ged 2002 social studies essential reading

8/15/2019 GED 2002 Social Studies Essential Reading

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A country’s balance of trade is the difference between the value of its exports and the valueof its imports in any given year. If the value of exports is greater than the value of imports, acountry has a positive balance of trade for that year. It is selling more than it is buying. If thevalue of its imports is greater, the country has a negative balance of trade. It is buying morethan it is selling. A positive balance of trade is called a trade surplus; a negative balance of

trade is called a trade deficit. Of course, a trade surplus is more desirable. However, sincethe 1950s, the U.S. has had a trade deficit. In 1999, Americans imported $1.23 worth ofgoods for each dollar they exported.

In order to trade with a foreign company, businesspeople of a country must exchange theirown money for the money of the other country. For instance, if a U.S. importer wants to buycameras from Japan, he or she must first use U.S. dollars to buy Japanese yen. They theimporter can buy Japanese products with the yen he or she has bought. On the other hand, aJapanese person who wants to import U.S. machinery must first buy dollars to purchase themachinery. The price of a country’s money in terms of another country’s money is called theexchange rate.

Exchange rates can go up or down without warning and can contribute to changes in the trade balances. If the value of the U.S. dollar increases with regard to the money of other countries,U.S. importers can benefit, but exporters may suffer. Suppose, for instance, that the U.S.dollar is worth about 120 Japanese yen. Then the value of the dollar increases to 150 yen.U.S. importers could buy more yen with each of their dollars. They could then use the extrayen to import more Japanese cameras. U.S. exporters, on the other hand, would be able to sellless machinery to Japan because Japanese importers would be able to buy fewer dollars withtheir yen.

American companies have worked hard to market their products throughout the world.However, as seen in the graph on the right, the trade deficit is still increasing.

Trade Balances and Money Values

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Almost every day, people come into contact with businesses of various sizes. A family mayhave dinner in a family-owned restaurant in their neighborhood. A businessman might buyhis lunch in a fast-food restaurant that has a chain of restaurants all over the country. Other

businesses people deal with are so large that they extend to almost all parts of the world. Such businesses are called multinational corporations.

A multinational corporation is a business organization that has its main office and possiblysome production plants in one country. At the same time, it also has factories, sales offices,mining operations, or other business operations in foreign countries.

Sometimes a multinational corporation is just a single company that produces only one product. More often, though, a multinational corporation is a conglomerate. A conglomerateis a group of businesses that come together under one name and one organization but producemany different products. Ford Motor Company is a good example. Ford companies aroundthe world make such varied products as cars, tools, and radios.

Some people think that multinational corporations are good forms of business. They say thatmultinational corporations help keep the price of consumer goods down in the United Statesand help people in poorer countries.

A multinational corporation is likely to have one or more factories in a developing country. Adeveloping country is one where most people are poor and unskilled, and the nation’seconomy is too weak to help them. A multinational corporation can create badly needed jobsin a developing country. In addition, the corporation may build housing for its workers, paytaxes to the country’s government, and build modern roads and airports so it can ship its

products out of the country.

Many people object to multinational corporations. They note that some of these corporationshave more money than the countries where they build their plants. Critics say that thecorporations sometimes use their wealth to influence government leaders in those countries.

Critics also claim that U.S. multinational corporations are increasing the unemployment athome, and so weakening the United States economy. A multinational corporation pays itsworkers in developing countries much less money than it would have to pay U.S. workers. Itmay pass these savings on to U.S. consumers by charging lower prices for its products. At thesame time, however, its use of cheap labor abroad is costing U.S. workers jobs at home.

Foreign Competition

Competition is a strong force in a country’s free enterprise system. Competition among U.S. producers is intense. Those who succeed are usually the ones who produce the best productsat reasonable prices. Most people agree that this is good for the economy and the consumer.Some people are not so sure, however, that foreign producers should be totally free tocompete in U.S. markets.

Some people are in favor of free trade, or unrestricted trade among nations. They believethat competition is always helpful, whether it takes place among the producers in just onecountry or among producers from many different countries. If producers competeinternationally, they will have to sell goods of high quality. They will feel constant pressureto keep prices as low as possible. Consumers will also have a wider choice of goods andservices.

Multinational Corporations

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On the other hand, some people believe that free trade can hurt a country like the UnitedStates. Because some foreign countries pay low wages to their workers, they can afford tosell their products at low prices. If these products enter the United States in unlimitedamounts, the U.S. market would be flooded with cheap imports. U.S. companies, which payhigher wages, would be unable to compete with the low prices of foreign goods. They would

have to lower wages, lay off workers, or even close down. In all cases, U.S. workers wouldsuffer.

