Unit 7
Political Ideologies
in countries where people have little freedom, economic development will be hindered - a factor that affects development
Ranking Development
includes high, middle, and low income
Effects of Trade Barriers
increased prices for foreign goods and trade wars
Population
it is hard to support a large population in a less developed country because there are significantly more people than there are jobs - a factor that affects development
Multinational Corporations
large corporations that sell goods and services throughout the world, may of them producing their goods and services globally - by locating production facilities abroad, these corporations avoid some shipping fees and tariffs and are able to obtain cheaper labor - the host countries benefit by gaining jobs and tax revenue - may find that its facility in one country can produce an item at a lower opportunity cost than another, due to the resources that are available there, leading to the best utilization of resources (efficiency).
Societal Values
often children are needed for labor and do not have time for education, and additionally, there are limited resources available - a factor that affects development
Political Corruption and Instability
political corruption and instability can lead to war and destitution - a factor that affects development
Production
some countries lack suitable resources necessary to produce items needed for survival - a factor that affects development
Fixed Exchange Rate Systems
systems in which governments try to keep their currencies' values consistent with each other - one country fixes its currency's value against the value of another country's money - makes trade much easier, but often require the countries that participate to follow similar economic policies - problems begin when the supply and demand for a currency put great pressures on a currency's value to change
Comparative Advantage
the ability of one person or nation to produce a good at an opportunity cost that is lower than that of another person or nation - countries should produce products for which they have lower opportunity costs - gives up less production by producing another item than someone else
Absolute Advantage
the ability of one person or nation to produce a particular good at a lower cost than another person or nation - more productive in producing goods, production costs are lower
Globalization
the act, process, or policy of making something worldwide in scope or application - economics: our focus has been on the globalization of the economies of countries around the world - the world continues to shrink, not geographically, but in many other ways * like through technology, which bridges distances that allows the economies of countries worldwide to become more and more intertwined - in the last few years, we have seen more countries develop trade agreements - world leaders are realizing their countries can reap many benefits by interacting with one another on a global economic basis - a possible method for easing poverty in the world's poor countries
Foreign Portfolio Investment
the entry of funds into a country when foreigners make purchases in the country's stock and bond markets - occurs when foreigners purchase stocks and bonds to support an LDC's economy - these purchases help fund development in the same way that stocks and bonds support the U.S. economy
Foreign Direct Investment
the establishment of an enterprise by a foreigner - occurs when a foreign company establishes operations in an LDC - it may merge with an existing company, purchase a company already established in the LDC, or build a factory in the LDC - this type of investment often occurs when a multinational corporation sets up operations in the LDC - these corporations are often attracted to LDCs because of the availability of inexpensive labor and a wide range of inexpensive natural resources
World Bank
the largest provider of development assistance that assists less developed countries and helps them strengthen economically - created at the end of World War II, as many European countries were devastated economically, geographically, politically, and environmentally at the end of the war - it was evident to world leaders that an organization was necessary to assist in restoration funding - over time, the scope has evolved from this original purpose
Economic Development
the methods used to improve the well-being of the people living within that country - focuses on political, societal, and economic advances
Imports
to buy goods from other countries - the payments made to other foreign companies for these purchases are done in U.S. dollars, which are then exchanged for that foreign country's currency - some of the world's leading importers of goods and services are companies within the United States - the United States imports goods depending on the resources available and the ability to make particular goods at a comparative advantage - the goal is to maintain an equal balance of payment relationship with other countries - the goal is equilibrium - the balance of payment is used to measure international trade - it takes into account the payments and receipts of all residents of one country with the payments and receipts of all residents of another country - the U.S. imports what it needs that cannot be produced at a comparative advantage
Exports
to sell goods to other countries - the payments made to other foreign companies for these purchases are done in U.S. dollars, which are then exchanged for that foreign country's currency - some of the world's leading exporters of goods and services are companies within the United States - the United States exports goods depending on the resources available and the ability to make particular goods at a comparative advantage - the goal is to maintain an equal balance of payment relationship with other countries - the goal is equilibrium - the balance of payment is used to measure international trade - it takes into account the payments and receipts of all residents of one country with the payments and receipts of all residents of another country - the U.S. produces what it can at a comparative advantage and exports worldwide
Measuring Development
use per capita gross domestic product (GDP), which is the primary measure of a country's: - development - energy consumption - labor force - consumer goods - literacy - life expectancy - infant mortality rate
Factors that Affect Development
* Rapid Population Growth * Resource Distribution * Physical Capital * Human Capital * Political Factors * Debt - certain circumstances are necessary to encourage development - when they are not present, a country does not grow or develop, and it becomes harder to meet the needs of the people within that country
Developed Nations
*higher standard of living *higher degree of political freedom *high agricultural output *high level of industrialization *generally healthy population *well educated *populations live in cities and towns
Less Developed Nations
*lower standard of living *agricultural output is per each family *high unemployment rates *lower level of education *low literacy rates *poor housing quality, diets, and health care
The Benefits of International Trade
- A country may not have the ability or materials to produce a particular item. Lacking materials could include capital, labor, or natural resources such as land. - The country may have the materials needed to produce a particular item, but it is not economically feasible to produce that item. - International trade can be beneficial for countries that have the resources necessary to produce certain products, but not a "comparative advantage." From an efficiency standpoint, it makes more sense to produce goods that have a lower opportunity cost (using existing resources), and then trading for items it does not produce. - Countries often develop trade partners because they do not have the capabilities to produce all of the items they need, even though they have the necessary materials to produce many of them. - Consumers have a vast array of goods and services to choose from. - The price of goods is kept in check through international competition. - Efficiency in production is continually being upgraded due to the competitive nature of an international market as well. - The standard of living (the quantity and quality of goods and services available) increases as a direct result from international trade.
