18.1 – 8a – globalization: characteristics and trends

  • Globalization – the movement toward a more integrated and interdependent world economy
  • People are buying more foreign products

16.1 – International Trade – absolute and comparative advantage

Why nations trade

  • Specialization is an important reason for trade
  • Exports – the goods and services that a nation sells to other nations
  • Imports – the goods and services that a nation buys from other nations
  • International trading, exchanging goods and exotic products

The basis for trade

  • Absolute advantage – country’s ability to produce more of a given product than another country can produce
  • Production possibilities frontier – diagram showing the maximum combinations of goods and/or services an economy can produce when all resources are fully employed
  • Comparative advantage – country’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost
  • Opportunity cost – cost of the next best alternative use of money, time, or resources when making a choice
  • Comparative advantage is based on the assumption that everyone will be better off specializing

Restricting international trade

  • Tariff – tax placed on an imported product
  • Quota – limit on the amount of a good that is allowed into a country
  • Protective tariff – tax on an imported product designed to protect less efficient domestic producers
  • Revenue tariff – tax placed on imported goods to raise revenue
  • Government can use a quota to keep foreign goods out of the country
  • Health inspections are also considered barriers

Arguments for protection

  • Protectionists – person who wants to protect domestic producers against foreign competition with tariffs, quotas, and other trade barriers
  • Free trader – person who favors fewer or even no trade restrictions
  • Arguments for trade barriers
    • National defense
    • Infant industries arguments
    • Protect domestic jobs from cheap foreign labor
    • Limiting imports will keep American money in united states instead of allowing it to go abroad
    • Reduction of trade deficits and thus help the balance of payments
    • National pride
  • Infant industries argument – argument that new and emerging industries should be protected from foreign competition until they are strong enough to compete
  • Balance of payments – difference between money paid to, and received from, other nations in trade

The free trade movement

  • Use of trade barriers to protect domestic industries and jobs works only if other countries do not retaliate with their own trade barriers
  • 1930 passage of Smoot Hawley Tariff Act, one of the most restrictive tariff in history
  • High tariffs hurt more than they helped
  • 1934 passage of Reciprocal Trade Agreements Act, which allowed it to reduce tariffs up to 50 percent
  • Most favored nation clause – trade law allowing another country to enjoy the same tariff reductions the United States negotiates with any third country
  • 1947, 23 countries signed the General Agreement on Tariffs and Trade, extending tariff concessions and worked to eliminate import quotas
  • 1962 passage of Trade Expansion Act of 1962 gave president power to negotiate further tariff reductions
  • GATT replaced with WTO
  • World Trade organization (WTO) – international agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries
  • North American Free trade agreement – agreement signed in 1993 to reduce tariffs and increase trade among the united states, Canada and Mexico

Regional Economic cooperation

  • Free trade area – group of counties that have agreed to reduce trade barriers among themselves but lack a common tariff barrier for nonmembers
  • Customs union – group of countries that have agreed to reduce trade barriers among themselves and have uniform tariffs for nonmembers
  • European union – economic, political, and social union established in 1993 by the Maastricht Treaty as the successor of the European Community
  • 1993, EU became the largest single unified market in the world in terms of population and output
  • Euro – single currency of the EU introduced in January 2002 and adopted by many member nations
  • ASEAN – group of 10 southeast Asian nations working to promote regional cooperation, economic growth, and trade
  • Cartel – group of sellers or producers acting together to raise prices by restricting availability of a product
  • Members of OPEC tried to create the equivalent of a monopoly and push up world oil prices, the growth has been slow compared to most standards

16.3 – 8b – foreign exchange and trade deficits

Financing international trade

  • Foreign exchange – various currencies used to conduct international trade
  • Markets include banks that help secure foreign currencies for importers
  • Help us banking system build a supply of foreign currency
  • Foreign exchange rate – price of one country’s currency in terms of another country’s currency
  • Fixed exchange rate – system under which the values of currencies are fixed in relation to one another
  • 1971 US would no longer redeem foreign held dollars for gold
  • Flexible exchange rates or floating exchange rates – system that relies on supply and demand to determine the value of one currency in terms of another
  • Worked relatively well

Trade deficits and surpluses

  • Trade deficit – balance of payments outcome when spending on imports exceeds revenues received from exports
  • Trade surplus – balance of payments outcome when revenues received from exports exceed spending on imports
  • Trade-weighted value of the dollar – index showing strength of the US dollar against a group of major foreign currencies
  • A persistent trade imbalance can cause a chain reaction that affects income and employment
  • Under flexible exchange rates, trade deficits tend to correct themselves automatically through price system; you don’t want strong nor weak dollar

