unit 5
a world connected
the world is connected through
money flow
trade
labor
communication
technology
international trade
countries exchange goods an services
exports to other countries
imports of goods unable to be produced within a country
economic interdependence
countries depend on each other for certain goods; imports
are cheaper than producing within a country
are for when countries lack resource to produce something
benefits of international trade
encourages economic growth (more/better paying jobs)
encourages competition (more producers competing = lower prices for consumers)
expands available products/services (ability to purchase goods unavailable in home county)
specialization (producing the bestselling goods and trading the rest)
specialization
limiting the types of goods produced/sold
chosen based on land, labor, and capital
caused international trade
challenges of specialization
local businesses threatened by consumption of imported goods
lost employment opportunities when people are hired overseas
countries become dependent on critical goods/services
benefits of specialization
countries focus attention on their most efficient products
purchasing products for less than the domesticated cost
choosing specialization
easy decisions:
climate
natural resources
human resources
technology
difficult decisions:
opportunity costs of one product over another
global demand changes
absolute advantage
the ability to produce goods more efficiently than any other country
determine how much each country produces with the same resources
compare each country’s production level
highest production level = absolute advantage
comparative advantage
the ability to produce goods with a lower opportunity cost than any other country
figure out the opportunity cost for each country for the same product
compare each country’s opportunity cost
lowest opportunity cost = comparative advantage
complexity of international trade
can cause job loss
can also result in more jobs
benefits outweigh disadvantages
currency
system of money created by a nation/region
has a changing value
different denominations
tradable to other currencies
why currencies differ
countries choose the currency they want to trade in, allowing
governments to keep economies separate from other nations
economic management easier
choosing a currency
creating their own
us = us dollar
mexico = mexican peso
canada = canadian dollar
adopting one from another country
panama = us dollar
adopting a common currency
european union (most european countries) = euro
value of currency
each currency has a changing value relative to other currencies
currency exchange rate
fluctuates based on many factors
reasons for exchanging currency
travel/tourism
trade
investment purposes
changing currency
currency is bought/sold in the market
based on supply/demand
exchange rates change daily
some nations have fixed exchange rates
how supply and demand affect exchange rates (british pounds)
as demand increases, the exchange rate equilibrium increases
factors that change demand for currency
determined by:
domestic inflation/employment rates
the country’s gdp
government strength/stability
involvement in war
exchange rate tables
shows rates of currencies being traded
rates in relation to a single reference currency
often displayed electronically in real time
why exchange rates change
changes in demand
changes in prices
changes in interest rates
effects of a stronger currency
positive:
prices of foreign goods decline/become more affordable
traveling to foreign countries is more affordable
negative:
american made goods are more expensive = fewer exports
foreigners less likely to travel to the us
effects of a weaker currency
negative:
foreign countries exporting to the us receive less for their goods
imported goods become less expensive
positive:
american made goods seem cheaper - more exports
foreigners more likely to travel to the us
devaluation and revaluation
devaluation: lower currency value
encourages exports
discourages imports
revaluation: higher currency value
discourages exports
encourages imports
technology and globalization
new forms of transportation
container ships
airplanes
new ways to communicate
internet
mobile phones
countries: effects and interdependence
economies have become more interdependent
increase in imports/exports
countries: specialization
development of new industries
shifts in employment levels
countries: the foreign sector
households/consumers provide factors of production to firms
firms/producers provide goods and services to households
household imports > foreign sector > producer exports
companies: global operations
companies are increasingly operating across borders
companies can import/exprot goods worldwide
multinational corporations operate/invest in multiple countries
companies: the global workforce
new techs = global workforce
outsourcing work to laborers in other countries
consumers: increased options
provides more purchasing options
more competitive options
measuring the global economy
studying economic indicators
growth:
gdp
output of a given economy
purchasing power parity (ppp)
used to compare gdp and levels of production; calculated by
comparing the amount needed to buy a set product in two currencies
calculating an event measurement between the two currencies
trade:
trade volumes
trade deficits/surpluses
trade volumes
surplus: happens when exports > imports
