exam 4

Question 1

Three basic economic questions that each society has to answer

Answer 1

What goods and services are to be produced?
How are they to be produced?
Who will receive them?

Question 2

factors of production

Answer 2

land, labor, capital, and ideas

Question 3

Production Possibilities Frontier (PPF)

Answer 3

graphically shows how much can be produced between two goods and what will it cost to change what’s being produced more or less

Question 4

left of PPF

Answer 4

attainable but not efficient

Question 5

right of PPF

Answer 5

unattainable

Question 6

curved vs straight PPF

Answer 6

straight line has a consistent slope across all levels of production showing that the opportunity cost is the same at all levels of production ; a curved line has an inconsistent slope that shows how opportunity cost increases with specialization; more realistic as it becomes increasingly difficult to produce in the industry not specialized in

Question 7

What can shift the PPF outward or inward?

Answer 7

outward: tech improvement and expanding resources
inward: natural disaster, reduced labor force, government restriction in production, war

Question 8

opportunity cost

Answer 8

cost of trade off in changing what is produced

Question 9

opportunity cost calculation

Answer 9

on straight PPF
good 2/good 1 (what opportunity cost will be calculated) = how many of good 1 per good 2

on curved PPF
difference between point a and b on good 1/ difference between point a and b on good 2= opportunity cost of good 2

Question 10

autarky

Answer 10

no trade
production = consumption

Question 11

absolute advantage

Answer 11

a country can produce more of a good than another

Question 12

comparative advantage

Answer 12

one country has a lower opportunity cost

Question 13

specialization

Answer 13

when a country prioritizes production of a good they have a comparative advantage; creates greater gains from trade

Question 14

gains from trade

Answer 14

with the assumptions that:
opportunity cost is constant, consumption and production in one good is the same after trade, complete specialization in good with comparative advantage, additional production is shared evenly
specialization increases total consumption and production

Question 15

gains from trade calculation

Answer 15

production before trade + production that can take place with specialization x opportunity cost
= additional production
ie 20 + (20 -10) x 1 = 30

Question 16

effect of trade on graph

Answer 16

consumption surpasses pre-trade PPF

Question 17

winners and losers in trade

Answer 17

in accordance with the law of supply and demand: demand increases with price decreases
supply increases with price increases
pre-trade price will be lower in country with comparative advantage
consumers in importing country and producers in exporting country benefit from lower prices and increased production
producers in importing country and consumers in exporting countries lose out on decreased production and higher prices

Question 18

winners and losers in trade on graph for exporting countries

Answer 18

y axis: price x axis: quantity
p1: autarky equilibrium
q0: autarky quantity
Demand shifts right for domestic products in exporting country
pE: Price after trade
increases in exporting country
q2: total production after trade, at intersection of supply line and demand after trade line
q1: quantity demanded by domestic producers at intersection of pE and demand before trade
difference between q1 and q2 is what’s exported

Question 19

winners and losers on graph in importing countries

Answer 19

p1: autarky equilibrium in disadvantaged country
pE: Price after trade
decreases in importing country
Demand shifts left for domestic products in importing country
q1: quantity produced after trade (reduced) at intersection of supply and demand after trade
q2: quantity demanded by importing country’s consumers, at intersection of pre-trade demand and pE
difference between importing country’s domestic production and demand is what’s imported

Question 20

tariff

Answer 20

a tax on an import
domestic producers benefit
increases price for domestic producers, reducing demand for imported goods

Question 21

tariffs on graph

Answer 21

y axis: price x axis: quantity
domestic supply: upward line
domestic demand: downward line
p0: autarky price
pW: world price after trade
q1: quantity domestically produced after trade
q2: quantity demanded by domestic consumers after trade
imports: reduce from difference between q1 and q2 to difference between q3 and q4
pT: price after tariff (producers cannot bring prices back up to p0)
q3: increased production after tariff
q4: reduced demand after tariff
tariff revenue by gov is difference between pW and pT + q3 and q4

Question 22

quota

Answer 22

restriction of on the volume of imports of a specific product

Question 23

quota on graph

Answer 23

essentially same as tariff, but no revenue

Question 24

trade surplus

Answer 24

exports > imports

Question 25

trade deficit

Answer 25

exports < imports

Question 26

trade balance

Answer 26

exports = imports

Question 27

US trade data

Answer 27

long term trade deficit, exports 25x higher than in 1947, ups and downs with recessions

Question 28

low foreign wages argument against trade

Answer 28

low foreign wages hurt domestic firms and workers who cannot compete
- costs are offset by the benefits of low priced imports
- trade help exports, which hire more workers as a result of trade

Question 29

national defense argument against trade

Answer 29

in times of national crisis or war, a country must be able to rely on key industries: steel, oil, defense, and food

Question 30

antidumping argument against trade

Answer 30

dumping occurs when goods are sold abroad at prices below cost in the home country
- often supported by gov. subsides from dumping country
- sometimes used as predatory pricing
-against trade law

Question 31

infant industry argument against trade

Answer 31

an industry needs trade protection to achieve a comparative advantage or survive in the global market

Question 32

three concerns about globalization

Answer 32

domestic employment, environment, and exploitation of foreign workers