Chapter 26 Section 4

The Global Economy
Key Terms
comparative advantage, tariffs, quotas, trading blocs
Find Out
• Why do nations develop trading blocs and
regional trade agreements?
• What are the four types of trade policy?
The Global Economy
Understanding Concepts
Global Perspectives How is the global economy
making nations interdependent?
Section Objective
Analyze the factors that dominate global economic
concerns today.
In the late 1990s, South Korea experienced
a sharp economic downturn. The
International Monetary Fund loaned South
Korea $57 billion to help strengthen its
financial institutions and industrial
corporations. South Korea’s problems
threatened to spread to Japan and other
nations with major trade with and
investments in South Korea. The
international effects of South Korea’s
economic downturn demonstrated how
interdependent nations have become in
today’s global economy.
I. International Trade (pages 732–734)
A. The economic principle of comparative
advantage says that each country should
produce those goods it can make more
efficiently and purchase those goods that
other nations produce more efficiently;
nations also trade to obtain goods and
services that they cannot produce, and to
create jobs.
B. Governments limit or control international
trade using barriers such as tariffs, quotas,
non-tariff barriers, and embargoes; countries
may also engage in unfair trade practices
such as dumping.
I. International Trade (pages 732–734)
C. Economists look at a nation’s balance of
trade—the measure of the entire flow of
money in and out of a country—to
measure a nation’s overall performance in
the global economy.
I. International Trade (pages 732–734)
Explain your position on unrestricted
international trade.
Answers will vary. See International Trade on
text pages 732–734 for a discussion of pros
and cons.
II. Trade Agreements (pages 734–735)
A. Over 100 nations have signed the General
Agreement on Tariffs and Trade (GATT)
since it was first enacted in 1947 in an effort
to reduce trade barriers.
B. In 1994 GATT was replaced by a regulatory
body known as the World Trade
Organization (WTO), which hears complaints
brought to it by member countries and has
the authority to penalize nations that violate
the GATT treaty.
II. Trade Agreements (pages 734–735)
C. The European Union (EU), currently made
up of 15 European nations, is the world’s
most important economic group; the EU
achieved monetary integration with the
adoption of the euro in 2002.
D. In signing the North American Free Trade
Agreement (NAFTA), the United States,
Canada, and Mexico agreed to reduce and
eventually end most trade restrictions
among their nations.
II. Trade Agreements (pages 734–735)
How do you think European political and
economic unification will affect the
United States?
Answers will vary. Some believe European
unification will threaten U.S. world
economic leadership.
III. Trade Alternatives for the United States
(pages 735–736)
A. A pure free-trade policy would mean that
businesses in different nations could buy
and sell goods with no tariffs or other
limitations of any kind.
B. The goal of a fair trade policy is to create an
orderly world market that does not give an
unfair advantage to countries that use unfair
business practices.
C. With managed trade, government intervenes
in trade arrangements in order to achieve
specific results.
D. Protectionism is the policy of using trade
barriers to protect domestic industries from
foreign competition and to prevent
unrestricted trade.
III. Trade Alternatives for the United States
(pages 735–736)
What challenges does globalization
present to the American economy?
Answers may vary but should include: the
American worker must now compete with a
much larger labor pool; economic and political
decisions are now more complicated.
Checking for Understanding
1. Main Idea Using a graphic organizer like the
one below, identify factors that affect the
stability of the global economy.
Answers might include: free trade—quotas,
tariffs, trading blocs; economic development—
investment capital, stable markets, economic
freedom, lack of national unity, military rule of
government, rapid population growth
Checking for Understanding
Match the term with the correct definition.
C comparative
D tariff
B quota
A trade bloc
A. a group of nations that
trade without barriers
such as tariffs
B. limit on the quantity of a
product that may be
C. economic principle that
each country should
produce those goods it
can make more
efficiently and trade for
other goods
D. a tax placed on imports
to increase their price in
the domestic market
Checking for Understanding
3. Identify embargo, General Agreement on
Tariffs and Trade (GATT), World Trade
Organization (WTO).
An embargo is an agreement prohibiting trade.
The General Agreement on Tariffs and Trade
(GATT) is a treaty that made an effort to reduce
trade barriers.
The World Trade Organization (WTO) is a
regulatory body that replaced the GATT and
enforces the provisions of the treaty.
Checking for Understanding
4. Why do nations trade with one another?
Nations trade with one another to exercise and
benefit from comparative advantage.
Critical Thinking
5. Drawing Conclusions Which type of trade
policy do you believe is the most appropriate for
the United States to follow? Why?
Answers should be supported.
Global Perspectives Trade is
becoming more and more international,
and countries are linking their economic
fortunes with trade agreements.
However, there are barriers to
international trade. Review these
barriers, and then prepare a plan for
helping nations to overcome these
barriers and build their international
trade opportunities.