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CHAPTER 26.1: INTERNATIONAL TRADE
1. THE BASICS
a) EXPORT: this is when a country sells a good to another country.
b) IMPORT: this is when a country buys a good from another country.
2. WHY NATIONS TRADE
 It is the way nations solve the problem of SCARCITY. Nations trade for
goods they either have difficulty producing or cannot produce at all. For
example, we trade for diamonds since we have a nowhere to really find
them. On the other hand, we export commercial aircraft since we can
make it cheaper and easier (due to technology) than anyone else.
 Another reason we trade is due to COMPARATIVE ADVANTAGE. This
term refers to the fact some countries can produce goods/services
cheaper and more efficiently than other countries. For example, we buy
color TV’s from foreign nations – not because we can’t make it, it’s
because other countries can do it cheaper than us. (Remember
SPECIALIZATION!!!) Other examples include oil (from Saudi Arabia and
other areas in the region.
 Lastly, trade creates JOBS. Instead of limiting business to just the
home nation, businesses can market their products worldwide – which
means more business – which means the need for more employees.
3. RESTRICTIONS ON TRADE
a) TARIFF: this is a tax on an imported good. The purpose of this is to
make foreign goods more expensive than domestic-produced (homeproduced) goods. For example, if the USA wanted to “protect” its
automobile industry, they would add a tariff (20%) on foreign produced
cars.
b) QUOTA: this is a set limit to the amount of a particular good that can
be imported. During the 1970’s, the USA set a quota on the number of
Japanese-made automobiles to protect American automakers.
Nowadays, it’s been decided that the costs of using the two trade restrictions
outweighs the benefits. This led to the creation of….TRADE AGREEMENTS.
4. TRADE AGREEMENTS
 EUROPEAN UNION: this was created to combat the economic power
of the USA. These European nations exercise free trade/travel between
each other. They became even further linked in 2002 when they
decided to use the EURO as their common currency. Nowadays, the
combined GDP of the European Union is identical to the USA!
 NAFTA: (North American Free Trade Agreement) – this was created in
the 1990’s to counter the growing power of the European Union. It’s
members are the USA, Canada, and Mexico. Like it’s European
counterpart, they have eliminated trade barriers between each other –
which has led to a massive increase in trading between the three
countries. Critics of this agreement argue that it has led many American
businesses to re-locate to Mexico to take advantage of their cheaper
wages and less restrictions – which has cost many Americans their jobs.
 WTO: (World Trade Organization) – this is an international organization
that regulates trade among nations. They also try to help third-world
countries develop their economies. Critics of this group argue that they
favor corporations and don’t care about the environment.
5. FINANCING TRADE
 If you ever travel overseas, you need to be aware of the exchange
rate, which is the value of our money compared to another country’s.
This changes on a daily basis. This is controlled by supply and
demand.
6. BALANCE OF TRADE
 When a country exports more than it imports, then that country has a
trade surplus.
 When a country imports more than it exports, then that country has a
trade deficit.
 The USA has a trade deficit. This has led to the weakening of our
dollar.
26.1 REVIEW
1. What are the two trade agreements created to increase trade between
their member nations?
2. What is a trade deficit?
3. What are two ways to restrict trade?
4. Why do we refrain from (not use) trade restrictions nowadays?
5. What are THREE reasons nations trade?
6. What is a trade surplus?
7. What determines the exchange rate?
CHAPTER 26.2: ECONOMIC SYSTEMS
7. MARKET ECONOMIES
 In a market economy, PEOPLE own the factors of production. In
addition, economic decisions are made by everyone – not just a few
people.
 The role of government in a market economy is to ensure
COMPETITION. It is responsible for punishing businesses that threaten
this. Governments also try to encourage positive externalities- and
discourage negative externalities.
 The largest GDP’s belong to market economies. This includes the USA,
which is primarily a market economy. (Not pure however, we’re actually
MIXED… which is discussed later).
8. COMMAND ECONOMIES
 These economies are the opposite of market economies. In a command
economy, the government is responsible for making economic
decisions. It tells the citizens what and how much to produce.
Individuals in these economies have little or no freedom in making
economic choices.
