Print

The growth of the glob al economy continues to make the world’s peoples increasingly interdependent, or reliant on each other.
Natural resources are extracted and traded around the world. Other trade items could b e goods, services, and even lab or.
Countries with varying levels of economic development have b ecome increasingly interdependent through this world trade.

Economic Systems
What are the three main types of economic systems?

All economic systems must make three basic economic decisions: (1) what and how many goods and services should be
produced, (2) how they should be produced, and (3) who gets the goods and services that are produced. These decisions are made
differently in the three major economic systems—traditional, market, and command.
In a traditional economy, habit and custom determine the rules for all economic activity. Individuals are not free to make decisions
based on what they would like to have. Instead, their behavior is defined by the customs of their elders and ancestors. For example,
it was a tradition in the Inuit society of northern Canada that a hunter would share the food from the hunt with the other families in the
village. Today, traditional economies exist in very limited parts of the world. One of the few advantages in a traditional economy is that
the roles of individuals are clearly defined. There are also many disadvantages to this type of society. These societies are often very
slow to change. When new technologies are introduced, these ideas and techniques are discouraged.
In a market economy, individuals and private groups make decisions about what things to produce. People, as shoppers, choose
what products they will or will not buy, and businesses produce more of what they believe consumers want. A market economy is
based on the concept of free enterprise, the idea that private individuals or groups have the right to own property or businesses and
make a profit with only limited government interference. In a free enterprise system, people are free to choose what jobs they will
have and for whom they will work. People have the ability to make as much money as they can and do what is in their best interest.
Another positive aspect of market economies is that the government tries to stay out of the way of businesses and there is a great
variety of goods and services for consumers. An economic system organized in this way is referred to as capitalism.
One major problem with this type of economy is that it does not always provide the basic needs to everyone in the society. The weak,
sick, disabled, and old sometimes have trouble providing for themselves and often slip into poverty.
No country in the world, however, has a pure market economy system. Today, the U.S. economy and others like it are described as
mixed economies. A mixed economy is one in which the government supports and regulates free enterprise through decisions that
affect the marketplace. In this arrangement, the government’s main economic task is to preserve the free market by keeping
competition free and fair and by supporting public interests. Governments in modern mixed economies also influence their
economies by spending tax revenues to support social services.
In a command economy, the government owns or directs the means of production—land, labor, capital (machinery, factories), and
business managers—and controls the distribution of goods. Believing that such economic decision making benefits all of society
and not just a few people, countries with command economies try to distribute goods and services equally among all citizens. Public
taxes, for example, are used to support social services, such as housing and health care, for all citizens. However, citizens have no
voice in how this tax money is spent.
Socialism and communism are examples of command economies because they involve heavy government control. However, in
practice these two economic systems are mixed economies. In a socialist economy, the government owns some, but not all, of the
basic productive resources. The government also provides for some of the basic needs of the people, such as education and health
care. Communism is an extreme form of socialism in which all property is collectively, not privately, owned. Under communism, the
government decides how much to produce, what to produce, and how to distribute the goods and services produced. One political
party—the Communist Party—makes decisions and may even use various forms of coercion to ensure that the decisions are carried
out at lower political and economic levels.
Recent history has demonstrated, however, that communist economies lack the free decision making and incentives that foster
business innovation and generation of products that people need and want. Customers can be limited in their choices, and
economies can stagnate. As a result of these problems, command economies often decline. The Soviet Union, as described below
by a Russian observer, provided an example of this situation:

“In 1961, the [Communist] party predicted . . . that the Soviet Union would have the world’s highest living standard by 1980. . . . But
when that year came and went, the Soviet Union still limped along, burdened by . . . a stagnant economy.”
—Dusko Doder, “The Bolshevik Revolution,” National Geographic, October 1992

By 2000, Russia and the other countries that were once part of the Soviet Union were developing market economies. Communist
China and Vietnam have also allowed some free enterprise to promote economic growth, although their governments tightly control
political affairs.
Socialism allows a wider range of free enterprise. It has three main goals: (1) an equitable distribution of wealth and economic
opportunity; (2) society’s control, through its government, of decisions about public goods; and (3) public ownership of services and
factories that are essential. Some socialist countries, like those in Western Europe, are democracies. Under democratic socialism
people have basic human rights and elect their political leaders.

Assessing On what idea is a market economy based?

Economic Development
What influences economic development?

