Test #1 Flashcards
chapt. 2, 5, 6
What is Ceteris Paribus?
The assumption in economics - “holding other things equal”
We only want to allow one variable to change at a time
What is the PPF?
The PPF illustrates the trade-offs facing an economy that produces only two goods
It shows the maximum amount of one good that can be produced for any given quantity produced of the other
*always uses quantities
- the x and y intercepts are the max amount that can possibly be produced of that product
Any point on or below the line is feasible (on the line is efficient), and any point above the line is not feasible
What does it mean by there are not missed opportunities in production
When moving between efficient points of production, there is no way to produce more of one good without producing less of the other good
Explain the idea of increasing opportunity cost
In reality, the PPF is not straight, it’s curved which shows an increasing opp. cost.
It becomes more and more expensive as you move along with production (producing a small amount of a diff good is ok at first but as you produce more and more of that good you have to give up more and more of the other goods)
What is economic growth and what are the two possible causes of it
Economic growth = an increase in production capacity (PPF shifts upwards)
2 possibilities:
increase in FACTORS of production:
- increase resourced used to produce goods and services
better TECHNOLOGY:
- advances in the technical means for producing goods and services
What are examples of factors of production?
Land (natural resources)
Labour - hours of work or number of workers (mental and physical abilities of the workforce)
Physical capital - usually refers to machinery / goods or services used that aren’t human
Human capital - proxy of education - educational achievements and skills of the labour force
When does a country have a comparative advantage?
What has to be the case for a country to trade?
A country has a comparative advantage if the opp. Cost of producing a good or service is lower than other countries
Countries will trade only if the price of goods is less than its domestic opp. cost
How can both countries gain from trade?
Through specialization and trade, both countries produce more and consume more than if they were self-sufficient
What does it mean to barter?
Exchanging goods or services for other goods or services without using money
What does the circular-flow diagram represent? What are the four different aspects that are interconnected in the diagram?
It represents the transactions in an economy by flows around a circle
Household (person or group of people that share their income)
- households give money to markets for goods and services (and they receive goods and services)
Markets for goods and services give money to firms ( and receive goods and services)
Firms (organizations that produce goods and services for sale)
- firms give money to factor markets (and receive factors)
Factor markets (people selling their resources to firms)
- factor markets give money to households (and receive factors)
Describe an economy’s income distribution
What determines an economy’s income distribution?
The way in which total income is divided among the owners of the various factors of production (how it’s allocated between differently skilled workers as well as owners of capital and land
Factor markets determine the economy’s income distribution
What is positive economics and normative economics?
Positive - economic analysis that describes the way the economy actually works (it’s a statement that is either true or false)
Normative - make predictions about the way the economy SHOULD work (shows political leniency)
What is an efficient economy and efficient allocation?
efficient economy - no missed opportunities - can’t produce more of one good without producing less of the other. (requires both efficiency in production and efficiency in allocation
efficient allocation - allocating resources so that consumers are as well off as possible
What are some real world complications that the circular flow diagram ignores?
Family run businesses, firms selling to other firms, government involvement
What are the two key sources of differences in economists’ opinions?
- Differences in VALUES
- Differences arising from economic modelling - disagreements about which simplifications are appropriate in a model make different conclusions
What is globalization?
What is hyperglobalization?
The growth of all the different forms of economic linkages among countries
The phenomenon of extremely high levels of international trade
What is reshoring? What are some arguments for it?
Bringing production closer to markets
Companies sometimes decide that the money they saved by buying goods from suppliers thousands of miles away is more than offset by the disadvantages of long shipping times and other inconveniences
Some firms considering relocating some production facilities as means to minimize future production disruptions
What economic model does trade follow? What is an autarky?
The Ricardian model of international trade
- countries specialize in what they have a comp.advan
- there is a constant opportunity cost (straight PPF)
Autarky = a situation in which a country doesn’t trade with other countries
- autarky price = price before opening to trade
What is the real explanation for low wages in poor countries?
The low wages are due to low overall productivity
- productivity –> for a given unit of effort, what kind of value is generated?