 The two types of governments that make usage of command
economies are socialism - which believes the government should
control everything so wealth will be evenly spread out…. and
communism - which was created by Karl Marx. According to Marx, there
has been an eternal struggle between the bourgeoisie (people who own
the means of production) and the proletariat (workers). Eventually a
communist society would evolve to a point where all property would be
owned by everyone and there would be no need for government. (The
Soviet Union failed at this, as has any country that attempted….)
 Command economies tend to grow MUCH slower than market
economies, which is evident by their horribly low GDPs. The best
examples of command economies are China and Cuba.
9. MIXED ECONOMIES
 Pure forms of market or command economies are extremely rare. Most
countries have a combination of the two, called a MIXED economy. For
example in the USA, the government controls some industries, such as
the US Postal Service. As you already know, our government indirectly
serves the “regulator” of the economy.
26.2 REVIEW
1.
2.
3.
4.
5.
6.
What THREE things do governments try to do in market economies?
What two types of governments tend to use command economies?
What are two examples of countries with command economies?
What type of economy tends to have a higher GDP?
Technically speaking, what type of economy do most countries have?
(APPLICATION) If Cuba were to change its economy to a market
economy, what affect do you believe it would have on their GDP?
CHAPTER 26.3: ECONOMIES IN TRANSITION
10. During the 1990’s, many command economies collapsed. These include
the Soviet Union (which was completely dismantled) and China. Russia
(the largest part of the USSR left standing) and China have implemented
“market-command” ideals into their economies in hopes of improvement.
The results are – at best – mixed at this time.
11. UNDEVELOPED COUNTRIES
 While there are around 200 countries in the world today, only 20 are
considered
“developed.
 These “developing” nations tend to have traditional economies – which
are economies based on traditions and customs. They tend to occupy
the very bottom ranks of the GDP scale.
Developing nations have several problems that prevent then from
“developing.”
a) High population growth: with a quick-growing population, the
population increases faster than the GDP can keep up with. Developed
nations tend to have slow population growth rates. Population
“explosions” make it difficult to ensure there is enough food and
housing for everyone.
b) Constant fighting/War/Unstable leadership: Due to this,
developing nations cannot stay stable long enough to get their
economies to evolve.
c) Poor location: they don’t have access to trade routes, are isolated, or
do not have the means to produce anything.
26.3 REVIEW
1. What are three problems that prevent developing nations from
“developing?”
2. How are nations such as Russia and China trying to deal with the
problems their economies are having?
CHAPTER 27.1: GLOBAL DEVELOPMENTS
We live in an age of GLOBAL INTERDEPENENDENCE. We have to rely on
others – and others have to rely on us. Nations trade goods with other
nations all over the world. The benefits of global trade are that businesses
can make more MONEY and it creates more COMPETITION.
There are some “cons” (or negatives) to global interdependence. First of all,
competition can force a lot of weaker businesses out of business – which can
mess up a country’s economy and leaving people unemployed. Some
countries threatened by this will adopt the philosophy of PROTECTIONISM to
protect their economy. In the long run, protectionism can end up driving up
the price of goods.
WHAT THE US IMPORTS
OIL, MINERALS
WHAT THE US EXPORTS
Computers, wheat, aircraft, medical equipment, technology
27.1 REVIEW
1.
2.
3.
4.
5.
What are the benefits to global trade?
What is the criticism of global trade?
Why is protectionism generally bad in the long run?
What does the US import primarily?
What does the US export?
CHAPTER 27.2: THE UNITED NATIONS
At the end of World War II, the USA and other countries formed the UNITED
NATIONS. It’s purpose was to maintain PEACE promote TRADE, and to
offer aid in times of need.
The “Security Council” of the UN is responsible for maintaining peace. It is
made up of 15 countries, 5 of which are permanent members: USA, Russia,
China, United Kingdom, and France. The UN’s has not been very effective
maintaining peace lately due to disagreements between these 5 nations.
The UN’s biggest success thus far has been by offering aid in times of need
to countries that require it (due to wars or natural disasters).
27.2 REVIEW
6. What is the purpose of the United Nations?
7. Who are the members of the Security Council? Who are the permanent
members?
8. What has been primarily the biggest success of the UN?