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Chapters 2 and 15:

Economic Systems, Globalization, and International Trade

Key Concepts: Free Enterprise, Socialism, Globalization, Balance of Trade, Absolute and Comparative Advantage, Outsourcing, Offshoring, Tariff, Exchange Rate Name: _______________________________________________

Period: ____

Teacher: Mrs. Povletich

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The Three Economic Questions Chapter 2, Section 1

• All nations in the world must decide how to answer three economic questions about the

production and distribution of goods. • How a society answers these three economic questions defines its economic system.

Every society must answer the following questions:

What goods will be produced? Because of scarcity, no country can produce every good it wants in the quantity it would like.

How will the goods be produced? Will production decisions be made by individuals or by the government? Will producers use existing technology or new technology?

For whom will the goods be produced? Will the government decide? Will price decide? Will goods be produced for the purpose of trade with other countries?

Major Differences between Free Enterprise and Socialism Use pages 33-38 in your textbook to complete the chart highlighting the characteristics of each economic system. When you are finished, answer the questions at the top of the next page. Free Enterprise Socialism

Resources

Government’s Role in the Economy

Economics Plans

Income Distribution

Controlling Prices

Private Property

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The United States is considered to have a free enterprise (capitalist) economy but why should it really be considered a mixed economy? Why are almost all countries “Mixed Economies”? The Index of Economic Freedom that is in your textbook is a bit outdated. Go online and look up the 2016 Index of Economic Freedom. Choose one country in each of the categories and then describe why that country earned the score that it did. Country Economic Characteristics

(why did this country earn the score it received)

Free

Mostly Free

Moderately Free

Mostly Unfree

Repressed

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The Visions behind Free Enterprise and Socialism Use pages 39-40 in your textbook to complete the chart. You can use the chart on page 39 to make sure you hit the key points. Adam Smith Karl Marx Place and year of birth

Major Work (book) Economic system based on his ideas

Ideas contributing to his “visions”

Use the following key to label each of the statements as more like the free enterprise vision of Adam Smith or more like the socialist vision of Karl Marx. S = Adam Smith, free enterprise vision

M = Karl Marx, socialist vision _____ Resources are owned by private individuals

_____ Government decision makers write economic plans

_____ Private property is sacred.

_____ Government makes major decisions concerning the use of resources and the production of goods.

_____ Much attention is given to distribute income away from high earners toward low earners.

_____ Government owns and controls many resources.

_____ Government does not attempt to control prices.

_____ Government plays a small role in the economy.

_____ Government sets wages and the prices of goods.

_____ Government owns most property and uses it for the benefit of the people.

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Globalization Chapter 2, Section 2

What Is Globalization?

Globalization is a process by which individuals and businesses in any part of the world are much more _______________________ by events elsewhere in the world than they used to be.

Globalization is also the growing __________________________ of the national economies of the world

to the degree that we may be witnessing the emergence and operation of a ________________ worldwide economy.

What will globalization mean for countries that have a socialist economy? As globalization spreads, many countries are moving toward greater ________________ ____________________ practices. In fact, the world is currently moving from ________________ of national economies toward __________ large world economy. It now makes sense to speak of “the” economic system, and the economic system that best describes what is happening in the world economy is free enterprise or _____________________.

• Globalization didn’t just happen overnight. It has happened over many, many years. The end of the

_____________ ___________________ brought some countries closer together, and advances in ______________________ such as the steamship, the telephone, and the Internet have led to increased trade between people in different countries.

Costs and Benefits of Globalization

• Benefits include expanded __________ with new people and products. Income per person has _____________________ in countries that have opened up their economies to globalization. In addition, developing countries have seen the benefit of reduced ___________ and _________ labor, along with increased __________ _____________________.

• Critics of globalization believe that it causes a greater discrepancy between ______________ nations and

__________________ ones. In America, critics point out that many Americans are losing their jobs through a practice called _________________________—where work is done for a company by persons other than the original company’s employees in a country other than the one in which the company is located.

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• Is offshoring bad for the United States? Although some Americans lose their __________ due to globalization, jobs are always being lost and found in an economy responding to market __________________. Even if the degree of offshoring in the United States were __________, people would still be losing old jobs and getting new jobs every day.

• Globalization does not __________________ everyone in the same way.

o Consider this: If an American worker loses her job due to offshoring, she may have a negative

view of offshoring. Her company, on the other hand, may be getting the same level of work for significantly ___________ cost, and may see profits ________________. There is also the possibility that prices for the company’s products may go ___________ due to decreased production costs. The employee may find another ____________________ job.

o Could this be a win-win situation for everyone involved?