Exchange Rates
- Another aspect of globalization is the globalization of money. Money in fact, is not globalized. Most countries around the world do not accept each other's currency. This can be very hard since currencies around the world are not always equal, as you must exchange your currency for that of the country you are visiting. - This can be problematic for travelers and businessmen circling the globe. Often, in order for an American business to purchase foreign goods, it must first convert its money to the money used in that particular country. - There is a great deal of controversy that has prevented the globalization of money. - Because money is not globalized, exchange rates have been developed to allow people to convert currency (money) from one country into the currency of another country.
A Single World Currency?
- As globalization continues to spread, there is controversy surrounding the establishment of a world currency. There are those who feel that such a move will bring stability to the global economy and make international trade much simpler. There are others who are adamantly opposed to the idea. - Those who support the idea use the example of the euro to support their argument; the euro was established by the European Union to be the standard currency. The European Union is a trade organization formed by a number of European countries. Most of them have adopted a single currency known as the euro. It has made trade much easier between the countries, but also requires them to follow similar economic practices.
Understanding Economic Development
- Obviously, some countries develop faster and more intensely than others given their resources and production capabilities *some countries have more capital (such as technological equipment and knowledge) than others *some countries have more land (natural resources) than others *some countries have more labor than others - Societal and political issues also influence the level of economic development in a country. *countries that have a traditional economy often develop at a slower pace than countries with a free market economy *a country's political system can also affect the level of development - In countries that have a centrally planned economy, the level of development can also be much slower and less intense
The Functions of the World Bank
- The World Bank, the largest provider of development assistance, lends billions of dollars each year to countries to use for economic development. The funds are used to meet medical needs, create economic improvements, and upgrade modes of transportation. The World Bank sells bonds in financial markets to fund these loans. It also gets contributions from industrialized nations around the world including the United States. - While there is certainly controversy over the contributions of developed countries like the United States (many feel that the U.S. should worry about its own economically-challenged people rather than give money to help those outside of the U.S.), no one can argue how the loans have greatly benefited developing nations. These loans have helped countries build new hospitals, roads, and educational institutions. - These loans have also improved the lives of citizens through economic achievements, and they have made the development of industries and jobs possible. In addition, these efforts have made improvements in the quality of living for people within the country. New markets have opened up where the U.S. and other industrialized nations can sell their goods. The operations of the World Bank have had a great effect on the globalization of the world economy.
Foreign Investment
- a large portion of the funds that businesses obtain to expand their companies comes from loans made by banks - banks are able to make these loans because people deposit their savings into them - in LDCs people usually do not have money to place into banks for the purposes of saving and investing - LDCs must look to foreign investments as well as help from global economic organizations to expand their economies
Trade
- occurs to obtain resources not available domestically (in their own country) - resources are not distributed evenly across the globe, therefore countries must trade in order to obtain the goods and services that are needed and wanted - when important crops are in short supply, trade is one way businesses meet the demands of the people - addresses the economic development that is taking place around the world
(Major) U.S. Exports
1. Chemicals 2. Industrial Machinery 3. Electrical Machinery 4. Data-Processing Equipment 5. Airplanes and Parts 6. Vehicle Parts Power-Generating Machinery 7. Vehicles: Cars and Trucks 8. Scientific Instruments 9. Telecommunications Equipment - many of the major U.S. exports occur in manufacturing facilities - the U.S. also leads the world in the manufacture of products like computer software and technological equipment, which are not among the top exports but do account for a significant amount of exported goods - services are another growing export - many U.S. companies provide technological and business assistance to other companies around the world, which is now considered a major export due to the growing service industry in the U.S.
(Major) U.S. Imports
1. Vehicles: Cars and Trucks 2. Crude Oil and Petroleum 3. Electrical Machinery 4. Data-Processing Equipment 5. Clothing 6. Industrial Machinery 7. Telecommunications Equipment 8. Vehicle Parts 9. Power-Generating Machinery 10. Chemicals - many of the same products that are on the exports list are also on the imports list - the U.S. produces whatever it can at a comparative advantage and then exports them worldwide - the U.S. must import many chemicals that require scarce resources or are too expensive to produce in the U.S.
