exam 4 Flashcards
Three basic economic questions that each society has to answer
What goods and services are to be produced?
How are they to be produced?
Who will receive them?
factors of production
land, labor, capital, and ideas
Production Possibilities Frontier (PPF)
graphically shows how much can be produced between two goods and what will it cost to change what’s being produced more or less
left of PPF
attainable but not efficient
right of PPF
unattainable
curved vs straight PPF
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
What can shift the PPF outward or inward?
outward: tech improvement and expanding resources
inward: natural disaster, reduced labor force, government restriction in production, war
opportunity cost
cost of trade off in changing what is produced
opportunity cost calculation
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
autarky
no trade
production = consumption
absolute advantage
a country can produce more of a good than another
comparative advantage
one country has a lower opportunity cost
specialization
when a country prioritizes production of a good they have a comparative advantage; creates greater gains from trade
gains from trade
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
gains from trade calculation
production before trade + production that can take place with specialization x opportunity cost
= additional production
ie 20 + (20 -10) x 1 = 30
effect of trade on graph
consumption surpasses pre-trade PPF
winners and losers in trade
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
winners and losers in trade on graph for exporting countries
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
winners and losers on graph in importing countries
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
tariff
a tax on an import
domestic producers benefit
increases price for domestic producers, reducing demand for imported goods
tariffs on graph
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
quota
restriction of on the volume of imports of a specific product
quota on graph
essentially same as tariff, but no revenue
trade surplus
exports > imports
trade deficit
exports < imports
trade balance
exports = imports
US trade data
long term trade deficit, exports 25x higher than in 1947, ups and downs with recessions
low foreign wages argument against trade
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
national defense argument against trade
in times of national crisis or war, a country must be able to rely on key industries: steel, oil, defense, and food
antidumping argument against trade
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
infant industry argument against trade
an industry needs trade protection to achieve a comparative advantage or survive in the global market
three concerns about globalization
domestic employment, environment, and exploitation of foreign workers