deficits: happens when imports > exports
trade barriers
countries can establish limits on trade to
limit the influence of the foreign sector
punish other countries by withholding trade
limit the amount of imported goods
tariffs: a tax on imported goods (such as foreign cars at 2.5% and light pickup trucks at 25%)
raises the price on imported goods
gives domestic goods an advantage
subsidies: grant of money from the government given to domestic industries
allows companies to sell goods at a lower price than imported goods
disadvantages imports
decrease of imported goods
embargoes: ban on trade with another country
may restrict single products from a single country
may restrict all trade with a country
1960 embargo against cuba limited tourism, transportation, and any business regarding cuba
quotas: limits how much of a good can be imported
restricts the availability of goods = increased prices
standards: standards set by the government to protect consumers
limits imports
requires imports to be quality products
incentives
positive: more profitable to take a course of action
negative: less profitable to take a course of action
why countries form trade agreements
allows countries to
easily sell what they produce
easily buy what they don’t produce
encourage competition
types of trade agreements
creating direct agreements: countries sign treaties to draft direct agreements to
cut taxes
reduce trade barriers
participating in international organizations: outside groups that help countries solve trade disputes
creating special economic zones: specific territories governed under separate trade laws/restrictions
global organizations: the world trade organization (wto)
founded in 1995 and members make up 90% of the world’s trade
helps settle trade disputes
monitors trade policies
regional organizations: the european union (eu)
created to help member countries trade more freely
shares a common currency
creates a common market (free movement of people goods)
regional organizations: the associaton of south east asian nation (asean)
maintains a free-trade zone
works to help members toward growth
direct agreements: north american free trade agreement (nafta)
signed by mexico, canada, and the us
took effect in 1994
eliminated many tariffs/allowed free trade
trade benefits and drawbacks
benefits:
new opportunities
economic growth through increased gdp
drawbacks:
trade imbalances
surpluses = exports > imports
deficits = exports < imports
movement of jobs
jobs will move to where work is most efficient, which causes job loss
exploitation of workers/the environment
more likely in developing countries
the environment
pollution, etc in countries with no enforced regulations
sequencing: free exports and the economy
more goods are sold
more money flow into the economy
businesses invest in the future
more jobs/higher wages
sequencing: free imports and the economy
goods are cheaper
citizens have more to spend
domestic spending increases
economic growth
gdp per capita
higher number = more developed
social indicators to development
education:
high literacy rates
access to education
population:
population growth rates
life expectancies
income:
per capita income
standard of living
quality of developing economies
lower gdp per capita
lower standard of living
many economic/social challenges
economic activities in developing economies
in economic activities
strong focus on agricultural activity
heavy reliance on natural resources
usually has a growing industrial economy
the global economy and developing economies
globalization positively impacts developing economies
increased jobs
growth of a middle class
increasing standard of living
future challenges for developing economies
social issues include
very high population growth
environmental problems
poverty
the international monetary fund (imf) and the world bank
the imf:
provides economic advice
loans money to developing countries
the world bank:
works to solve poverty issues in developing countries
provides loans/grants to developing countries
shares knowledge with economic leaders
transitioning economies
changing to a new economic system
command economy (limited freedoms and mostly government regulated) to mixed market economy (more freedoms and less government regulated)
making the transition
privatizing state owned businesses
open trade with other countries
establish a fair labor market
stages of transition
different countries are in different stages
china:
still actively transitioning
still restricts many activities
many industries still state owned
allowing new reforms to increase private ownership
benefits:
economic growth
more employment
more workers in industries/services
new opportunities in foreign investments
challenges:
fast growth that is difficult to control
greater foreign involvement/investment
china’s transition today:
2nd largest economy behind the us
one of the us’s top trade partners
world’s number one exporter
the czech republic:
completed transition
almost completely privatized all industries
joined the european union
developed economies
generally higher gdp per capita
high standard of living
strong technology and service industries
the global economy and developed economies
more focused on services than industries
outsource manufacturing/other jobs to developing economies
future challenges for developed economies
slower economic growth
difficulty to find jobs for less-educated workers
aging population