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GLOBALIZATION Chapter 2, Section 2

Benefits of Globalization For each of the following benefits of globalization, describe how it is a good thing. Use your book to help find the answers. BENEFIT: Increased Trade DESCRIPTION: __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ BENEFIT: Higher Standard of Living DESCRIPTION: __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Costs of Globalization For each of the following costs, describe the major costs put forth by critics of globalization. Then summarize the response that supporters of globalization might offer for each cost. Use your book to help find the answers. COST: Increase in Income Inequality DESCRIPTION: _______________________________________________________________ ____________________________________________________________________________________________________________________________________________________________ RESPONSE: __________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________

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COST: Loss of American Jobs DESCRIPTION: _______________________________________________________________ ____________________________________________________________________________________________________________________________________________________________ RESPONSE: __________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________ COST: More Power to Big Corporations DESCRIPTION: _______________________________________________________________ ____________________________________________________________________________________________________________________________________________________________ RESPONSE: __________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________

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INTERNATIONAL TRADE Chapter 15, Section 1

Why Do People in Different Countries Trade with Each Other?

• Individuals trade to make themselves ___________________________. • Some countries are able to __________________ certain goods that other countries either ____________

produce or can produce only at extremely ____________ costs. What Are Exports and Imports?

• Trade between countries consists of exporting and importing goods. o An _______________ is a good that is produced in the domestic country and sold to residents of a

foreign country. o An _______________ is a good produced in a foreign country that is purchased by residents of the

domestic country. • Between 1980 and 2005, the value of U.S. exports and imports generally

_____________________. o Exports increased by more than ________ percent, from just over $200

billion to just under $900 billion. o Imports increased by more than ________ percent, from about $250

billion to about $1,600 billion. Balance of Trade

• A country’s balance of trade is the ___________________ between the value of a country’s exports and the value of its imports.

o If a country has a positive balance of trade, it is said to have a trade ________________. o A country with a negative balance of trade is said to have a trade ______________.

Absolute and Comparative Advantage

• A country has an absolute advantage in the production of a good when it can produce _________ of a good than another country can produce with the ___________ quantity of resources.

• Countries tend to _________________, or do only one thing. A country will specialize in the production of the good, or goods, that it can produce for ________ than other countries.

• A country has a comparative advantage when it can produce a good at a _________________ opportunity cost than another country.

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Benefits of Specialization and Trade • Countries can have more of a good if they ____________________ in producing goods for which they

have a ________________________ advantage. They can then ______________ some of these goods for other goods. With specialization and trade, they can make themselves better off.

o For example, let’s consider two cases for Japan and the United States. o In the first case, neither country specializes and

neither country trades. Both countries have only what they produce. In this case, Japan has ________ food and __________ clothing than it needs. The United States has the opposite—more food and less clothing.

o In the second case, each country specializes in producing the good for which it has a comparative advantage. Japan produces only _________________, and the United States produces only ____________. Then the countries trade some of their goods. Both countries end up with more of the goods they need.

Outsourcing and Offshoring

• The term outsourcing describes work done for a company by ______________________ company or by people other than the ________________________ company’s employees.

o When a company outsources certain work to individuals in another __________________, it is said to be engaged in offshoring.

o Some _____________ are lost in offshoring. o Offshoring is simply people producing a good or service at a lower ___________ than other

people. It is _________________________ advantage at work. The Costs of Offshoring Are Easier to See than the Benefits

• We often see news reports about people who lose their jobs owing to offshoring. • At the same time, some foreign companies are offshoring jobs to the United States. • Lower __________________ result from offshoring. However, steady increases in the

_______________________ (inflation) eat up much of the benefit.

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Applying the Principles INTERNATIONAL TRADE

Chapter 15, Section 1

When a country can produce more of a good than another country can produce with the same quantity of resources, the first country has a(n) __________________________________________ in the production of the good.

When a country _______________________ in the production of a good, it produces only that good.

When a country can produce a good at a lower opportunity cost than that of another country, the first

country has a(n) __________________________________ in the production of the good. Opportunity Costs Stacy and Travis both produce garden ornaments, including bamboo wind chimes and wooden birdhouses. Stacy and Travis make the wind chimes and birdhouses by assembling parts manufactured by other people. The following table shows the number of wind chimes and birdhouses that Stacy and Travis can make in one hour. Wind Chimes Birdhouses Stacy 3 1 Travis 2 3

When Stacy spends one hour making ______ wind chime(s), she gives up the opportunity to make _____ birdhouse(s). So for Stacy, the opportunity cost of making a wind chime is ______ birdhouse(s).

