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
