Download Chapter 26- Comparing Economic Systems

Chapter 26- Comparing
Economic Systems
Why Nations Trade
 Exported goods are sold to other countries;
imported goods are purchased from abroad; the US
imports more than it exports
 Trade is one way nations solve the problem of
scarcity; nations trade for goods and services they
could not otherwise have or have them as cheaply
 The main reason countries trade is
comparative advantage; the ability of a
country to produce goods at a lower cost than
another country can
 Because of comparative advantage nations
can specialize and use resources to produce
things they produce better than other nations;
this can lead to overproduction
 International trade also creates jobs; exporting
goods allows companies to produce more products
and hire new workers
Restrictions and Integration
 Barriers to trade include tariffs and quotas; a
tariff is a tax on imported goods the goal is to
make price of imports higher than domestic
goods
 Quotas limit the amount of foreign goods
imported
 Most countries try to reduce trade barriers; they
aim to achieve free trade; to increase trade
countries join together with a few key partners to
set up free trade zones
1.
2.
3.
European Union= organization of independent
European nations with no trade barriers and a
common currency, the Euro
North American Free Trade Agreement
(NAFTA)= eliminates all trade barriers between
the US, Canada, and Mexico
The World Trade Organization= oversees trade
among nations
Financing Trade
 The exchange rate is what the price of your
nation’s currency is in terms of another nation’s
currency; this rate is set by supply and demand and
can change daily
 The balance of trade is the difference between the
value of a nation’s exports and its imports; it can
be favorable or unfavorable
 A positive balance of trade is known as a trade
surplus (exports>imports) a negative balance is
known as a trade deficit (exports<imports)
Market Economies
 In a pure market economy, decisions are made in
free markets based on the interaction of supply and
demand; capitalism is another name for this
 In a market economy- private citizens- not the
government own the factors of production:
natural resources, capital, labor, and
entrepreneurship
 In a market economy supply and demand
interact to set prices, producers and
consumers make their own decisions
 Most of the largest economies are market
economies; per capita GDP is the total GDP
divided by the nation’s population
Command Economies
 In a command economy the individual has
little influence on how the economy
functions; major decisions are made by the
government, also called a controlled economy
 Socialism is the belief that the
means of production should be
owned and controlled by
society, directly or through the
government; wealth would be
distributed equally
 Karl Marx believed socialism
would develop into
communism, one class would
evolve, all property would be
held in common, and there
would be no need for
government
 Most resources-especially land and capital- are
owned by the government who decide what to
produce, how to produce, and for whom to produce
 Command economies fix wages of workers and set
prices; planning agencies have a great deal of
power (agriculture, steel production, consumer
products)
 They are inefficient, grow more slowly, and attain a
lower per capita DGP than do market economies;
Cuba and North Korea are 2 examples
Mixed Economies
 In a mixed
economy
individuals carry on
economic affairs
freely, but are
subject to some
government
intervention; most
countries have this
system
 In the US, free enterprise is combined with
government decisions in the marketplace;
government keeps competition free and fair
and protects the public
 The US also promotes the economy by
providing services to businesses and
consumers such as the highway system and
US Postal Service
Changing Economies
 The Soviet Union, China, and countries of Eastern
Europe had command economies but by 1991 were
all in the process of changing
 Russia emerged as the largest country from the
former Soviet Union; state-owned factories are now
privately owned, stock markets were created, and
supply and demand form the basis of economic
decisions
 China converted many state-owned factories to
private ones; they learned about markets from
merging with Hong Kong and their economy has
averaged 10% annual growth over the past 20 years
Developing Countries
 Most countries are developing countries, or
countries whose average per capita income is only
a fraction of more industrialized countries
 Many making the transition have traditional economies;
economic decisions are based on custom or habit; traditional
methods are used to make items
 Problems include high rates of population growth, lower per
capita GDPs, lack of food and housing, a lack of natural
resources, and sometimes war, debt, and corruption
 The World Bank recommends these governments
invest more in their people, allow markets to make
economic decisions, and eliminate trade barriers