The European Union (EU)
A regional trade organization made up of fifteen European nations, whom agree to reduce or eliminate trade barriers among themselves. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
North American Free Trade Agreement (NAFTA)
An agreement that will eliminate all tariffs and other trade barriers between Canada, Mexico, and the United States. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
The Caribbean Community and Common Market (CARICOM)
Consist of countries form South America and Caribbean. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
The Southern Common Market (MERCOSUR)
Consists of Brazil, Argentina, Paraguay, and Uruguay. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
Asian Pacific Economic Cooperation (APEC)
Countries that lie along the Pacific Rim, including United States, Mexico, and Canada, which have signed a non-binding agreement to reduce trade barriers among their nations. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
Free Trade
Despite the arguments favoring protectionism, a number of countries around the world, including the United States, have entered into trade agreements with each other and, in some cases, have formed organizations that promote free trade among a group of nations. Many feel that such actions will go far to improve the global economy and foster better diplomatic relationships among countries.
Reciprocal Trade Agreement Act
In 1934, the act gave the President the power to reduce tariffs by as much as 50 percent. It also allowed congress to grant most-favored-nation (MFN) to U.S. trading partners. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
The World Trade Organization (WTO)
This organization was founded in 1995 to ensure compliance with the General Agreement on Tariffs and Trade (GATT). It is a worldwide organization whose goal is free global trade and lower tariffs. - an international trade agreement/international cooperation that favors lowering trade barriers and increasing trade
Interdependence
a characteristic of a society or macroeconomy with a high degree of division of labor, where people depend on other people to produce most of the goods and services required to sustain life and living - due to vast improvements in transportation and communication over the past 100 years, countries have found themselves more interdependent on other countries for important needed resources - these resources can be obtained much easier and cheaper than in years past - the profits earned by one person or business are used to buy the goods of other businesses - if one business sector is declining, it adversely affects other business sectors
Trade Wars
a cycle of increasing trade restrictions
The United Nations Development Program (UNDP)
a economic institution (a United Nations program), in which its main goal is the eradication of poverty through economic development - provides grants to LDCs to help improve economic and social processes - voluntary donations from members of the United Nations support these grants - was organized in the mid 1960s
Import Quotas
a limit on the amount of a good that can be imported - one of the three main types of trade barriers
Trade Barriers
a means of preventing a foreign product or service from freely entering a nation's territory - there are times when governments choose to hinder trade between certain countries or the trade of certain products, when countries will block trade with other countries that mistreat their citizens or are aggressive to other nations - the United States has long used trade sanctions as a form of diplomacy
Specialization
a method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas - the profits earned by one person or business are used to buy the goods of other businesses - if one business sector is declining, it adversely affects other business sectors
Per Capita GDP
a nations gross domestic produce divided by its population
Voluntary Export Restraints
a self-imposed limitation on the number of products shipped to a particular country - one of the three main types of trade barriers
Tariffs
a tax on imported goods - one of the three main types of trade barriers
The International Monetary Fund
an organization formed to stabilize the international exchange rates and facilitate development - originally established to stabilize international exchange rates, it is now a economic institution/organization thats goal is aiding and overseeing development projects - does not focus on giving monetary aid as much as it gives advice and technical assistance to LDCs - it does assist these countries by providing aid that is needed to fund international dealings
Protectionism
another reason for the use of trade barriers is to protect certain domestic industries from competition, in which these policies are often enacted for the following three major reasons: 1. Protect Jobs Within the Country: for example, if an import of products like clothes increases greatly, those employed in garment factories may lose jobs 2. National Security Concerns: for example, when a country does not want to depend on the resources of another country in times of war, it will protect certain industries to ensure that they remain in business—a good example is the steel industry 3. Ensure Growth of New Businesses: for example, a lack of competition from foreign companies will help a company get established and grow, creating jobs within the country
The Objectives of Trade
companies gain the goods and services they need and sell the ones that they are best able to produce - countries today really don't barter and exchange goods for other goods - these transactions are handled using money; but the bartering principle remains the same, as countries agree on prices that provide benefits to both sides
Economic Structure
countries that have a traditional economy often develop at a slower pace than countries with a free market economy - a factor that affects development
Less Developed Countries
countries where GDP is low, and unemployment is high - a large percentage of the population is subsistence farmers, growing only enough to meet their own needs for survival (a characteristic of a less developed country) - education is not a priority as most children are needed to work on the farms, and funds for providing educational resources are very limited (a characteristic of a less developed country) - literacy rates are generally low for these countries (a characteristic of a less developed country) - aspects such as health care, nutrition, and housing suffer as well (a characteristic of a less developed country)
Flexible Exchange Rate Systems
created to alleviate problems associated with fixed exchange rate systems - allow the exchange rate to be calculated according to supply and demand - exchange rates are allowed to reflect the market - allow for the fluctuations in currency values on a day-to-day basis and can change the amounts of imports and exports