The U.S. government sometimes protects the country’s industries by charging tariffs, whichare also called duties. Tariffs are taxes placed on imports to raise their prices. The consumer

pays these taxes. If the U.S. government places a tariff on Brazilian shoes, for example, thistariff will be included in the price a person pays if she buys a pair of shoes imported fromBrazil. Tariffs, therefore, can reduce the price advantage that imports may have over U.S.goods.

The U.S. government can also set quotas to protect the country’s producers. Quotas limit theamount of certain imports that may come into the country over a specific period, usually ayear. The United States places quotas on steel, textiles, and many food products.

In 1992, the U.S., Mexico, and Canada completed the North American Free TradeAgreement. Over 15 years it would eliminate most trade barriers and tariffs and create theworld’s largest trading zone.

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THE ROLE OF CONSUMERSSavings, Investment, and Insurance

Budgets Advertisements Protection and Education

Savings, Investment, and Insurance

Savings are personal earnings that are not spent. There are many reasons that consumers maydecide to save part of their money rather than spend it. They may save to take a vacation, buy ahouse, or send their children to school. How much people saves depends on such factors as the levelof their income and personal preferences. The rich can afford both to spend more and to save more.People with low incomes are often unable to save; they may even have to borrow money to meeteveryday expenses. And some people who can afford to save may prefer to spend most of their

money.

Investments are savings that people put to work to earn additional money. If people keeptheir extra money in a drawer at home, they are saving but they are not investing. These

people are not using what they already have to earn more money. A savings account, on theother hand, is an investment. It earns interest. Interest is the additional money the bank pays

people for depositing their money in a savings account. In most banks, savings accounts areinsured by the federal government for up to $100,000 for each depositor. Money marketfunds, another form of investment, usually earn higher interest than savings accounts. Moneymarket certificates and treasury bills (“T-bills”) offer even higher rates of interest. Buying

property, such as a house, with the hope of selling it later at a higher price can be yet anotherform of investment.

Many people invest part of their savings in some type of insurance. This type of investment protectsthe insured person against possibly large financial losses that could occur from accidents, longillnesses, or deaths in the family. Under the terms of the insurance policy, the insured person agreesto pay a premium to the insurance company. In return, the insurance company agrees to pay up to amaximum amount to an insured person who suffers a loss.

There are many types of insurance, including life insurance, automobile insurance, and homeinsurance. Insurance can be useful because few families could afford to pay the large debts

that can result from accidents or the death of the main wage earner.

Budgets

Many consumers plan ahead when it comes to spending their money. They do this by

making budgets. A budget is simply a list of expected spending and expected income. A

budget can cover different periods of time: a week, a month, or a year.

When people prepare a budget, they usually start with those costs they know they are going tohave to meet. Rent, electric bills, and loan payments would be in this group. Then theycompare these costs with their expected income for the same period of time. The difference

between the two amounts gives them an idea of what they can spend on other things.

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No two persons or families have identical budgets. Families with high incomes can afford to spendmore on nonessential things, such as sports equipment or long vacations. They may also have


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substantial savings. Economists advise that everyone should try to save, but many low-incomefamilies are unable to do so. Differences in taste, interests, and values also account for differences inbudgets. Even people with the same income will spend differing amounts on entertainment,education, clothes, and any number of other items.

Advertisements

While people may or may not enjoy watching TV commercials, they wouldn’t be able to watch manytelevision programs at all without the financial backing of advertisers. The costs of TV programs arepaid by advertisers who want the public to learn of their products or services. TV commercials areonly one of the advertising methods that businesses use; radio announcements, billboards, andInternet, newspaper, and magazine ads are some of the others. Advertising is a major industry inmany countries. In 1999 advertisers spent more than $165 billion to reach the public.

Advertising is useful for several reasons. It provides a way for consumers to learn about the products available to them. When a person wants to buy a car, for instance, he or she canlearn about the features and prices of different models through advertising. Advertising can

also help bring about better products. Producers look for ways to improve their products sothat they can claim to have a better product than similar ones on the market.

Advertising boosts the nation’s economy by increasing people’s desire to buy; in this way it createsdemand. For example, many children desire certain toys after they see commercials during achildren’s TV program. This is a very important function of advertising. It is not enough to have ahigh level of production in the country. For the economy to run well, there must also be a high levelof demand.

The advertising industry has many critics. A basic complaint is that the main goal of

advertising is not to help the consumer but to increase the profits of producers. Information presented by advertisers is often one-sided: the good points of the product are stressed, butthe bad points are not mentioned. Large companies with millions of dollars are able to reachmillions of buyers through mass advertising. Small producers may, therefore, have difficultycompeting with large producers. And advertisers may try to encourage people to buy productsthey don’t really need.

