chapter 1 & 2 Flashcards
The Mercantilists
An economic theory that uses economic nationalism
primarily from Europe in 1500-1800s
Trade surplus
Argue that to maintain economic growth, a country should maintain a favorable trade balance.
From a macroeconomics perspective, what happens as equilibrium prices in lots of individual markets rise?
Inflation
efficiency
the only way to make more of one good is to produce less of another
inefficiency
it is possible to make more of one good without having to give up producing any of the other good
pure capitalism (market economy) is defined by 2 characteristics:
a) private ownership of resources
–b) no central government authority oversees production and consumption in capitalism, there is a reliance on markets to allocate economic resources
contrast with pure command economy (centrally planned), which is defined by 2 characteristics:
–a) all resources are owned by the government
–b) central authorities coordinate (dictate) all economic decisions
human capital
additional knowledge and skills gained through education, training, and experience
(physical) capital
output such as machinery, equipment, and buildings that is used to produce other goods and services
open economy (macro)
Y = C + I + G + (X - M)
closed economy
no X or M…so, just Y = C + I + G…
Scientists of the late 1700s and early 1800s begin theoretically exploring international trade topics
David Hume, Adam Smith, David Ricardo, and John Stuart Mill
what happens to demand for various goods and services?
demand increases
what happens to equilibrium prices in each of these markets?
Pe increases
if exports fall at the same time that imports rise, what happens to a trade balance?
The trade surplus shrinks and eventually may be eliminated
PPF
Production possibilities frontier
PPC
Production possibilities curve
opportunity cost per unit
calculation showing trade-offs between what is lost and what is gained as move along a PPF
Points outside a PPF are?
Unattainable
points inside the PPF are?
attainable but are inefficient
points on the PPF itself are?
both attainable and efficient
o.c. per unit will always be calculated as
loss divided by gain
When resources decrease, the PPF?
Shifts left
When resources increase the PPF?
Shifts right
Why sheep in Scotland
since cooler temperature in Scotland means sheep grow thicker wool coats there…
Why wine in France?
Get more wine from same acreage of grapes in France, since warmer temps mean bigger grapes
domestic exports
money is received by the domestic seller, which means there is an inflow of money into the domestic economy
domestic imports
money is paid by the domestic consumer, which means there is an outflow of money from the domestic economy
positive trade balance
there is an overall net inflow of money into the domestic economy
MRT
shows the amount of one product a nation must sacrifice to get one additional unit of the other product
Terms-of-Trade Limits
the region of mutually beneficial trade is bounded by the cost ratios of the two countries
Autarky
The absence of international trade (closed off)
Absolute advantage
The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.
Comparative advantage
The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
Adam Smith
absolute advantage, used real world observations to say that it is better to get certain things from other countries
David Ricardo
comparative advantage, lawyer can type faster that secretary but it is more economical to have the secretary so she can do lawyer tasks
theory of reciprocal demand
a larger country has less to gain from a smaller country in trade
John Stuart Mill
theory of reciprocal demand
Price-specie-flow doctrine
David Hume, trade imbalance automatically corrects itself, if country has trade surplus then the domestic cost rises, exports are more expensive, and encourages imports