- so countries that produce lower value products will be paid less
- many low-wage nations would be much poorer than they are if they weren’t able to export goods like clothing based on their low wage rates
What does factor intensity refer to?
refers to the ranking of goods according to which factor is used in relatively greater quantities in production compared to other factors
ex. clothing production is labour-intensive because it tends to use a high ratio of labour to capital
When is production of a good characterized by increasing returns to scale?
if the productivity of labour and other resources used in production rise with the quantity of output (the products have to be produced in a massive amount in order to make money from it)
If an industry gets more efficient as it grows, then there will be a few large producers and production will only take place in a few countries
ex. Large passenger airplanes require enormous factories and huge one-time investments in research and development so a small number of companies with large-scale factories dominate production → and have lots of trade in the industry
What are the sources of comparative advantage?
- Differences in climate
- Differences in factor endowments:
factor abundance = supply of a factor of production relative to other factors (ex. canada is abundant in forests)
factor intensity = how intensively a factor is used in the production of a given good relatively to other factors - Differences in technology
What does the Heckscher-Ohlin model of trade say about factor endowments
Shows how differences in factor endowments determine comparative advantage:
–> goods differ in factor intensity, and countries tend to export good that are intensive in factors they have in abundance
What is a factor price?
the price employers have to pay for the services of a factor of production
Ex. wage rate of an accountant working for an apparel company
How does international trade affect factor prices in a country? → (according to the Heckscher-Ohlin model of trade)
*Compared to autarky, international trade tends to raise the prices of factors that are abundantly available and reduce the prices of factors that are scarce
If international trade increases the demand for a factor of production, that factor’s price will rise; if international trade reduces the demand for a factor of production, that factor’s price will fall
How does international trade impact exporting industries and import-competing industries (as well as impact factors used in them)
international trade leads to a higher production in exporting industries and lower production in import-competing industries
increases the demand for factors used by exporting industries and decreases the demand for factors used by import-competing industries
How does international trade impact the demand and price for goods according to their abundance level
international trade increases the demand for factors that are more abundant in a country compared with other countries, and to decrease the demand for factors that are more scarce in a country compared with other countries:
so, international trade makes prices of abundant factors go up and makes prices of scarce factors go down
Define consumer surplus and producer surplus
Consumer surplus:
- the difference between what a consumer is willing to pay and what the consumer actually pays
- graph - area under the demand curve and above the price
Producer surplus:
- the difference between market price and the minimum price producer would accept
- graph - area above the supply curve and below the price
In canada, what is the typical factor intensity or our exports and imports
What’s concerning about this?
exports tend to be human-capital-intensive (high-tech design, tv production)
imports tend to be unskilled-labour-intensive (clothing production)
*concern is that international trade in canada raises the wage rate of highly educated canadian workers and reduces the wage rate of unskilled canadian workers
*CONCERN - the wage gap has increased substantially over the last 40 years
What is free trade?
The government doesn’t attempt to reduce or increase the levels of exports and imports that occur naturally as a result of supply and demand
Describe how the world price after opening to trade impacts a countries’ imports and exports
also what will happen to surplus?
If a country opens to trade and the world price is lower than the autarky price, they will import the product (their domestic demand will be greater than their domestic supply)
*gain in consumer suplus
If a country opens to trade and the world price is higher than the autarky price, they will export the product (their domestic supply will be higher than their domestic demand)
*gain in producer surplus
What are the 2 misconceptions about trade between low-wage and high-wage countries?
Pauper labour fallacy:
“Trade must hurt living standards in importing country”
Ex. local businesses not getting enough business cause people are buying cheaper (importing) from other countries
Sweatshop labour fallacy:
“trade must hurt poor, exporting countries”
But… without international trade, lots of people would be out of jobs
What is a tariff? What are the 2 effects of a tariff?
Tariff is a tax levied on imports (raises the WP)
- intended to discourage imports and protect import-competing domestic producers
- government makes money from this which is counted as an addition to the countries’ surplus (government revenue = quantity demanded after the tariff - quantity supplied after the tariff x the amount of tariff)
2 effects:
1. Increase in domestic production and reduction in domestic consumption
2. less is consumed, leading to lower gains from trade
What is an import quota? What are the effects of an import quota?
