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Chapter Intro 2
Section 1: International Trade
The exchange of goods and services helps create economic interdependence among peoples in different places and different countries. Nations trade with one another to obtain goods and services they themselves cannot produce efficiently.
Chapter Intro 2
Section 2: Economic Systems
An economic system is the way a society organizes the production and consumption of goods and services. Market and command economies approach economic decision making in very different ways.
Chapter Intro 2
Section 3: Economies in Transition
An economic system is the way a society organizes the production and consumption of goods and services. Both former command economies and developing nations face severe challenges in creating market economies.
Section 1-Main Idea
Guide to Reading
Big Idea
The exchange of goods and services helps create economic interdependence among peoples in different places and different countries.
Section 1
Why Nations Trade
Nations trade with one another to obtain goods and services they themselves cannot produce efficiently.
Section 1
Why Nations Trade (cont.)
• Nations trade to obtain goods or services they cannot readily produce.
• In 2005, U.S. exported about 10% of goods produced; imported slightly more
– Example: Imports industrial diamonds, exports commercial planes
Section 1
Why Nations Trade (cont.)
• Comparative advantages allow nations to specialize
– Example: Saudi Arabia—oil
– May be based on factors of production
Section 1
Restrictions and Integration
Countries sometimes try to protect their economies by setting up trade barriers.
Section 1
Restrictions and Integration (cont.)
• Governments use trade barriers to protect their economies.
• Two most common trade barriers:
– Tariff—customs duty makes import more expensive
– Quota—limits amount of product imported
Imports and Exports, Selected Nations
Section 1
Restrictions and Integration (cont.)
• Most countries prefer free trade or reduced trade barriers.
Section 1
Restrictions and Integration (cont.)
• Trade agreements:
– European Union—member countries have used euro since 2002
– NAFTA: U.S., Canada, Mexico
• Trade among members growing faster than are separate economies
• Opponents say American workers lose jobs
• Proponents say economic growth stimulated
Section 1
Restrictions and Integration (cont.)
– World Trade Organization (WTO)
• Oversees trade among nations
• Helps with negotiations, development, trade disputes
The North American Free Trade Agreement (NAFTA)
Section 1
Financing Trade
A nation’s balance of trade can be either a surplus or a deficit.
Section 1
Financing Trade (cont.)
• A nation’s balance of trade is either surplus or a deficit.
Section 1
Financing Trade (cont.)
• Exchange rate—value of a nation’s currency in relation to another currency
– Most countries use flexible exchange rate system
– Currency’s value can change daily
– Affects nation’s balance of trade
Section 1
Financing Trade (cont.)
• Trade surplus—value of exports exceeds value of imports
• Trade deficit—value of imports exceeds value of exports
– Tends to devalue currency
Section 1
Financing Trade (cont.)
• Deficits correct themselves through price system
Section 2-Main Idea
Guide to Reading
Big Idea
An economic system is the way a society organizes the production and consumption of goods and services.
Section 2
Market Economies
Market economies are characterized by individual freedom, competition, and less government control.
Section 2
Market Economies (cont.)
• In a market economy, supply and demand determine how decisions are made.
Section 2
Market Economies (cont.)
• Market economy:
– Private citizens own factors of production
– Supply and demand set prices, production
– Decentralized
Section 2
Market Economies (cont.)
– Pure form does not exist
– Most of world’s largest economies
– Higher per capita gross domestic product (GDP)
Section 2
Market Economies (cont.)
• Government intervenes to
– Prevent monopolies
– Punish lawbreakers
– Influence externalities
Section 2
Command Economies
In command economies, the government tells producers what to do.
Section 2
Command Economies (cont.)
• In a command economy, economic decisions are made by the government.
• Also called controlled economy
• Socialism: society should control production, distribute wealth equally
Section 2
Command Economies (cont.)
• Communism: one class, holding all property in common
– Karl Marx advocated violent revolution
– No need for a government
Section 2
Command Economies (cont.)
• Command Economy:
– Government makes three basic allocation decisions:
• What to produce
• How to produce
• For whom to produce
Section 2
Command Economies (cont.)
– Rely on planning agencies
– Economy grows more slowly
– Lower per capita GDP
Per Capita GDP, Selected Nations
Section 2
Mixed Economies
Today the American economy and others like it are described as mixed economies.
Section 2
Mixed Economies (cont.)
• Many modern economies combine features of market and command economies to form a mixed economy.
Section 2
Mixed Economies (cont.)
• Mixed Economy:
– Combines elements of market and command economies
– Most world economies
– Individual freedom with some government intervention
Section 3-Main Idea
Guide to Reading
Big Idea
An economic system is the way a society organizes the production and consumption of goods and services.