17.1 – 8c – economic development

  • Developing country – country with relatively low average per capita income and less developed infrastructure, education, and health care system

The importance of economic development

  • poverty is beyond an economic problem, it causes social discontent, political unrest, and un-stability of a nation
  • US has the largest total income
  • Not proportional to the actual size of the country nor population
  • International community concern for developing countries, out of morality and self-interest (raw materials)

Stages of economic development

  • Primitive equilibrium – first stage of economic development during which the economy is stagnant
  • No monetary system and may not be economically motivated toward growth
  • Second stage is a period of transition, involves breaking away from primitive equilibrium and moving toward economic and cultural changes
  • Takeoff – third stage of economic development when barriers of primitive equilibrium have been overcome
  • Country starts to save and invest more of its national income
  • Fourth stage is semi development, makeup of country’s economy changes
  • Final stage is high development, where efforts to obtain food, shelter, and clothing are more than successful
  • Nation emphasizes service and provide more public goods

Obstacles to development

  • Population growth, there are more people to feed and greater demand for goods
  • Crude birthrate – number of live births per 1000 people
  • Life expectancy – average remaining life span in years for persons who attain a given age
  • Zero population growth – condition in which the average number of births and deaths balance so that the population size is unchanged
  • Limited natural resources
  • Health and death rates due to infections
  • Lack of appropriate education and technology
  • External debt – borrowed money that a country owes to foreign countries and banks
  • Default – act of not repaying borrowed money
  • In some cases, those countries who are in default cannot borrow again
  • Government corruption can be an obstacle to economic progress
  • In most cases, developing countries are often in civil war; immediate impact of war such as devastating loss of lives, property, infrastructure
  • Capital flight – legal or illegal export of a nation’s currency and foreign exchange

17.2 – achieving economic development

Funding economic development

  • To generate these internal funds, an economy must produce more than it consumes
    • Market economy: incentive to save stems from the profit motive
    • Command economy: government may still be able to force saving by requiring people to work on farms, roads, or other projects
  • Micro loan – small, unsecured loan made primarily to women to help them undertake an income generating project in a developing country
  • Have a three-month duration and require small weekly payments on principal
  • International monetary fund – international organization that offers advice, financial assistance, and currency support to all nations
  • World bank – international agency that makes loans and provides financial assistance and advice to developing countries
  • They also invest in private businesses and other enterprises
  • National development association makes soft loans
  • Soft loans – loan that might never be paid back
  • Can obtain external funds by borrowing from foreign governments
  • Attract private funds from foreign investors who might be interested in a country’s natural resources is another way
  • Expropriation – government confiscation of private or foreign owned goods without compensation

18.1 – 8d – globalization: characteristics and trends

  • Globalization – the movement toward a more integrated and interdependent world economy

Characteristics of globalization

  • As transportation and communication improved and populations grew, markets expanded into regions
  • Multinational – corporation producing and selling without regard to national boundaries and whose business activities are in several different countries
  • As a result of globalization, stores are stocked with a wide variety of products from other countries
  • Production sites are also moved
  • Outsourcing – hiring outside firms to perform non-core operations to lower operating costs
  • Growth of international organizations that promote trade between nations
  • General agreement on tariff and trade – international agreement to extend tariff concessions and reduce import quotas
  • International monetary fund offers advice and financial assistance to nations so their currencies can compete in open markets
  • World bank helps developing countries join global markets as part of economic development

Globalization trends

  • Specialization and division of labor lead to higher levels of productivity
  • Division of labor – separation of work into a number of individual tasks to be performed by different workers
  • Comparative advantage – a country’s ability to produce a given product at a lower opportunity cost than another country
  • Results interdependence
  • The culture, currency, or laws of an individual country can interfere with the increase in economic integration
  • European coal and steel community – group of six European countries formed in 1951 to coordinate iron and steel production to ensure peace among member countries
  • Free Trade of the Americas – 34 nation group established in 1994 in order to set up a regional free trade area in the Americas with no internal barriers to trade
  • As globalization continues, different regional groups may merge into even larger global markets
  • Globalization can lead to great economic gains, these gains may not be important to everyone

18.3 – coping with the future

  • Capitalism has demonstrated an ability to generate wealth, and it also has shown that it can adapt to the changing desires and needs of people
  • Modified free enterprise economy – free enterprise system with some government involvement
  • Market economy has many advantages, including the ability to adjust to change gradually without the need for government intervention
  • More capitalistic economies have modified their systems to make them more compatible with prevailing norms of what is right and wrong
  • The ability to evolve, and adjust to demand placed on it, are strengths of capitalism that will continue to ensure its success in the future
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