Economics- Unit 7

Explain why a nation with a high GDP may be underdeveloped.

A nation with a high GDP and a large population will have less development than a nation with a lower GDP, but a smaller population.

informal barriers to trade:

barriers to trade that are instituted through indirect means. ex: licensing requirement or health and safety regulations.

How can specialization affect employment?

countries transitioning certain areas of production to specialization may observe negative trends in employment. Employees in companies undergoing specialization may face three possibilities: unemployment, relocation, or retraining.

What happens if the exchange rate in a fixed exchange rate system moves out of range?

governments will try to fix it by buying foreign currency to affects the currency's supply and demand.

Three forms of trade barrier:

import quota, voluntary export restraint, and tariffs.

When a nation's currency depreciates it often results in a decrease in _____________ and an increase in ________________

imports exports

malnutrition:

inadequate nutrition.

Physical capital:

includes objects made by men and women that are used to produce goos and services. They also include roads and bridges that allow raw materials and finished goods to be manufactured and transported.

arable:

suitable for producing crops.

comparative advantage:

the ability to produce a product most efficiently given all the other products that can be produced.

absolute advantage:

the ability to produce more of a given product using a given amount of resources.

Life expectancy:

the average expected life spans of an individual.

foreign exchange market:

the banks and other financial institutions that facilitate the buying and selling of foreign currencies.

natural rate of population increase:

the difference between the birth rate and the death rate.

foreign portfolio investment:

the entry of funds into a country when foreigners make purchases in the country's stock and bond market.

foreign direct investment:

the establishment of an enterprise by a foreigner. ex: a multinational corporation establishes a production facility in a foreign nation

Industrialization:

the extensive organization of an economy for the purpose of manufacture.

Law of Comparative Advantage:

the idea that a nation is better off when it produces goods and services for which it has a comparative advantage.

population growth rate:

the increase in a country's population in a given year, expressed as a percentage of the population at the start of the year.

world bank:

the largest provider of development assistance.

how does human capital influence resource distribution?

the level of human capital within a nation's economy can be used an indicator of the country's development, production, and resource distribution. A nation with a high literacy rate is likely to have an educated, skilled work force.

how do trade barriers affect manufacturers in the country with the barrier?

the manufacturers have less competition, but they also have less incentive to increase the efficiency and productivity of their goods and services.

infant mortality rate:

the number of deaths that occur in the first year of life.

Development:

the process by which a nation improves the economic, political, and social well being of its people.

Literacy rate:

the proportion over the age of 15 that can read and write.

balance of trade:

the relationship between a nations imports and exports.

trade surplus:

the result of a nation exporting more than it imports.

trade deficit:

the result of a nation importing more than it exports.

Infrastructure:

the services and facilities necessary for an economy to function.

When a nation's currency appreciates it often results in a decrease in _______________ and an increase in ______________

exports imports

internal financing:

financing derived from the savings of a country's citizens.

brain drain:

the tendency for the most highly educated and wealthy individuals within a less developed nation to move to developed nations with greater opportunities.

protectionism:

the use of trade barriers to protect a nation's industries from foreign competition.

exchange rate:

the value of a foreign nation's currency in terms of the home nation's currency.

united nations development program:

a program dedicated to the elimination of poverty through development.

free trade zone:

a region where a group of countries agree to reduce or eliminate trade barriers.

Less developed nations:

nations with a low level of material well being.

What are the disadvantages of protectionism towards infant industries?

1) a protected infant industry lacks the incentive to become more efficient and competitive. 2) it is difficult for the government to take away protection once it is assigned.

What contributes to unequal resource distribution?

1) each country possesses different types and quantities of land, labor, and capital. 2) culture and history affects an economy development and production.

What are some less developed nations?

Bangladesh, Nepal, Albania, Mexico, Poland, Saudi Arabia, and the nations of Central and South Africa.

Carl and Kate want to make extra money by printing designs on T-shirts and making birdhouses. Kate can print 6 T-shirts or make 2 birdhouses per hour. Carl can print 1 T-shirt or make 1 bird house per hour. Who has the absolute advantage in producing goods?

Kate has the absolute advantage in producing both T-shirts and birdhouses.

Carl and Kate want to make extra money by printing designs on T-shirts and making birdhouses. Kate can print 6 T-shirts or make 2 birdhouses per hour. Carl can print 1 T-shirt or make 1 bird house per hour. Who has the comparative advantage in producing goods?

Kate has the comparative advantage for printing T-shirts. Carl has the comparative advantage for making bird houses.

Why do LDCs often look to foreign investment rather than internal financing?

LDCs often are filled with poor citizens who are unable to invest their savings into the bank or have wealthy citizens who are unwilling to trust the banks and instead invest in foreign banks. Therefore, the nation must rely on foreign investment to provide funding.

Why do nations trade?

Nations trade because the unequal distribution of resources prevents countries from producing everything that their citizens need and want. Trade allows an economy to be most effective by specializing in production of certain goods (where they have a comparative advantage) and trading for other goods and services.

The _______________ tariff of 1930 launched the largest and most dangerous trade war in United States history.

Smoot-Hawley

What are the most recent trade wars?

Steel Tariff of 2002 and Beef War of 1999.

What are some developed nations?

United States, Canada, Australia, new Zealand, Western Europe, and Japan.

The reciprocal trade agreement act of 1934 gave the president the ability to grant most favored nation status to U.S trading partners. What does this status do?

