Unit 5

1. Unit 5 International and Global Economics Ch 17 – International Trade Ch 18 – Comparative Economic Systems Ch 19 – Developing Countries Ch 20 – Global Economic Challenges

2. Trade The key to trade is _______________. One area/country will specialize in something + another area/country will specialize in something else. They will then trade these goods/services as ___________. You can tell what a country specializes in by looking at its exports (the goods/services it ________ + _____ to other nations). Imports are goods/services that one country ______ from another. Ch 17 – International Trade

3. Why should a country import instead of making goods themselves? It doesn’t have an absolute advantage (the ability to produce a product more ___________). It doesn’t have a comparative advantage (the ability to produce a product _________ more efficiently, or at a lower _________________). Although 2 particular countries might both be able to produce coffee beans w/ the same efficiency, 1 of them might be able to produce bananas relatively more efficiently than the other, so it grows more bananas, + the other country grows more coffee beans. End Section 1

4. Barriers to international trade Some people dislike international trade b/c it can displace selected industries + groups of workers (__________________). 2 main ways of restricting international trade: Tariffs – a ____ placed on ______ to their price in the domestic market. Protective tariffs – a tariff high enough to protect ______________ domestic industries. This type of tariff makes the imports MORE ___________ than the domestic competition. Revenue tariffs – a tariff high enough to generate _______ for the gov.’t w/o prohibiting imports. This type of tariff allows the imports to be ___________ than the domestic competition. 2. Quotas – a ____ placed on the quantities of a product that can be imported. Other ways of restricting trade include tougher ______________ for imports + requiring a ______ for foreign countries to import certain goods.

5. Reasons for “protection” Protectionists are people who favor trade barriers to protect domestic industries. So why are they against free trade? 1. ______________ – (best argument – but what is necessary for national security?) afraid that a country could become too specialized + thus too dependent on foreign countries for other goods. 2. _______________________ – new or emerging industries need to be protected from foreign competition (but removing barriers later is difficult). 3. ________________________ – (most common argument) if American goods are too expensive, people will buy foreign goods putting American workers out of jobs (but inefficient + problem gets worse). 4. ____________________ – less $ goes to foreign countries (but $ usually comes back for exports). 5. __________________________________ – the difference b/w the $ a country pays out to, + receives from other nations (but $ usually comes back for exports).

6. The free trade movement The benefits of trade barriers to protect domestic industries + jobs works only if other countries do not respond w/ _____________ ___________. If they do, ________________ b/c they have neither efficient production nor access to less costly products + raw materials. Trade barriers lead to a in ____________ ____. Remember the Smoot-Hawley tariff of 1930 from Ch 14? World trade _____%!

7. Trade organizations The World Trade Organization (WTO) is an international agency that administers trade _________, settles trade ________ b/w gov.’ts, organizes trade __________, + provides technical assistance + training for developing nations. Due to the __________ in tariffs + quotas, international trade has . The North American Free Trade Agreement (NAFTA) is an agreement b/w the US, Canada, + Mexico to _________ trade barriers. Begun in 1993. Trade b/w the 3 countries has _____________ since. End Section 2

8. Financing international trade To trade w/ other countries, we must pay them in their _________ (Ex. British imports must be paid for in pounds, Japanese imports must be paid for in yen, etc…). So American dollars must be ________ for the necessary currency. The foreign exchange rate is the price of 1 country’s currency in terms of another country’s currency. Ex. 1 USD = .75 Euro or 1 Euro = 1.33 USD. When converting money, you must also pay a small __________________. A fixed exchange rate is a system under which the price of 1 currency is fixed in terms of another ________________ so the price does not change. A flexible (or floating) exchange rate is when the forces of ______ + _______ determine the value of each country’s currency.

9. Balance of trade A trade surplus occurs whenever the value of a nation’s exports is ________ than the value of its imports. So it’s __________ more than it’s buying. A trade deficit occurs whenever the value of a nation’s exports is ____ than the value of its imports. So it’s __________ more than it’s selling. A persistent trade deficit tends to ___________________ of a country’s currency on foreign exchange markets. End Section 3

10. Types of economies Economics deals w/ the decisions a society makes on how to use ______ ________ to fulfill _____________ + __________. There are 3 ?s they must answer: 1. ________ to produce? 2. _______ to produce it? 3. ____________ to produce it? How a society answers these questions determines what kind of economy it has. Ch 18 – Comparative Economic Systems

11. Capitalism An economic system in which the means of production are ________________, supply + demand determine prices, + businesses operate to make a _______. Advantages: ___________ Freedom Highly decentralized High degree of consumer satisfaction Flexibility to accommodate _________ _________ Disadvantages: Doesn’t satisfy everyone’s ________

12. Socialism An economic system in which the gov.’t owns + runs some of the basic productive resources in order to distribute output in ways deemed to be in the __________ of society. They are usually ______________. Advantages: Satisfies the ___________ of all members of society Still enjoy some __________ People can vote out the gov.’t if it isn’t doing an effective job Disadvantages: Less _______ than capitalism _______ are high

