WORLD ECONOMY

The world is divided into a variety of regions, with various economies. Countries can be classified into developed and developing countries. There are many measurements of how developed a nation is. The developed countries like the U.S., Britain, France, etc. are countries with high income, good health care, and strong industry. Developing countries, like India and Pakistan, have less income and a smaller production.

Of course, this over-generalization is not a good picture of specific countries. Most countries in the world are capitalist countries, which have economies in which different individuals and companies operate businesses in hopes of making money. We will spend most of the time discussing capitalism. Some countries are socialist economies. In these economies, the income is often relatively low, but basic services like health care are well-provided for. Other economies, like those in the Middle East, are high-income, but they do not have a large industrial base. These are the oil-producing high-income economies. They derive their great wealth from the export of oil, not the production of manufactured goods. There are also countries in which the economy is difficult to classify. The countries of the U.S.S.R. that are making the transition from socialism to capitalism are experiencing great instability and the economic situation is difficult to gauge in those areas.

The world can also be divided along many other lines: geographic, cultural, language, etc. Different geographic areas split the world into distinct economic zones, so do people's tastes, etc. There is no one classification of all the world's countries that fits everyone, and that is an important point to remember.

Economies are not measured by how much they produce, but also what they produce. Some countries are just better at making certain things than other countries. A country has a comparative advantage over another when it can make the same product at a lower cost. The opportunity cost for making those products are small in the country is small, while the opportunity cost for something else is large. However, another country may have a greater advantage producing the other product. (i.e., Country A can produce 1 product A for 3 product C while Country B can produce 1 product A for 2 product B; thus, country A has a comparative advantage in making product A while country B has a comparative advantage in making product B.)

Different economies also consume different products besides producing different products. Some of this is determined by prices. Remember, the supply and demand principle determines how much of any product people buy. People in any country buy things that are cheap. Prices of goods differ from nation to nation, depending on the state of supply. Also, as always, people's preferences determine what is consumed. People in China consume a lot of rice while people in Europe consume a lot of bread.

In the modern economy, nations are inderdependent on each other, everyone trading with everyone else to obtain wanted products. Imports are the products that a country buy from others while exports are products that a country sells to others. A nation's balance of trade is the difference between imports and exports. When there are more exports than imports, there is a trade surplus; when there are more imports than exports, there is a trade deficit. There are also debtor nations and creditor nations. Some countries, like the U.S. which has a huge trade deficit, has to pay for these things by massively borrowing and/or selling off its own assets. Creditor nations lend out money to other nations and has a monetary cushion to protect its economy. The amount of import and export depends on competitiveness and income. A country that is competitive (its products are cheap and readily available) exports more. High-income nations also import a lot, because their people have more to spend. Trade deficits often cause a decline in income while trade surplus cause an increase in income. Those countries have export-led growth, their economies grow because they export more and more.

International trade is drastically different from domestic trade. If you want to sell something in your own country, you just go ahead and sell it. The international market is beset by competition not only between companies and industries but it is competition between countries, and that puts many hurdles in the way of free exchange. Many countries seek to answer their own fears and public demands by suppressing and stopping international trade. Countries can put up a variety of economic barriers against foreign competition. Quotas are limits on the amount of products that can be imported and exported. Tariffs are taxes put on imports. Some quotas and tariffs can be so strong as to make trade impossible. There are indirect ways to control imports, too. For example, when two countries regulations differ, trade is hampered. (A product that meets the home country's regulation may not meet the regulation of another.) These and other forms of limitation on trade are all manifestations of protectionism. Protectionist policies come when a nation is not competitive and thus foreign competition would possibly put domestic businesses out of business. However, they generally have the result of generally inefficiency and high prices. Often, barriers in one country causes others to put up barriers, too, resulting in a trade war. Trade wars can be devastating. (The Great Depression was caused in part by a trade war, and that eventually contributed to the beginning of World War II.) To prevent barriers and trade wars, many countries have agreed to form organizations like the WTO (World Trade Organization), which resolves economic disputes without resorting to drastic and damaging measures. These institutions of trade will be discussed later.