next >>. 2 a nation’s economic system greatly affects its trade relationships
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A nation’s economic system greatly affects its trade relationships.
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To identify different types of economic systems
To explain how natural, human, and capital resources affect a nation’s ability to trade
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To explain the stages of economic development and their effects on trade
To differentiate between an absolute and a comparative advantage
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You must understand a nation’s economic system in order to effectively conduct business there.
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Economic Systems and International Trade
Understanding economics will help you understand economic systems and international trade.
economics
the study of how a society chooses to use resources to produce and distribute goods and services for people’s consumption
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Economic Systems and International Trade
There is a strong link between a country’s form of government and its type of economic system.
Economic systems influence the use of resources and impact a country’s ability to compete in international trade.
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Types of Economic Systems
Types ofEconomic Systems
MarketEconomies
CommandEconomies
MixedEconomies
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Market Economies
The United States has a market economy.
market economy
an economic system in which economic decisions are made in the marketplace
The ideas of capitalism, or the free enterprise system, are associated with a market economy.
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Market Economies
One force that drives purchases by consumers and businesses is supply.
supply
the amount of goods and services that producers provide at various prices
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Market Economies
The other force that drives purchases is demand.
demand
the amount or quantity of goods and services that consumers are willing to buy at various prices
The meeting place between supply and demand is the equilibrium price.
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Market Economies
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Market Economies
Profit is the driving force of the market economy.
There are different forms of profit:
– Personal
– Company
– Governmental
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Market Economies
Two other forces drive market economies :
Private property rights
Relatively free and competitive marketplaces
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Market Economies
In any market, there are some goods that require governmental regulation, such as dangerous chemicals.
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Command Economies
A command economy is also known as a planned economy.
command economy
an economic system in which a central authority makes all key economic decisionsThe government, or a
national leader, decides what will be produced, how, and for whom.
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Command Economies
Two Types of Command Economies
Strong Command Economy Moderate Command Economy
There is heavy government control. State owns major resources.
Government owns much of the land, and private property rights are limited.
State may control minerals and ores, airlines, and other enterprise.
The goal is full employment. The goal is full employment.
These countries are often communist states.
These countries are often socialist states.
Cuba is an example. France and Sweden are examples.
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Mixed Economies
Most countries have a mixed economy.
mixed economy
an economic system in which the marketplace determines some economic decisions, and the government makes some decisions
Some argue that socialism is a mixed economy.
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Mixed Economies
Characteristics of Mixed Economies
The government oversees defense, education, building and repairing roads, fire protection, and other general services.
Everything else is bought and sold in the marketplace.
Either the government or the marketplace tends to dominates.
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Economic Resources
Economic Growth
Natural Resources
Human Resources
Capital Resources
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Natural Resources
Natural resources are raw materials found in nature that are located on the ground and in the water.
Nations rich with resources are able to export raw materials and manufactured goods made from those materials.
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Natural Resources
Countries with few natural resources must import key resources, which makes everyday goods more expensive.
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Natural Resources
Two Types of Natural Resources
Renewable (can be replaced) Nonrenewable (will not grow back)
Agricultural products Iron ore
Trees Coal
Fish Oil
Seaweed Diamonds
Water Gold and other minerals
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Human Resources
Human resources are:
Workers
Managers
Contractors
Other employees
The term human resources is distinct from the term
population.
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Human Resources
Skilled Labor
Unskilled Labor
Physical Labor
Mental Labor
There is a strong connection between a country’s literacy level and the number of skilled workers in a population.
Unskilled labor refers to laborers who have less education and fewer skills that require training.
Jobs that require physical labor require unskilled and semi-skilled workers to perform tasks.
Mental labor jobs require special knowledge, negotiation skills, and creativity. Wages in these jobs are often higher.
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Capital Resources
Capital is the term for money, or funding, that helps a company buy items needed to start up and maintain a business.
Capital comes from investors and the sale of stock to outside investors.
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Capital Resources
When a country has a high level of national debt and a large deficit, it is more difficult to obtain capital.
A lack of capital can restrict the development of new businesses and economic growth.
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Capital Resources
Entrepreneurial resources are the funds that help start new companies.
Infrastructure refers to all the large-scale public systems and services necessary for economic activity.
Good infrastructure provides for
economic growth.
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Economic Decisions
Factors Affecting Economic Decisions
Scarcity OpportunityCosts
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Scarcity
Scarcity can refer to time, money, natural resources, human resources, or capital resources.
scarcity
a term used to describe a situation in which there is a limited amount of a commodity
Scarcity drives trends in decision-making.
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Opportunity Costs
Opportunity cost is the cost associated with taking one course of action instead of another.
Managers and government officials use a method called “cost-benefit analysis” to determine whether the benefits are higher than the cost.
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Economic Conditions
Economists look at several factors to describe the economic well-being of a country.
Gross Domestic Product
Cost of Living
Inflation Rate
Interest Rate Levels
Levels of unemployment
Purchasing Power Parity
Balance of Trade
Level of Foreign Debt
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Gross Domestic Product
The total value of goods and services produced in a country each year is known as the country’s gross domestic product (GDP).
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Gross Domestic Product
To calculate the GDP, economists add the total value of goods and services sold:
Increased productivity will cause the GDP to rise.
To consumers
By businesses
From the government
To other countries
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Cost of Living
The cost-of-living index is a measure of how much a typical family must spend to live.
A rise in the cost of living means it costs more to live.
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Inflation
Inflation is the increase in currency relative to the availability of goods and services.
The Consumer Price Index (CPI) is a measure of a country’s inflation rate.
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Interest Rates
An interest rate is the cost of borrowing money, expressed as an annual percentage.
Most economists believe that lower interest rates are better for the majority of people.
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Unemployment Levels
The unemployment rate is a measure of the number of people who are looking for jobs but are unable to find them.
The unemployment rate is the difference between the current rate compared to the baseline rate.
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Purchasing Power Parity
Purchasing power parity (PPP) is an estimate of the exchange rate needed to equalize the purchasing power of currencies from different countries.
Economic stability exists when PPP is stable and changes very little over time.
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Balance of Trade
A balance of trade is based on the number of imports as compared to the number of exports.
A country is better off when the balance of trade is near zero, which means balanced.
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Level of Foreign Debt
When a national government owes money to foreign banks, individuals in other countries, and other national governments, it has a foreign debt.
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Economic Cycles
Recession
Rising
Peak
Decline
Unemployment is very high
Companies begin hiring and
economic activity increases
High employment, strong growth in GDP, positive consumer environment
Decline toward another
recession
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Stages of Economic Development
Four Stages of Economic Development
Underdeveloped
Developing
Industrialized
Post-Industrialized
High unemployment, few natural and human resources, high poverty level, dependent on other nations
Small middle class, technological dualism, regional dualism, low savings rates, poor banking facilities
Trade with foreign countries, manufacture of physical goods dominant, manageable unemployment
Value of total sales of services is greater than the value of physical goods produced
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Absolute or Comparative Advantage
A country has an absolute advantage when it can produce a good or a service more efficiently than any other country.
A comparative advantage is an advantage gained by a product a country makes more efficiently on a personal best level.