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. European Union= organization of independent European nations with no trade barriers and a common currency, the Euro

2. North American Free Trade Agreement (NAFTA)= eliminates all trade barriers between the US, Canada, and Mexico

3. 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