When Stacy spends one hour making ______ birdhouse(s), she gives up the opportunity to make _____

wind chime(s). So for Stacy, the opportunity cost of making a birdhouse is _____ wind chime(s).

When Travis spends one hour making ______ wind chime(s), he gives up the opportunity to make _____ birdhouse(s). So for Travis, the opportunity cost of making a wind chime is ______ birdhouse(s).

When Travis spends one hour making ______ birdhouse(s), he gives up the opportunity to make _____

wind chime(s). So for Travis, the opportunity cost of making a birdhouse is _____ wind chime(s). Fill in blanks to summarize Stacy’s and Travis’s opportunity costs for 1 chime (W) and 1 birdhouse (B). Opportunity cost of 1 wind chime Opportunity cost of 1 birdhouse Stacy: 1W = _____ B Stacy: 1B = _____ W Travis: 1W = _____ B Travis: 1 B = _____ W

Who has the comparative advantage in making wind chimes? Explain.

Who has the comparative advantage in making birdhouses? Explain.

Who should specialize in making wind chimes? Why?

Who should specialize in making birdhouses? Why?

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If she doesn’t specialize and spends one hour making wind chimes and one hour making birdhouses, Stacy

makes _____ wind chime(s) and _____ birdhouse(s). If she specializes and spends both hours making wind chimes, Stacy makes _____ wind chime(s).

If he doesn’t specialize and spends one hour making wind chimes and one hour making birdhouses, Travis

makes _____ wind chime(s) and _____ birdhouse(s). If he specializes and spends both hours making wind chimes, Travis makes _____ wind chime(s).

If Stacy and Travis do not specialize and each spends one hour making wind chimes and one hour making

birdhouses, then together they produce _____ wind chimes and _____ birdhouses.

If Stacy and Travis specialize and spend two hours working in the area in which each has a comparative advantage, then together they produce _____ wind chimes and _____ birdhouses.

Advantage and Specialization Suppose two nations, Smithville and Jonesland, can produce wheat and rice. The following table shows the combinations of the two goods that each country can produce with the same amount of resources. Smithville Jonesland Combination A: 90 wheat and 0 rice Combination E: 15 wheat and 0 rice

Combination B: 60 wheat and 10 rice Combination F: 10 wheat and 5 rice Combination C: 30 wheat and 20 rice Combination G: 5 wheat and 10 rice Combination D: 0 wheat and 30 rice Combination H: 0 wheat and 15 rice

Which country has an absolute advantage in producing wheat? Why?

Which country has an absolute advantage in producing rice? Why?

Which country has a comparative advantage in producing wheat? Explain using opportunity cost.

Which country has a comparative advantage in producing rice? Explain using opportunity cost.

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When the two countries do not specialize or trade, Smithville produces and consumes combination B (60 wheat and 10 rice) and Jonesland produces and consumes Combination F (10 wheat and 5 rice). Now suppose Smithville and Jonesland decide to specialize in the good in which each has a comparative advantage and agree to trade 20 units of wheat for 10 units of rice.

What good should each country specialize in producing and how much of the good should it produce?

Complete the following to show the amount of each good each country has after specializing and trading: Smithville: _____ wheat and _____ rice Jonesland: _____ wheat and _____ rice

Complete the following to show the benefits for each country of specialization and trade. Smithville: _____ more units of wheat and _____ more units of rice Jonesland: _____ more units of wheat and _____ more units of rice Outsourcing and Offshoring

What is the difference between outsourcing and offshoring? *********************************************************************************************

TRADE RESTRICTIONS Chapter 15, Section 2

Trade Restrictions: Tariffs and Quotas

• A tariff is a tax on ________________. • A ____________ is a legal limit on the amount of a good that may be imported. • Both tariffs and quotas ______________ the price of imported goods to the U.S. consumer.

The U.S. Government and Producer Interests

• Why does the government impose tariffs and quotas if they result in higher prices for U.S. consumers? o Government is sometimes more interested in __________________ interests. A producer has

more to gain by eliminating __________________ competitors, and will lobby the government to implement tariffs and quotas. The _____________ to consumers are relatively less than the _______________ received by producers.

