THE UNITED STATES AND THE WORLD Unit 8

Chapter 26 Comparing Economic Systems

International Trade and Its Benefits  More goods imported into US than exported (trade deficit)  Basic economic problem is called scarcity, people do not have enough resources to meet all of their wants  Problem solved by trade with other nations Why nations trade A. Trade for goods and services they do not have B. Comparative advantage, some countries can produce goods at a lower cost  Allows nations to specialize in things they produce more efficiently than other countries  Can result in overproduction, so they sell items on international market  Trade creates jobs

International Trade and Its Benefits Barriers to International Trade  Tariffs- a tax on imported goods  Makes the price of the imported good higher than domestically produced goods, goal is to get customers to buy domestic product  Quotas- blocking trade by limiting imports  Trade barriers often do not work, causes customers to pay higher prices  Movement toward free trade, reduction of trade barriers internationally

International Trade and Its Benefits  Regional Trade Agreements  Countries join together in zones of free trade  Trade barriers removed and trade increases among those countries  European Union (EU) organization of independent European nations  Combined value of all goods and services rival US  No trade barriers among nations  2002 began to use common currency called the euro (not all countries agreed)

International Trade and Its Benefits  North American Free Trade Agreement (NAFTA)- Early 1990’s US, Canada, Mexico signed free trade pact  Since signing trade has grown twice as fast as economy  Many criticize deal saying jobs in US will be lost to lower work costs in Mexico  Supporters argue that it stimulates growth and puts more low cost goods on the market  World Trade Organization (WTO) oversees trade among nations  Negotiates trade rules, helps countries trying to develop their economies, settles trade disputes  Critics say their policies favor major corporations at the expense of workers, environment and poor countries

International Trade and Its Benefits  Financing Trade  Different countries use different currency  Exchange rate determines price of certain nations currency  Flexible system where forces of supply and demand set price of different currencies, price may change from day to day  Exchange rate can have an effect on the balance of trade (difference of value between imports and exports for a country)  Weak currency means more exports because goods from that country are cheaper  Strong currency means fewer exports

International Trade and Its Benefits  Trade deficits and surpluses  Deficit- when imports value exceeds value of exports  Surplus- exports exceeds value of imports  *Increase in supply of countries currency around the world because of trade deficit causes currency to become devalued (weak), causes imports to become more expensive and system self corrects*

Economic Systems  Basic economic question is how to deal with scarcity (how to manage resources to meet needs of all, when there is never enough)  All economic systems must answer three basic questions:  What goods and services should be produced?  How should these goods and services be produced?  Who consumes these goods and services?  Different economic systems answer these questions in different ways  Three different types- market, command, mixed economic systems

Economic Systems  Market Economy (aka capitalism)  Business decisions made by private individuals based on supply and demand, ability to make a profit  Private citizens own factors of production -natural resources, capital (money, education, tools), labor and entrepreneurship  Supply and demand interact to set prices  Market economy is decentralized, economy runs itself

Economic Systems  Command Economies  Direct contrast to free market economy  Central government answers key economic questions  Government owns factors of production, set quotas on what to produce  Self interest and competition absent from system  People have less economic freedom, fewer choices than market economy  Type of economy can be very inefficient

Economic Systems  Socialism and Communism  Socialism political and social philosophy based on belief that democratic means should be used to distribute the wealth  Public controls centers of economic power  Government owns major industries  Communism economic and political power in the hands of the central government  Society can only change after a violent revolution and all government is authoritarian

Economic Systems  Mixed Economies  Most contemporary economies are mixed economies that blend the market and government intervention  United States (and most countries) are mixed economies  Private individuals make decisions and the government regulates activity  Government provides defense, system of justice, makes sure markets stay competitive  Government plays a role with externalities  Externalities are unintended consequences of government or individual action  Takes steps to reduce pollution (negative externality) or to provide funding for scientific research that can be used to develop new products (space program- positive)  Government also provides public goods- good or service which it would be impractical to make consumers pay for individually and is available to all (streetlights)

Economies in Transition  Many nations today are switching from traditional or command economies to market based economy  Command economies unable to achieve economic growth, meet needs of consumers  By 1991 many economies in Eastern Europe transitioned their political and economic systems  Russia  1991 USSR collapsed  Economy had been planned by central government (decision on what to make and sell decided by government)  Focused on industry, military and not on consumer goods  Caused shortages  State owned businesses were sold to private investors  Private investors now make government decisions, transition has been slow and filled with corruption

Economies in Transition  China  Moving from a command economy to a market economy  Economy used to be modeled on Soviet model  During 1990’s fell behind neighboring countries and introduced reforms to catch up  Converted state owned factories to private hands, set up stock market in Shanghai  1997 reunified with Hong Kong the ultimate free market where the private sector rules  Over the past 20 years economy has experienced phenomenal growth  Many in China have lost land and become displaced because of economic transition

Economies in Transition  Developing Countries  Many countries making transition to market based economy  Many are developing countries  Development is based on how well a nation provides food, education, shelter, and levels of economic production

Economies in Transition  Characteristics of Developing Countries 1. Low per capita GDP 2. Low energy usage, because no infrastructure or manufacturing 3. Most of population in agriculture (subsistence farming) 4. Unemployment rates high 5. Education system inadequate, children needed to work on farms; literacy rates low 6. Most of population is rural (not always) 7. Poor diet, access to health care lead to high infant mortality and lower life expectancy 8. Physical geography makes development difficult 9. Uneven distributions of resources, arable land

Economies in Transition  Political Factors  Colonial legacy  Many were former colonies with economies based on extraction of raw materials  Shipped to colonizers, turned into finished products, rely on mother country for manufactured goods  After WWII many became independent, turned to central planning, many are now turning to free enterprise  Corruption in government  Policies and political decisions to only benefit a small minority, leaving many with needs unmet  Civil wars and social unrest have plagued many countries  Military leaders spend huge sums of money at the expense of other societal needs

Economies in Transition  Debt and Helping Developing Countries  Some countries foreign debt is greater than annual GDP  Building infrastructure, developing education, healthcare and creating industry require large sums of money  International institutions promote development  World Bank- largest provider of development assistance, raises money in financial markets and takes contributions from member nations  International Monetary Fund (IMF)- facilitates development through policy advice, technical assistance  Often viewed as the last resort for struggling LDCs  Stabilization programs have negative impact on poor; cuts in government services, cutting wages while prices rise, country tries to export more to make money

Economies in Transition  Foreign direct investment- business established in country by foreign firm  Often formed by Multi-National Corporations (MNCs)  MNCs large corporations that produce and sell goods across the globe  Attracted because of profit, take advantage of cheap labor and natural resources  Money not reinvested in country, goes to foreign owners  Potential for unethical treatment (low wages for workers)  Positive effects provide jobs, introduce technology, opportunity for related services to develop