13. Communism A political + economic framework where all factors of production are collectively owned + directed by the __________. Theoretically a ____________ society. Gov.’t answers the 3 economic questions Advantages: It can change _________ in a relatively short time Many health + other public services are provided for everyone at little or no cost (although _________ may not be good) Disadvantages: No individual ___________ No ____________________ Fails to meet the needs/wants of consumers ______________ Lack flexibility End Section 1

14. The rise of communism in the USSR Communism started there in 1917 when ________ _________ overthrew the Russian gov.’t. ________________ was outlawed + factories were turned over to the workers who didn’t know how to run them. Production in factories + on ______. ______ came into power in 1927 + proclaimed that USSR was far behind western powers in development + tried to close the gap quickly w/ the 1st5-year plan (plan for the development of the USSR). It set impossibly _________ for production for items like steel, coal, oil, etc… Led to ________ of consumer goods, + although most goals weren’t met, many _______ were made. A 2nd 5-year plan had similar results. Also sought to control _________ production Seized private farms + combined them into large, gov.’t owned farms called collective farms. The crops were given to the state to _________. Some peasants burned their crops rather than turn them over to the state + were ___________________.

15. Central planning The Gosplan was the central _________________ for the USSR. They determined what was made, how much of it was made, + when it was made. This is a very __________ process. Imagine trying to plan how many shoes to make, what would you have to consider? How many shoes to make What type to make (sandals, boots, sneakers, etc) How many of each size to make How much of each input will be needed (leather, thread, laces, dye, glue, labor – which must all be planned as well) How much will it cost to make them How much should be charged for them They planned out ______________ production as well.

16. Problems that occurred Agriculture was less ___________ than in the US (25% of Soviet labor was in agriculture compared to 3% in the US). Peasants were ___ based on the # of items they produced (the gov.’t set the prices). Factory workers were paid based on the # of items they produced as well – to make the necessary _______, workers would often rush production at the end of the month leading to _____________ items. The Soviets had a reputation for producing some of the world’s _______ consumer + industrial goods. ____________ supply of consumer goods. Bribery + ________ were common.

17. The beginning of the end of the USSR In 1982, Mikhail Gorbachev was chosen as the communist party’s new general secretary (most __________ man in the USSR). Gorbachev believed in communism, but thought it only needed to be ________. Gorbachev blamed many of the country’s problems on poor ________ ___________. Began a policy known as perestroika (economic + gov.’t restructuring) which allowed more decisions on things such as prices + wages to be made at a _______________. This + other factors would lead to the USSR ___________ in 1991. End Section 2

18. Transition problems The switch from communism to capitalism is painful. Problems include: 1. Privatization (the conversion of state- owned property to ______ ownership). 2. Loss of __________________ for the communist party. Some find less than _______ ways of remaining in power. Some just no longer call themselves communists but remain in power in a new political party. 3. Dealing w/ problems inherent in a capitalist system such as social unrest, __________________, inflation, etc… 4. People must learn to make _________ on their own that the gov.’t used to make for them.

19. Chinese communism By 1949, China was controlled by communists under ___________. The communists attempted radical reforms (farms were collectivized + companies nationalized, etc) which had _________ effects on China’s economy + people. China created ________ as well + while some industrialization occurred, so did major ____________. Since the mid-1970s, China’s gov.’t has allowed some _________ economic reform, but the Communist party crushes any attempts to reform the ___________. End Section 3

20. Japan’s capitalism Although Japan has a capitalist economy, it’s gov.’t is very involved in the activities of the private sector. It’s gov.’t typically favors aiding businesses over ______________. Reasons for success: Close employer/employee working _____________ Pride in _________ of work Much of their work is done by machine or robot (very ___________) The gov.’t works to limit __________ competition (protectionist) This has led to a very _______ of living. Some of these characteristics had changed or decreased since it suffered a recession in the 1990s. End Section 4

21. Developing countries Countries whose average ___________ _________ is a fraction of that of more industrialized countries. Most are located in _____, ____, + Latin America. Why should we help them? Humanitarian reasons Build _____________ Source of _______________ Potential market for our _______ Politics (ex. Cold War) To stabilize the ___________ Ch 19 – Developing Countries

23. Obstacles to development __________ quickly due to high birth rates + greater life expectancy. Many have limited __________ (or control over their resources) +/or harsh climate + _____________. Lack of __________ + technology. __________ beliefs. External debt – $ borrowed from foreign banks + gov.’ts. They may end up having to default (to not pay back _______). Capital flight – the legal or illegal export of a nation’s currency. Gov.’t + business _____________. ________.