Protection and Education

A number of different agencies protect consumers in the United States against fraud and harmfulproducts. All levels of government—local, state, and federal—have such agencies.

At the local level, most cities have departments that inspect restaurants. Both state and localgovernments enforce laws to make sure that accurate weights and measures are used bysellers. To accomplish this, inspectors frequently check merchants’ scales and gasoline

pumps. State and local governments also have strict regulations concerning the quality of perishable goods, such as milk.

The federal government has many agencies that protect consumer health and safety. The Food andDrug Administration (FDA) prevents dangerous foods, drugs, and cosmetics from reaching themarket. The FDA has very strict standards for testing new drugs before they can be marketed.

Another federal agency, the U.S. Department of Agriculture (USDA) is responsible for inspecting andgrading food sold across state lines. The USDA also provides booklets on food and nutrition to thepublic.

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There are several other federal agencies that work to educate and inform the consumer.For example, the Federal Trade Commission (FTC) tries to eliminate false ormisleading advertising throughout the country. The list of ingredients and nutritionalinformation on packaged food is included to fulfill FTC requirements. Another agency,the Consumer Information Center, publishes hundreds of booklets to provide importantinformation to the buying public.

There are also some private organizations that help protect consumers. For instance, BetterBusiness Bureaus are sponsored by private business in many cities. These bureaus fightmisleading advertising and other unfair business practices. They keep information files onmany companies and record any known complaints against them. If people have doubtsabout whether to deal with a specific company, a call to their local Better BusinessBureau can often help them make up their mind.

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THE U.S. ECONOMY

• Measuring the Economy• Economic Growth• Economic Instability• Policies for Economic Stability• Government Spending and Regulations

Measuring the Economy

In order to plan for the needs of its people, a nation must be able to tell how its economy is doing.Economists use a number of ways to measure a national economy.

The gross national product, or GNP, measures a country’s total production. GNP is themarket value of all the goods and services a country produces in a given year. To avoiddouble counting, only the final goods and services are included. The values of the bricks,glass, mortar, and wood used to build a house, for instance, are not counted. Only the worthof the final good, the house itself, is included in the GNP.

Many economists think that in order to measure the true value of a country’s GNP, they must look atthe per capita GNP. The per capita GNP is the dollar amount they get when they divide the GNP bythe number of people in the country. A country with a very large GNP may still be a poor country ifits GNP must be distributed among a huge population. A country with a comparatively small GNPmay be a rich country if its population is small.

Another important economic indicator is the consumer price index, or CPI. Increases in theCPI are used to measure inflation. Inflation occurs when prices keep rising. The CPI iscalculated by keeping track of price changes in a “basket,” or a particular group of goods andservices that consumers normally buy in all parts of the country. Inflation in the United Statesis actually moderate compared with that of most other parts of the world.

Unemployment in a nation is measured by means of the unemployment rate. Unemployment occurswhen there is not enough work for all the people who are looking for work. The unemployment rateis found by dividing the number of unemployed persons by the number of workers in the labor force,and then multiplying the result by 100. This gives a percentage figure. If 5 million people areunemployed, for example, and the labor force is 50 million, the unemployment rate will be 10percent.

Economic Growth

If a country’s gross national product is increasing each year, economists say that its economy isgrowing. The percent of change in the GNP or per capita GNP from one year to the next measuresthe rate of a country’s economic growth. If a country’s GNP stays the same or goes down, it hasexperienced no economic growth for that year.

Most countries believe that economic growth is a good thing. If more and more goods andservices are produced, there will be more and more jobs for workers. There will also be more

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products for consumers, and life in general should keep getting better for the people of thecountry.

Economic growth can benefit more than one nation at a time. If the economy of the United States isgrowing, its producers will need to buy more materials from other countries. U.S. businesses will

also have more money to invest in foreign businesses. The United States in turn can benefit fromgrowing economies in other countries. The United States needs markets in other countries to sell itsproducts. Countries with growing economies will have more money to buy U.S. goods. And the saleof U.S. goods abroad helps both business owners and workers at home.

Some people argue that economic growth does not always mean that a country is doing agood job of meeting its people’s needs. In many countries, economic growth may help mainlythose people who already have money—while the poor remain poor. And even thougheconomic growth may bring more material goods, the people may not always be enjoying lifemore. Growth may go together with pollution of the environment and a hectic pace of life

that increases everyday tensions.

Economic Instability

Economic stability is a difficult goal for most countries to achieve. In a perfectly stable economy,economic growth would be combined with little or no inflation and low employment. No country,however, is free from inflation or unemployment.