Import quota is the legal limit on the quantity of a good that can be imported
Effects?
-WP increases
- there’s a quota rent instead of government revenue so the deadweight loss is larger than when a tariff is imposed
What are 3 reasons people want trade protection?
What’s a more underlying reason for trade protection?
- National security - want to protect domestic suppliers so we can be self-sufficient
- infant industry - new industries require a temporary period of trade protection to get established
- job creation - additional jobs created in import-competing industries
**another real reason is pressure from import competing industries (which import-competing producers have political influence)
ex. egg farmers in canada
Why aren’t trade protections more extensive?
International trade agreements
- and because trade protection hurts domestic consumers as well as foreign export industries
- NAFTA-UMSCA (NAFTA = trade agreement to remove trade barriers between US, Mexico, and Canada)
-EU
What are trade wars?
Occur when countries deliberately try to impose pain on their trading partners, as a way to extract policy concessions
What is the WTO
World trade organization
- oversees international trade agreements and rules on disputes between countries over those agreements
- try to minimize trade protection
What is outsourcing and offshore outsourcing?
Outsourcing = a company hires another company to perform a task, such as running the corporate computer system (until recently this has been done locally)
Offshore outsourcing = businesses hire people in another country to perform various tasks (made possible by modern telecommunications)
What are some macroeconomic buzzwords that might be in questions?
overall prices, unemployment, inflation
What is the paradox of thrift?
When families are worried about the future, they cut spending
- if all of us cut spending, then there’s less money for the firms, and they will start firing people and then the economy will depress itself even more
- shows that people’s individual decisions can have a different impact then they intended
before the great depression, what was the general idea of the economy and how to deal with it?
They thought the economy was self-regulating - we shouldn’t mess with it and things will go back to equilibrium
Describe Keynesian economics that developed post 1930s?
Keynesian economics - inadequate spending causes a depressed economy
Government intervention is needed when the economy is struggling
Intervention can help a depressed economy through monetary policy and fiscal policy
What are the two tools (policies) used to improve the economy (keynesian economics)
Monetary policy : uses changes in the quantity of money to alter interest rates (printing money and buying bonds)
Fiscal policy : uses changes in government spending and taxes
Define recessions (contractions) and expansions (recoveries) of the economy?
Recessions: periods of economic downturn, when output and employment are falling
Expansions: periods of economic upturn, when output and employment are rising
What is a “jobless recovery”
economy back in equilibrium but unemployment still high –> companies using machines instead of peoples
Define inflation and deflation
Why can both be problematic?
Inflation : the rate at which prices for goods and services rise
- discourages people from holding onto cash
Deflation: the rate at which prices for goods and services decreases
- encourages people to hold onto cash
What is the business cycle?
what does the vertical axis measure?
The short-run alternation between recessions and expansions
vertical axis = measuring employment or production (ex. GDP)
peak - the point at which the economy shifts from expansion to recession
tough - the point at which the economy shifts from recession to expansion
In the long run, what determines the overall level of prices?
Determined by changes in the money supply
What is a trade deficit and trade surplus?
deficit: the value of imports > the value of exports
surplus: the value of exports > the value of imports
What are the main determinants of trade imbalances?
savings and investments
- countries with high investment spending relative to savings run trade deficits
- countries with low investment spending relative to savings run trade surpluses
What is the goal for the economy in terms of expansions and depressions
We want price stability
- tame both the peaks and troughs of the economy
Difference between micro and macroeconomics
micro - focuses on how decisions are made by individuals and firms and the consequences of those decisions
macro - examines the overall behaviour of the economy - concerned with the general level of prices in the economy rather than with the price of one particular good or service
What is the most widely used indicator of conditions in the labour market?
unemployment rate
What are two important points about long-run economic growth?
- Long-run economic growth is a modern invention
- Countries don’t necessarily grow at the same rate
- what can be good in the long run can be bad in the short run, and vice versa
Explain causes of inflation and deflation
Short run: movements in inflation are closely related to the business cycle → when the economy is depressed, inflation tends to fall ; when the economy is booming, inflation tends to rise
Long run: overall level of prices mainly determined by changes in the money supply, the total quantity of assets that can be readily used to make purchases