Section 3-Key Terms
Guide to Reading
Content Vocabulary
• developing country
• traditional economy
Academic Vocabulary
• collapse
• nevertheless
A. A
B. B
Section 3-Polling Question
Do you think Russia and China are better off now that they have more open economies?
A. Yes
B. No
0%0%
Section 3
Changing Economies
Russia and China are making the difficult transition from command to market economies.
Section 3
Changing Economies (cont.)
• Russia and China are moving away from command economies toward market economies.
Comparing Economies: Russia, China, and the U.S.
Section 3
Changing Economies (cont.)
• Russia
– Soviet Union collapsed in 1991
– Soviet production inefficient
– State-owned factories transferred to private owners
– Stock markets created
Section 3
Changing Economies (cont.)
– Difficult transition
– Economy showing signs of improvement
Section 3
Changing Economies (cont.)
• China
– In 1980s, economy behind other Asian economies
– Began market reforms—some private factory ownership
– Reunification with Hong Kong in 1997
– Average 10 percent annual growth for 20 years
– About 160 million unemployed
A. A
B. B
Section 3
Which country do you think is adapting better to a market-based economy?
A. China
B. Russia
0%0%
Section 3
Developing Countries
Developing countries face many problems as they try to create market economies.
Section 3
Developing Countries (cont.)
• Developing countries are those whose average per capita incomes are far below those of industrialized countries.
Section 3
Developing Countries (cont.)
• Traditional economy
– Decisions based on habit
– People Often follow same career as family
Section 3
Developing Countries (cont.)
• Obstacles to development:
– High population growth rate
– Geography, natural resources
– War, debt, corruption
Social Statistics Comparison,Selected Regions
Section 3
Developing Countries (cont.)
• Help for developing countries
– International Monetary Fund (IMF)
– International Bank for Reconstruction and Development (World Bank)
– Debt forgiveness
A. A
B. B
C. C
D. D
Section 3
0% 0%0%0%
What is the worst by-product of war in a developing nation?
A. Destroyed roads and buildings
B. Hidden land mines
C. Depressed economy
D. Fewer workers
VS 1
International Trade
• Nations trade with one another to obtain goods and services that they themselves cannot produce efficiently.
• Comparative advantage is the ability of a country to produce a good at a relatively lower cost than another country can.
• Countries sometimes try to protect their economies by setting up trade barriers, such as tariffs and quotas.
VS 2
International Trade (cont.)
• A nation’s balance of trade can be either a surplus or a deficit.
• A nation’s currency can be strong or weak.
VS 3
Economic Systems
• Market economies, or capitalist systems, are characterized by individual freedom, competition, and less government control.
• In command economies, the government tells producers what to do, resulting in inefficiency and slow economic growth.
VS 4
Economies in Transition
• Russia and China, two former command economies, with the nations of Eastern Europe, are making the difficult transition from command to market economies.
• Developing nations are nations with little industrial development and low standards of living.
• Developing countries with traditional economies, many in Africa and Asia, also face problems as they try to create market economies.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
TIME Trans
DFS Trans 1
DFS Trans 2
The United States has a market economy. Individuals choose which goods to produce and the prices for which the goods will sell.
DFS Trans 3
Vocab1
export
to sell goods to other countries; or a good produced in one country, then sold to another
Vocab2
import
a good purchased from one country by another
Vocab3
comparative advantage
the ability of a country to produce a good at a lower opportunity cost than another country can
Vocab4
tariff
a customs duty; a tax on an imported good
Vocab5
quota
a limit on the amount of foreign goods imported into a country
Vocab6
free trade
policy of reduced trade barriers
Vocab7
exchange rate
the price of one nation’s currency in terms of another nation’s currency
Vocab8
balance of trade
the difference between the value of a nation’s exports and its imports
Vocab9
trade surplus
situation in which the value of the products exported by a country exceeds the value of its imports
Vocab10
trade deficit
situation in which the value of the products imported by a country exceeds the value of its exports
Vocab11
consequently
as a result
Vocab12
eventually
in the end
Vocab13
flexible
to adapt easily
Vocab14
market economy
system in which individuals own the factors of production and make economic decisions through free interaction
Vocab15
per capita GDP
Gross Domestic Product per person
Vocab16
command economy
an economic system in which the major economic decisions are made by the central government
Vocab17
socialism
economic system in which government owns some factors of production and distributes the products and wages
Vocab18
communism
economic system in which the central government directs all major economic decisions
Vocab19
mixed economy
system combining characteristics of more than one type of economy
Vocab20
intervene
to come between
Vocab21
exploit
to take advantage of
Vocab22
developing country
a country whose average per capita income is only a fraction of that in more industrialized countries
Vocab23
traditional economy
an economic system in which the decisions of what, how, and for whom to produce are based on custom or habit
Vocab24
collapse
to fall apart
Vocab25
nevertheless
even so
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