Tariffs and the Great Depression

• The ______________________________________________ proposed substantially higher tariffs on many imported goods.

o It was thought that with higher tariffs, Americans would buy ______________ imports and more domestic goods. Some believed that this would be __________ for the country.

• The expectation of this act being signed into law may have led to the sharp ____________ in the stock market in 1929. Some say this decline was the start of the Great Depression.

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• Many economists today believe that the act also made the Great Depression last _________________ than it would have otherwise.

Arguments for Trade Restrictions

• Responding to producer interests is only one of the reasons governments restrict trade. They also restrict trade for other reasons.

• The ___________________________________ argument states that certain industries are necessary to the national defense and therefore should be ______________________ from foreign competition.

• Criticism: The national-defense argument may have some validity, but in the past, it has been overused and abused to protect such industries and peanuts, candles, and thumbtacks.

• The __________________________________ argument states that new industries often need to be protected from older, more established foreign competitors until the new industries are _______________ enough to compete on an equal basis. However, ___________________________ the protection in the future is difficult.

• Criticism: Once an industry is protected from foreign competition, removing the protection is almost impossible. The once-infant industry will always argue that it is still immature and will fail if the protection is removed.

• _______________________ is the sale of goods abroad at prices below their costs and below the prices charged in domestic (home) markets. Critics of dumping say that dumpers seek only to get into a ______________, drive out ___________________, and then raise __________________.

o Do consumers benefit from lower prices as a result of dumping practices? Some economists argue that once dumpers ______________ their prices, competitors will _____________. The dumpers will have experienced only a string of losses.

• The _______________________________________ argument states that U.S. producers cannot _______________ with low wages in foreign countries.

o For example, it may seem obvious that producers in Australia cannot compete with producers in South Korea. After all, in 2003, production workers made $20.05 per hour in Australia, compared with $10.28 in South Korea.

o However, this argument overlooks one possible reason that wages are high in some countries and low in others: ________________________. Suppose workers in Australia were four times more productive than workers in South Korea. Then the cost for each unit of a good produced in Australia would be about ________ the cost of the same good produced in South Korea.

• Some people argue that if a foreign country uses tariffs or quotas _________________ U.S. goods, the

United States ought to apply ________________ tariffs and quotas against that country in hopes of reducing or eliminating its trade restrictions.

o This has the potential to turn into a trade ____________, with tariffs and quotas being placed on many items and the cost of goods ________________________________.

International Economic Integration

• Economic integration is the _______________________ of nations to form either a common market or a free trade area.

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o In a common market, member nations trade ________________ restrictions, and all ____________ the same trade barriers with the outside world.

o A major common market is the _____________________________________ (EU), which consists of 25 countries.

o In a free trade area, trade barriers among the member countries are ______________________, and each country is allowed to set its own trade rules with the rest of the world.

o A major free trade area created by the North American Free Trade Agreement (NAFTA) includes ________________, _________________, and the _______________________. NAFTA took effect in 1994.

International Organizations

• Many economists predict that countries are likely to join in common markets and free trade areas in the near future.

• Countries of the world are finding that it is in their best interests to _________________ trade barriers between themselves and their neighbors.

• The World Trade Organization (WTO) provides a forum for its member countries to ________________ and _____________________ trade issues.

• The World Bank, officially known as the International Bank for Reconstruction and Development (IBRD), _____________ money to the world’s poor and less-developed countries.

• The International Monetary Fund (IMF) is an international organization that provides economic ___________ and temporary ________________ to nations with economic difficulties.

THE EXCHANGE RATE Chapter 15, Section 3

What Is an Exchange Rate?

• The exchange rate is the ___________ of one country’s currency in terms of another country’s currency. o With a ____________________ exchange rate system, currency exchange rates are determined by

the forces of supply and demand. o In a _______________ exchange rate system, currency exchange rates are fixed, or pegged, by

countries’ governments. • To find out how much of your money you have to pay to buy a foreign good,

you need to follow three steps: o Find the ______________________ exchange rate. For example, on

October 28, 2005, it took €0.82 to buy $1 U.S. o Figure out how much of your money it takes to buy

_______________________ of the foreign money. For the example, you divide $1 by €0.82, which gives you $1.22.

o Multiply the _______________ of the foreign good by the answer in step 2. Suppose you want to buy something that costs €100. You multiply 100 by $1.22, and you get $122.

Appreciation and Depreciation

• Depreciation is a ____________________ in the value of one currency relative to other currencies.