Most natural resources are not evenly distributed throughout the Earth. This uneven distribution affects the global economy. As a
result, countries specialize in the economic activities best suited to their resources.
Geographers and economists classify all of the world’s economic activities into four types. Primary economic activities—such as
farming, grazing, fishing, forestry, and mining—involve taking or using natural resources directly from the Earth. Such activities take
place near the natural resources that are being gathered or used. For example, coal mining occurs at the site of a coal deposit.
Secondary economic activities use raw materials to make a tangible product that is new and more valuable than the original raw
material. Such activities include manufacturing automobiles, assembling electronic goods, producing electric power, or making
pottery. These activities occur close to the resource or to the market for the finished good.
Tertiary economic activities do not involve directly acquiring and remaking natural resources. Instead, these activities provide
services to people and businesses. Doctors, teachers, lawyers, bankers, truck drivers, and store clerks all provide professional,
wholesale, or retail services.
Quaternary economic activities are concerned with the processing, management, and distribution of information. They are vitally
important to modern economies that have been transformed in recent years by the information revolution. Just as with tertiary
economic activities, people performing these activities include “white collar” professionals working in education, government,
business, information processing, and research.
Economic activities, including industrialization, or the spread of industry, help influence a country’s level of economic development.
Those countries having more technology and manufacturing, such as the United States and Canada, are called more developed
countries. Most people work in service or information industries and enjoy a high standard of living. Because of modern techniques,
only a small percentage of workers in more developed countries is needed to grow enough food to feed entire populations. For
similar reasons, relatively small percentages of the people are employed in manufacturing industries in more developed countries.
Newly industrialized countries have moved from primarily agricultural activities to primarily manufacturing and industrial activities.
This transition to manufacturing and industry often brings improvements in socioeconomic development. Examples of newly
industrialized countries are Mexico, Malaysia, and Turkey.
Those countries that, according to the United Nations, exhibit the lowest indicators of socioeconomic development are less
developed countries. In many less developed countries, which are primarily in Africa, Asia, and Latin America, agriculture remains
dominant. Even though some commercial farming occurs, most farmers in these countries engage in subsistence farming, growing
only enough food for family needs. Some countries’ involvement in light industry grows out of a history of cottage industries,
businesses that employ workers in their homes. As a result, most people in less developed countries remain poor, as economic
development typically reduces poverty.

Listing List the four types of economic activities and explain how these economic activities relate to a country’s level of development.

Economies and World Trade

World trade is the exchange of capital, labor, goods, and services across international borders or territories, involving the import and
export of goods. In most countries, such trade represents a significant share of gross domestic product (GDP). Trade among
countries has been present throughout history, but its economic, social, and political importance has increased in recent centuries.
The unequal distribution of natural resources is one factor that promotes a complex network of trade among countries. Countries
export their specialized products, trading them to other countries that cannot produce those goods. When countries cannot produce
as much as they need of a certain good, they import it, or buy it from another country. That country, in turn, may buy the first country’s
products, making the two countries trading partners.
Other factors affecting world trade are differences in labor costs and education. Multinationals often base their business decisions
on these factors. They locate their headquarters in a more developed country and locate their manufacturing or assembly operations
in less developed or newly industrialized countries with low labor costs. In recent decades, many less developed countries have
allowed multinationals to build factories or form partnerships with local companies.
International trade is, in principle, not different from domestic trade. The main difference is that international trade is typically more
costly due to additional costs such as tariffs, time costs due to border delays, and costs associated with country differences such as
language, the legal system, or other cultural barriers.
Another difference between domestic and international trade is that factors of production such as capital and labor are typically more
mobile within a country than across countries. Thus, international trade is mostly restricted to trade in goods and services, and only
to a lesser extent to trade in capital, labor, or other factors of production. Trade in goods and services can serve as a substitute for
trade in factors of production.
Sometimes, a country can import goods that make extensive use of that factor of production and thus embody it. An example is the
import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports
goods that were produced with Chinese labor.
Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. The economies of
China and India are considered to be the largest. The seven largest emerging and developing economies by either nominal GDP or
GDP (PPP) are China, Brazil, Russia, India, Mexico, Indonesia, and Turkey. The ASEAN–China Free Trade Area, launched on January
1, 2010, is the largest regional emerging market in the world.

Contrasting Explain the differences between international trade and domestic trade.

Reviewing Vocabulary
1. Identifying What are the advantages and disadvantages to a command economy?

Using Your Notes

Answering the Guiding Questions

4. Describing What influences economic development?

5. Discussing What stimulates and supports world trade?

Writing Activity
6. Informative/Explanatory Write an essay explaining the advantages and disadvantages a less developed country might
experience by joining a free trade agreement.