other nations.

Wars are another obstacle. They ruin resources and destroy lives. Productivity goes down and people face a shortage of food, health care, and education. As a result, countries have more difficulty investing in their economies.

Many developing countries have large debts. These countries borrowed large amounts of money to help their economies grow. Their economies did not grow fast enough to pay the loans back. Now they have to use too much of their income to pay off their debt.

Finally, government corruption is a problem in some countries. Leaders have stolen money that was meant to help their nations’ economies and their people.

Glue Foldable here

Check for UnderstandingName two characteristics of a market economy.

1.

2.

What is the major difference between a market and a command economy?

3.

List two challenges faced by developing countries.

4.

5.

Reading Check

12. How do trade barriers hurt development?

Defining13. Use context clues

to determine the definition of landlocked.

How does being landlocked affect a nation’s economy?

14. Place a Venn diagram along the dotted line. Write 3 Types of Economieson the anchor. Label the tabs Market Economy, Mixed Economy, and Command Economy. On the tabs, write about each, and explain how a mixed economy is a combination of the other types.





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