• Appreciation is an __________________ in the value of one currency relative to other currencies.

If the Dollar Depreciates, Foreign Goods Are More Expensive

• What will happen to the price of a foreign good if the dollar depreciates? (Answer: The price will go _______.)

• What will happen to the price of a foreign good if the dollar appreciates? (Answer: The price will go ___________.)

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Applying the Principles THE EXCHANGE RATE

Chapter 15, Section 3

To find out how much of your money you have to pay for a foreign good, you need to follow three steps: Find the exchange rate. Figure out how much of your money it takes to buy 1 unit of the foreign money. Multiple the number of units in the price of the foreign good by your answer to step 2.

Example: Assume that $1 = ₤0.87, and you want to find the dollar price of an item that costs ₤25. Step 1: The exchange rate is $1 = ₤0.87 Step 2: If $1 = ₤0.87, the ₤1 = $(1/0.87) = $1.15, rounded to the nearest cent. Step 3: The price of the item in dollars is $1.15 x 25 = $28.75

Assume that the exchange rate is $1 = 25 Russian rubles.

How many dollars (rounded to the nearest cent) will it take to buy one ruble? _______________ Complete the following table. Price in rubles Price in dollars

A Volga car 419,540 _____________________

A McDonald’s Big Mac 160 _____________________

A souvenir coffee mug 430 _____________________

A picture book of Moscow 31.12 _____________________

Assume that the exchange rate is 1 Swiss franc = $0.80

How many Swiss francs (rounded to the nearest hundredth) will it take to buy one dollar? _______________

Complete the following table. Price in dollars Price in francs

A Ford Focus car 17,000.00 _____________________

A McDonald’s Big Mac 4.50 _____________________

A souvenir coffee mug 11.00 _____________________

A picture book of New York 19.00 _____________________

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Imagine two countries, Narnia and Gondor. The people of Narnia use Narns as currency, and the people of Gondor use Gords as currency. The following table shows the exchange rates for Narns and Gords in two years. Use the table to answer the questions. Year Exchange rate

2009 1 Narn = 20 Gords 2010 1 Narn = 25 Gords

One Narn buys _____ Gords in 2009.

One Narn buys _____ Gords in 2010.

A Narn buys ____________ (more or less) Gords in 2010 than in 2005, so the Narn has

_______________________.

One Gord buys _______ Narns in 2009.

One Gord buys _______ Narns in 2010.

A Gord buys _____________ (more or less) Narns in 2010 than in 2099, so the Gord has ___________________________.

In each of the situations below, determine whether you would prefer for the dollar to appreciate or depreciate relative to the euro.

You are planning a trip to France. __________________________

You are a U.S. businessperson whose chief competitor is a German company. _________________________

Your factory relies on parts imported from Germany. ________________________

Your job depends on foreign tourists visiting the United States. _________________________

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ECONOMIC DEVELOPMENT Chapter 15, Section 4

How Countries Are Classified

• A developed country, such as the United States, has a relatively ______________ per capita GDP. • A less-developed country has a relatively ___________ per capita GDP.

Obstacles to Economic Development

• Why are some countries poor while other countries are rich? • The population growth rate is equal to the ______________________ minus the

______________________. The population growth rate is typically _____________________ in less-developed countries.

• A low _________________ rate leaves banks with less money to lend, and capital goods cannot be purchased to ______________________ productivity. This situation is called the vicious circle of ________________. Many nations that are rich today, however, were poor in the past.

• ______________________ differences may pose a barrier to economic development. __________________ may be viewed as dangerous or risky, or good fortune may be left to ______________ instead of education and hard work.

• _______________________ instability and government seizure of personal property reduce personal investment.

• Countries with low _____________________________ tend to have higher per capita income growth. Factors That Aid Growth and Development

• Economists believe that a poor country has the potential to become a rich country if it does the following things:

o Promotes ____________________________. Free trade allows residents of a country to buy inputs from the _______________________ supplier, and opens up a world market to domestic firms.

o Taxes at a _________________ rate. A country with lower taxation provides a greater ________________ for workers to work, and provides more incentive for investors to invest.

o Reduces or eliminates _________________________ on foreign investment. o Reduces ___________________________ influence on bank lending activity. o Allows the free market to determine equilibrium ______________ and ________________. o Establishes simple and easy business ___________________ requirements. o Protects __________________________________. Countries that protect private property often

develop faster than those that do not.