United States Government

CHAPTER 26 NOTES Factors of Production • Economic systems around the world are a response to the basic challenge of scarcity—the condition that exists because society does not have all the resources to produce all the goods and services that everyone wants.

Section 1 Factors of Production (cont.) • Economic systems can be classified into three major types: – In a traditional economy, habit and custom dictate the rules for all economic activity. – A command economy has a central authority—usually the government—that makes most of these economic decisions.

Section 1 Factors of Production (cont.) – A market economy allows buyers and sellers acting in their individual interests to determine what, how, and for whom goods and services are produced.

Section 1 Factors of Production (cont.) • The resources of an economic system are called factors of production. They include: – land – capital – labor – entrepreneurs—the risk-takers who organize and direct the other factors of production to produce goods and services for profit

Section 1 Forms of Economic Organization • Three major forms of economic organization—communism, socialism, and capitalism—represent the range of economic systems that determine how the factors of production are allocated.

Section 1 Figure 1 Characteristics of Capitalism • Most capitalist economies have the following main characteristics: – private ownership – individual initiative – competition. A monopoly—when an industry includes only one seller—is the opposite of competition. – freedom of choice – profit or loss

Section 1 Characteristics of Capitalism (cont.) • Profit is the difference between the amount of money that is used to operate a business and the amount of money the business takes in.

Section 1 Changes in Capitalism • The U.S. economic system is based on capitalism, but includes significant elements of a command economy. • The governments growing role in the economy following the Great Depression has caused it to become a mixed economy—or modified capitalism.

Section 1 Another term for modified capitalism is

A. mixed economy. B. socialism. C. communism. D. nationalism. A. A B. B C. C 0%D.0%D 0% 0%

A B C D

Section 1 – DQ4 Developing and Newly Developed Nations • Developing nations are nations with little or no industry. • Newly developed nations are nations that have had significant or rapid industrial growth in recent decades.

Section 2 Figure 2 Nations that have had significant or rapid industrial growth in recent decades are referred to as A. undeveloped nations. B. developing nations. C. newly developed A. A nations. B. B D. growth nations. C. C D. D

Section 2 – DQ1 The Economic Choices • Some developing and newly developed nations have chosen to rely on free markets, trade, and contacts with the West to develop their economies. • These economic systems lean towards capitalism. • Other developing and newly developed nations have chosen socialism as a model for the economies.

Section 2 Figure 1 The Economic Choices (cont.) • Since socialists believe that wealth should be distributed as equally as possible, their policies are directed at making essential goods and basic social services available more or less equally to all. • Critics of socialism often use the term welfare state to describe the benefits of socialism and claim that it weakens people’s work ethic.

Section 2 The Economic Choices (cont.) • Under communism, the government owns all factors of production and takes a much more direct role in economic decisions.

Section 2 Searching for Economic Answers • Many developing and newly developed nations have adopted socialist economic policies, believing that this is the route to economic progress. • Socialist governments often turn to nationalization of existing industries, redistribution of land or establishment of agricultural communes, and a welfare system.

Global Trade in Goods: Who Exports to Whom?

Section 2 Searching for Economic Answers (cont.) • Socialist governments often take control of industry through a process called nationalization, in which the government pays private business owners that it takes over. • Latin America has had foreign-owned industries because of their colonial history and their reliance on foreign investment.

Section 2 Figure 3 Searching for Economic Answers (cont.) • Nationalization of these industries by the government has been both an economic policy as well as a gesture of anticolonialism. • After gaining their independence, many African nations tried to develop economies that were based on one cash crop or one resource for trade.

Section 2 Socialist governments often take control of industry through a process called A. naturalization. B. social service. C. absorption. A. A D. nationalization. B. B C. C D. D

Section 2 – DQ3 Socialism’s Practical Problems • Socialist ideology is losing ground in the developing world because several practical problems have caused socialism to fail to live up to its promises. • Banks and private investors have been cautious when investing in developing nations, meaning emerging socialist economies may have trouble attracting capital.

Section 2 Figure 3 Socialism’s Practical Problems (cont.) • The failure of large-scale state planning to meet the needs of the consumers in Eastern European nations raises concern about socialism’s ability to do so in other regions. • Western governments like the U.S. have exercised influence and pressure in favor of a combination of free markets and democracy in developing nations.

Section 2 Transforming the Russian Economy • The Soviet Union collapsed in 1991 because its Communist leaders could not keep the economy going. • Since then Russian leaders have been attempting to build a free enterprise system that can compete effectively in the global economy.

Section 3 Transforming the Russian Economy (cont.) • Under early Soviet communism, the government controlled about 98 percent of all farmland, and about two-thirds consisted of state farms—farms run like factories where workers are paid wages . • The remaining one-third were collective farms—farms where the government owns the land but rents it to families.