24. International agencies The United Nations (UN) It’s goals are to maintain international _______ + security, to develop friendly relations b/w all nations, + to promote _________ + cooperation to solve __________________ problems. The World Health Organization (WHO) combats heath problems in underdeveloped countries. The International Monetary Fund (IMF) promotes international ________ + provides monetary __________. The International Bank for Reconstruction and Development (World Bank) makes _______ for projects in ____________ countries. The United Nations Educational, Scientific, + Cultural Organization (UNESCO) promotes many programs. The _______________________ consists of 15 judges selected for 9 yr terms. Located in The Hague, the Netherlands. It hears cases brought by members + nonmembers. End Section 1

25. Stages of economic development Note that this is not absolute – just a rough framework. 1st Stage: Primitive equilibrium – there is no formal ________________________ (traditional economic system). 2nd Stage: _________ – the society breaks away from tradition + move towards economic/cultural changes. The economy doesn’t ____ at this stage, but people begin questioning the status quo. 3rd Stage: ______ – the barriers of primitive equilibrium are overcome + economic growth occurs. New techniques are used +/or they may get aid from other countries. More $ is saved + ___________. 4th Stage: Semi-development – national ________ faster than the ________ leading to a per capita income. 5th Stage: ____ Development – most people have their basic needs/wants met. Instead of emphasizing industry, the country emphasizes ____________.

26. Priorities for developing countries According to the World Bank developing countries should focus on the following: Investing more in their __________ – _________, family planning, nutrition, + health care. Improve the climate of enterprise. Allow _______ + _________ to answer the 3 economic ?s w/ less interference from the __________. Free ____ to promote imports + exports. Follow policies that curb inflation, borrowing, + _________. End Section 2

27. Developing developing countries In order to develop, a country must have $. This is hard to obtain w/o a certain degree of __________ __________. Development w/ internal funds – the only way a country will generate internal funds is if it makes more than it ___________ + saves $. Development w/ external funds – b/c it’s very difficult to develop an economy w/ internal funds alone, developing countries try to obtain external funds. There are 3 ways to do this: 1. Attract private funds from ______________ who are interested in their natural resources. -This can be difficult if the country has a history of expropriation (taking over foreign property w/o _______ in return). 2. __________ from foreign gov.’ts. 3. Obtaining a ______ from an international agency (like World Bank).

28. Regional cooperation Sometimes countries join together to form a free-trade area (an agreement in which 2 or more countries reduce ______________ + ______ among themselves) or a customs union (an agreement in which 2 or more countries agree to abolish ______ + trade restrictions among themselves + adopt ______ ________ for nonmember countries). The EU (European Union) is the most __________ example of regional cooperation. About ______ of Europe is in the EU. There are no internal barriers regulating the flow of ________, financial capital, or goods + services. Citizens have a common ______ (except for Britain), can vote in European _______, + many member countries use the common currency the euro. A cartel is a group of producers or sellers who agree to limit the production or sale of a product to control _____. OPEC (Organization of Petroleum Exporting Countries) is a cartel that has managed to ________ world oil prices by limiting oil production. End Section 3

29. The global population issue Thomas Malthus wrote in Essay on the Principle of Population (1798) that the world’s pop. was growing _____ than its ability to ____ itself. Originally, he said that the only factors checking pop. growth were war, ________, + disease (he later added ______ restraint). But he said these factors were not enough. Since then, in some _____________________ countries, the population has either stopped or has actually . Why? B/c in these countries, children are a _____________________. The world’s pop. is about ______% per yr. It’s predicted that by 2050, the world’s pop. will reach __________, the vast majority of this growth will be in ___________ countries. Ch 20 – Global Economic Challenges

30. Nonrenewable energy resources pop. puts more pressure on _________________. Most of our energy comes from nonrenewable resources (resources that cannot be _________ once they are used). Most of our nonrenewable resources are fossil fuels. They include: ______ – most used fossil fuel _______________ ____ – most plentiful fossil fuel _______________ – produces highly hazardous byproducts which are hard to dispose of

31. Renewable energy resources Renewable resources are natural resources that can be replenished for future use. They include: _____________________ (or hydropower) – comes from water _________ – comes from wood, peat, straw, corn, tires, landfill gasses, fish oils, + other waste ___________ – comes from the sun __________ End Section 1

32. Incentives Ensure economic systems work _________. _____________ incentives encourage more widespread + lasting results than programs that rely on conscience, patriotism, or other motivations. The _________ – buyers buy more at lower prices, but producers produce more at higher prices. ___________ – producers have an incentive to pollute – lower production _____. Pollution can be controlled by either legislating ________________ standards (setting minimum standards of purity for air, water, etc) or by providing _________________ (taxing companies based on the amount of pollution they release). End Section 2

33. Applying economics Economics is all about __________ + making ______. Applying economics can help lead to reasoned decision making. Suggested steps for solving economic problems can be applied to virtually all problems involving choices: 1. State the problem or issue. 2. Determine the _____(s) to be attained. 3. Consider the various ways of _______ the goal(s). 4. Determine the ________ of each alternative. 5. Decide which alternative best leads to the attainment of the ____ goals or the most ___________ goals. This involves using a cost-benefit analysis (comparing the costs of an ________ to its benefits). End Section 3