When trading partners are given MFN or NTR status, they are subject to decreased taxes if the President institutes them. All NTR partners will receive a decrease in the tariff if the President enacts it.

fixed exchange rate:

a currency system in which governments try to keep the values of their currencies constant against one another.

flexible exchange rate:

a currency system that allows the exchange rate to be determined by supply and demand.

Trade war:

a cycle of increasing trade restrictions.

Depreciation:

a decrease in the value of a currency.

What do trade wars often result in?

a decrease in trade for both countries.

import:

a good that is brought in from another country for sale.

export:

a good that is sent to another country for sale.

import quota:

a limit on the amount of a good that can be imported.

Trade Barrier:

a means of preventing a foreign product or service from freely entering a nation's territory.

what are the consequences of rapid population growth?

a nation must increase employment opportunities, health care facilities, teachers and school rooms, agricultural production, and industrial output. This level of growth is often daunting. Countries with a huge population often suffer from lower development than is necessary to support all of the people.

Per capita GDP:

a nations gross domestic product decided by its total population.

infant industry:

a new industry.

european union:

a regional trade organization made up of European organizations. It is made up of 6 western european nations. - Many countries formed custom agreements that abolish tariffs and trade restrictions.

When life expectancy and birth rate increases, what results?

a significant increase in the population.

euro:

a single currency that replaces individual currencies among members of the european union.

customs duty:

a tax on certain items purchased abroad.

tariff:

a tax on imported goods.

reciprocal trade agreement act of 1934:

a trade agreement which gave the president the power to reduce tariffs by as much as 50%.

World Wide Trade Organization:

a trade organization whose goal is freer global trade and lower tariffs.

international free trade agreement:

agreement that results from cooperation between at least two countries to reduce trade barriers and tariffs and to trade with each other.

NAFTA:

an agreement that will eliminate all tariffs and other barriers between the United States, Canada, and Mexico.

Appreciation:

an increase in the value of currency.

Suppose that a nation treats their fruit with an insecticide that is widely accepted in their country, but another country who wants to discourage imports places a ban on this type of insecticide. What is this ban called?

an informal barrier

Describe how subsistence agriculture, consumer goods, literacy rate, life expectance, and infant mortality rate can be used to determine if a nation is developed or under-developed.

an underdeveloped nation will have a labor force that is devoted to agriculture, low literacy rate, low consumption of consumer goods, lower life expectancy, and higher rate of infant mortality.

why was the flexible exchange rate developed?

as a result of the changes continually occurring in the international trading system which made it nearly impossible to maintain equal economic policies required by the fixed exchange rate.

Voluntary export restraint:

definition:a self imposed limitation on the number of products shipped to a particular country. - A country voluntarily decreases its exports in an attempt to prevent a trade barrier.

The United States is the world's leading __________ and _____________

exporter and importer.

foreign investment:

investment originating from other countries.

The United States' success can be attributed to:

its wide range of exports and its commanding lead in manufacturing.

newly industrialized country:

less developed country that has showed significant improvement in the measure of development.

What types of nations tend to have a larger population?

less-developed nations

Subsistence agriculture:

level of farming in which a person raises only enough food to feed his or her family.

Why was the NAFTA controversial throughout the United States?

many feared that American companies would relocate their production facilities to Mexico where cheap labor is easily obtainable. This would take away jobs from American workers.

Natural resources:

materials found in nature that are used to make goods and provide services.

How does a typical fixed exchange rate system work?

nations will work together around a stable currency. The country with the most stable currency will act at the center and other countries will fix their exchange rates to the currency of the central country.

Developed nations:

nations with a higher than normal level of material well being.

Is self-sufficiency a good method?

no, self sufficient is often not the best method. It is better for nations to specialize in some products and trade for others to maximize their economic success.

what are the positive and negative factors of a multinational corporation expanding into a foreign country?

positive: increase in availability of jobs/employment, training, technology, and opportunities. negative: most do not reinvest money back into the LDC, too capital intensive, and unethical behavior.

when does specialization occur?

specialization occurs when producers decide to produce only certain goods or services rather than producing all the goods and services that they need.

how does protectionism protect jobs?

protectionism shelters workers in industries that would be hurt from foreign competition. ex: if nations in Asia developed an advantage in producing textiles the United States may respond by adding increased tariffs to protect American industries that would be unable to compete with Asia.

how does protectionism protect infant industries?

protectionism shields a young industry from foreign competition against more mature rivals. tariffs are eliminated once the infant industry can compete successfully.

how can consumer goods be used as a measure of development?

quantity of consumer goods that a nation produces per capita can indicate the level of development. A large number of consumer goods in an economy shows that people have enough money to meet basic needs and still have money left over.

What are the five economic activities? (hint: SPICE)

saving, producing, investing, consuming, and exchanging.

nations seeking to maintain a balance of trade will:

set values of imports equal to exports.

How is specialization determine?

specialization is determine by a nation's natural resources, human capital, and physical capital.

arguments for protectionism:

to protect jobs, protect infant industries, and safeguard national security.

How do trade barriers affect consumers?

trade barriers have negative consequences on consumers as they result in an increase in prices.

When nation specialize in producing only certain goods, they obtain the goods that they don't or can't produce through _________

trade.

trade imbalance:

when a large difference exists between a nations imports and exports.

positive trade imbalance:

when a nation exports more than it imports.

negative trade imbalance:

when a nation imports more than it exports.

What happens if a trade imbalance continues? What is a nation able to do by balancing trade?

when a trade imbalance continues, the value of currency falls. By balancing trade, a nation can protect the value of its currency.