Section 3 Transforming the Russian Economy (cont.) • In 1991 several Soviet republics declared their independence, effectively ending the Soviet Union. • Since the collapse of communism, Russian leaders have broken up the huge, state-owned industries, created a stock market, and initiated other reforms.

Section 3 Transforming the Russian Economy (cont.) • There are several factors to explain the slow change of Russia, including: – resistance to reform by former Communist bureaucrats – Russian misunderstanding of democracy

Section 3 Farms that are run like factories where farmworkers are paid wages are called A. work farms. B. public farms. C. state farms. A. A D. collective farms. B. B C. C D. D

Section 3 – DQ1 Changing the Chinese Economy • After World War II, the Chinese Communist government created a planned economy. • China found itself unable to compete economically with the market-based economies of its neighbors.

Section 3 Figure 4 Changing the Chinese Economy (cont.) • In recent years, the Chinese economy has enjoyed much growth for several reasons: – China has a large labor pool. – Its government promotes manufacturing by giving foreign companies tax breaks and cheap land.

Section 3 Changing the Chinese Economy (cont.) – Its government has spent billions on highways, ports, and fiber-optic communications to assist manufacturers. • The Chinese government is attempting to move from a command to a market economy while maintaining the political control of the Communist Party.

Section 3 Changing the Chinese Economy (cont.) • Trade with China is opening markets for American goods and new bases for American companies to expand.

Section 3 International Trade • Nations engage in international trade to: – obtain goods and services that they cannot produce themselves – receive comparative advantage—the principle that says each country should produce goods it can make more efficiently and purchase those that other nations produce more efficiently

Section 4 Figure 5 International Trade (cont.) • One barrier to international trade is tariffs, or taxes placed on imports to increase their price in the domestic market. • Quotas are limits on the quantities of a foreign product that can be imported.

Section 4 International Trade (cont.) • Countries may use embargoes to totally bar trade with a specific economy. • Economists look at a nation’s balance of trade as an important measure of a nation’s overall performance in the global economy.

Section 4 The principle that says each country should produce goods it can make more efficiently and purchase those that other nations produce more efficiently is called A. economic efficiency. B. comparative advantage. C. balance of production. D. comparative disadvantage.

Section 4 – DQ1 Trade Agreements • Since the end of World War II, the major nations have created a number of organizations and agreements aimed at limiting unfair trade practices. • Trading blocs are groups of nations that trade with each other without barriers such as tariffs. • In 1947, 90 countries subscribed to a treaty, the General Agreement on Tariffs and Trade (GATT) in an effort to reduce trade barriers.

Section 4 Trade Agreements (cont.) • In 1994 GATT was replaced by a regulatory body known as the World Trade Organization (WTO) to enforce the provisions of the treaty. • The WTO hears complaints from member countries and has the authority to assess penalties against nations that violate the terms of the GATT treaty.

Section 4 Trade Agreements (cont.) • The European Union (EU) has become the world’s most important regional economic group. • The EU has been the means for the various countries of Europe to achieve full economic integration. • In 1992, the U.S., Canada and Mexico concluded negotiations for another large trading bloc—the North American Free Trade Agreement (NAFTA).

Section 4 Groups of nations that trade with each other without barriers such as tariffs are A. allies of trade. B. non-tariff partnerships. C. trading blocs. D. free trade organizations.

Section 4 – DQ2 Trade Alternatives for the United States • The four major approaches to U.S. economic policy are free trade, fair trade, managed trade, and protectionism. • A pure free-trade policy would mean businesses in different nations could buy and sell goods with no tariffs or other limitations of any kind.

Section 4 Trade Alternatives for the United States (cont.) • Fair trade is trade that is regulated by international agreements that outlaw unfair business practices or limit tariffs. • Managed trade means the government intervenes in a trade arrangement to achieve a specific result. • Protectionism is the policy of using trade barriers to protect domestic industries from foreign competition and to prevent free trade.

Section 4 When the government intervenes in a trade arrangement to achieve a specific result it is called A. state trade. B. protectionism. C. managed trade. D. fair trade.

Section 4 – DQ3 Capitalist and Mixed Economies • Three major types of economic systems are traditional, market, and command. • Capitalist economies have private ownership, individual initiative, competition, freedom of choice. • Mixed economies blend capitalism with some government regulation.

Chapter Summary start Major Economic Transitions • Since 1991, Russia has been working toward capitalism and democracy, but change has been slow. • China’s Communist government is trying to develop a market economy but at the same time maintain an authoritarian political system.

Chapter Summary Emerging Economies • Some developing and newly developed nations rely on free markets, trade, and investment. • Others have chosen a socialist system, but socialism is losing popularity.

Chapter Summary Global Economy • The main approaches to trade policy include free trade, fair trade, managed trade, and protectionism. • Trade barriers include tarrifs, embargoes and unfair trade practices. • The World Trade Organization (WTO), European Union (EU), and North American Free Trade Agreement (NAFTA) encourage free trade.

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