Inflation is a constant rise in prices. It does not affect all people in the same way. Mostsalaried people and wage earners will feel some ill effects from inflation. People drawing

Social Security or public welfare checks will suffer the most. Their incomes increase tooslightly or much too slowly to keep up with the rate of price increases. The rich suffer leastfrom inflation. They usually cut back on their savings rather than their spending. In addition,they are apt to own many stocks and bonds. During times of inflation, the interest earned bystocks and bonds may also go up; the income of rich shareholders may keep pace withinflation.

Another form of economic instability is recession. When a country is suffering from a recession, theproduction of goods and services declines. Some capital equipment, such as factories and machines,will be idle, and some workers will be unemployed. As a recession becomes more severe,unemployment increases.

A recession exists when a nation’s GNP declines or fails to grow for a period of at least sixmonths. When a recession lasts a long time and is very severe, it is called a depression. Theworst depression in the history of the United States, the “Great Depression,” occurred duringthe 1930s.

Inflation and recession occur under opposite circumstances. When the amount of moneycirculating—or being spent—in the economy greatly exceeds the value of available goods andservices, prices go up. Inflation occurs. When there is too little money to pay for the available goodsand services, production goes down and unemployment goes up. A recession occurs. At times, the

United States and other countries have experienced yet a third form of instability, called stagflation. Stagflation means that the economy suffers from both high inflation and high unemployment.

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Policies for Economic Stability

The U.S. government fights economic instability on two main fronts: fiscal (budget) policy andmonetary (money) policy. The government’s fiscal policies decide how it will tax the people and howit will spend the money it collects. Its monetary policies dictate how much money will flow throughthe economy.

Inflation occurs when total demand and spending are greater than total production. To controlinflation, the government may adopt a fiscal policy to cut down on its spending. Reducing thegovernment’s demand for goods and services reduces total demand. The decrease in demandtends to reduce inflation. The government can achieve the same result by increasing taxeswithout increasing government spending. Higher taxes will mean that individuals and

businesses will have less income to spend. This will lower total demand and will tend toreduce inflation.

To fight recession, the government will reverse its fiscal policy. Instead of trying to reduce spending,the government will try to encourage it. The government probably will increase its own spendingwith the aim of boosting production, increasing jobs, and raising incomes. Or the government mightreduce taxes. This would leave individuals and businesses with more money to spend and to invest.

Monetary policy in the United States lies with the Federal Reserve System, a governmentagency that is basically independent of Congress and the president. The Federal Reserve is

basically a bank for banks. It holds a certain percentage of the banks’ deposits, and it provides loans to banks.

The Federal Reserve controls the size of the money supply on a daily basis. During periods ofinflation, the Federal Reserve reduces the amount of money flowing through the economy. Moneythen becomes scarcer, so it increases in value. The rise in prices slows down. During a recession, theFederal Reserve expands the money supply. This encourages producers to make more goods, and itgives the economy a needed boost.

Controlling the money supply has little to do with printing money. The Federal Reservecontrols the money supply mainly through its dealings with banks. For instance, to fight

inflation, the Federal Reserve can raise the discount rate. The discount rate is the rate ofinterest the Federal Reserve charges when it makes loans to private banks. Because banksmust pay higher interest rates, they will raise the interest rates for their loans to customers.Individuals and businesses will borrow less money. Consequently, there will be less money inuse and less pressure to increase prices. In times of recession, the Federal Reserve will takethe opposite tack. It will lower the discount rate to increase the amount of money availablefor spending.

Government Spending and Regulation

The government provides many services that are vital to all Americans. National defense, food anddrug safety, highways, and Social Security’s health and retirement benefits are just a few examples.The first graph below shows that the federal government gets most of the money to run itsprograms from taxes. It also borrows sizable sums from banks or from individuals who buy

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government bonds. The second graph shows that the government spends more than two-thirds ofits money on national defense and benefit programs for individuals.

If the government spends more than it takes in, the federal budget will show a deficit. Each year thatthe budget shows a deficit, the government’s debt grows larger. The amount of interest thegovernment owes on money it has borrowed also grows. The federal deficit for 2003 is expected toexceed $200 billion. Many economists believe that large deficits will lead to higher interest rates.They also predict that other economic problems may result. Federal budget deficits have attractedthe concern of thoughtful government leaders, citizens, and economists.

Private business is well aware of the government’s presence in the economy. Governmentantitrust laws stand to prevent any one company from becoming so large that it eliminatesall competitors. The government also plays public watchdog on private business practices.Factories that pollute the environment, for instance, must pay higher taxes.

ged 2002 social studies essential reading

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