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DESOTO HIGH SCHOOL INTERNATIONAL (GLOBAL) BUSINESS OUR GLOBAL ECONOMY STUDY GUIDE OBJECTIVES— Describe the basic economic problem List the steps of the decision-making process Describe how the market sets prices Explain the causes of inflation Name the three main factors of production Understand how different countries make economic decisions Describe the factors that affect economic development Identify the different levels of economic development Discuss economic principles that explain the need for international trade Identify various measures of economic progress and development Define terms related to economics VOCABULARY— Absolute advantage Comparative advantage Developing country Factors of production Gross domestic product (GDP) Infrastructure Market price Privatization Balance of trade Consumer price index (CPI) Economics Foreign debt Industrialized country Less-developed country (LDC) Mixed economy Scarcity Command economy Demand Economic system Foreign exchange rate Inflation Market economy Opportunity cost supply GLOBAL FOCUS – DUAL ECONOMIES In Mexico City, people working for multi-national companies are often within a couple of blocks of people selling items on the street. You will see modern buildings with the latest office technology. While just a short drive out of the city, people are conducting business as they did more than 50 years ago. These contrasting situations are examples of a dual economy, in which two very different business settings exist in the same country. Dual economies exist in every region of the world. These diverse settings represent two extreme levels of economic development. The modern economy could be described as an industrialized economy. The traditional business activities may be viewed as less developed. These two different levels of economic developed are often observed in the difference between urban and rural areas in emerging markets. Cities will often have large companies that are the foundation o a country’s economy. The countryside is home to traditional enterprises, such as creating hand-made crafts and operating small farms. The level of participation in international business is a characteristic of this urban-rural dual economy. Companies in cities are more likely to be involved with cross-border commerce and global trade, while traditional businesses in rural areas are usually involved in local markets. Another dimension of the dual economy within every country involves street vendors, pushcarts, homebased businesses, and other unregistered enterprises. Commonly called the informal economy, these businesses are in contrast to formal enterprises that obtain required permits and pay taxes. Millions of Mexican workers are employed in the informal sector. Economists estimate that nearly half of the jobs in Mexico City involve informal business activities. Dual economies exist in almost every country including industrialized countries such as Canada and the United States. As some business activities lead to economic growth, others fall behind. Problems of poverty, hunger, and homelessness are symptoms of this economic underdevelopment. Individual countries and global development agencies work to address the gap that results from dual economies in an effort to alleviate poverty and avoid social unrest. THINK CRITICALLY 1. What is a dual economy? ECONOMICS AND DECISION-MAKING THE BASIC ECONOMIC PROBLEM Scarcity economics opportunity cost Making Economic Decisions Every time you decide how to use your time, money, and energy, you are making an economic decision. Companies and nations also have to make choices The Decision-Making Process Step 1 – Define the problem Step 2 – identify the alternatives Step 3 – evaluate the alternatives Step 4 – make a choice Step 5 – take action on the choice Step 6 – review the decision STUDY GUIDE: OUR GLOBAL ECONOMY Page 2 BASICS OF ECONOMICS PRICE-SETTING ACTIVITIES Supply demand market price inflation Price is one of the most visible economic factors you encounter every day. The point where supply equals demand is known as the market price. Inflation has two basic causes. First, when demand exceeds supply, prices go up (demand-pull inflation). The other cause of inflation occurs when the expenses of business increase (cost-push inflation). ECONOMIC SYSTEMS ECONOMIC RESOURCES SATISFY NEEDS Factors of production economic system Every country makes economic decisions. These decisions provide a basis for solving the basic economic problem—satisfying unlimited needs and wants with limited resources. TYPES OF ECONOMIC SYSTEMS Economic system command economy Mixed economy privatization market economies Every nation decides how to use its factors of production to create goods and services for its people. The economic choices of a country relate to three basic questions. What goods and services are to be produced? How should the goods and services be produced? For whom should the goods and services be produced? ACHIEVING ECONOMIC DEVELOPMENT DEVELOPMENT FACTORS Differences in living and work environments reflect the level of economic development. The main influences on a country’s economic development are literacy level, technology, and agricultural dependency. TYPE OF DEVELOPMENT Industrialized country STUDY GUIDE: OUR GLOBAL ECONOMY infrastructure less-developed country (LDC) Page 3 Developing countries RESOURCES SATISFY NEEDS THE ECONOMICS OF FOREIGN TRADE Absolute advantage comparative advantage Countries are interdependent with each other and so are their economies. Consumers have come to expect goods and services from around the world, not just from suppliers in their own country. MEASURING ECONOMIC PROGRESS Gross domestic product (GDP) Balance of trade gross national product (GNP) foreign exchange foreign debt Consumer price index (CPI) The World Cup, the World Series, and the Olympics are sports events that involve scorekeeping. As with sports, international business also keeps score. Various economic measures are used toevaluate and analyze the economic conditions of a country. NOTES ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ STUDY GUIDE: OUR GLOBAL ECONOMY Page 4