Chapter 1 & 2 Economics Test PDF

CHAPTER 1 What is economics? -​ it is the social science of satisfying unlimited wants with scare resources -​ trade offs- having more of one good thing usually means having less of another Microeconomics -​ decision making -​ the study of cost and benefits in decisions process, markets...

CHAPTER 1 What is economics? -​ it is the social science of satisfying unlimited wants with scare resources -​ trade offs- having more of one good thing usually means having less of another Microeconomics -​ decision making -​ the study of cost and benefits in decisions process, markets and prices Macroeconomics -​ evolution of economy -​ GDP, prices levels, income distribution -​ measures economic growth The cost benefit principle -​ what is the additional benefit of taking an action? -​ what is the additional cost of taking an action? -​ an individual should take action if and only if the extra benefits from making the action are at least as great as the extra costs Costs and benefits that matter in decision making 1.​ Opportunity costs 2.​ marginal costs 3.​ marginal benefits Costs and benefits that DONT matter in decision making 1.​ Sunk costs 2.​ average costs 3.​ average benefits *when the problem is to discover the proper level at which to pursue an activity, the cost-benefit rule is to keep on increasing the level of activity as long as marginal benefit of the activity exceeds the marginal cost -​ the decision process does not involve the concept of “average” (the comparison between the average benefit and the average cost)—this is not relevant to decision making -​ the average benefit and average cost comparison may be very favorable Characteristics of a perfectly competitive market 1.​ All firms sell the same standardized product a.​ it implies that buyers are willing to switch from one seller to another if they can obtain a lower price 2.​ The market has many buyers and sellers a.​ implies that individual buyers and sellers will be price takers, taking the market price as a fixed number beyond their control 3.​ Productive resources are mobile (free entry/exit) a.​ implies that if a potential seller identifies a profitable business opportunity in a market, he or she will be able to obtain the labor, capital, and other productive resources necessary to enter that market 4.​ Buyers and sellers are well informed a.​ implies that buyers and sellers are aware of the relevant opportunities available to them *bc of their inability to influence market price, perfectly competitive firms are often described as price takers—inability to influence the price of a good International Economics  -​ studies how nations interact with each other -​ mainly through trade of goods and services but also through flows of money and through investment -​ IE also deals with international issues like migration, management of global resources, global conflicts and cooperation Purchasing Power Parity (PPP) adjustment: -​ PPP is the amount of adjustment needed to exchange rate between countries for the rate to be equivalent to each currency’s purchasing power -​ PPP adjustment allows to make a fair international comparison by using common set of prices *the richer the country the smaller the adjustment needed for example.. Sweden and the U.S. Basic concepts of International Economics -​ imports -​ purchase of goods or services from another country -​ exports -​ sale of goods or services to other countries -​ trade balance  -​ the difference between the total value of exports and the total value of imports -​ trade surplus -​ when a country exports more than it imports -​ trade deficit -​ when a country imports more than it exports Facts! ​ International trade as a fraction of the national economy has tripled for the US in the past 40 years ​ Compared to the US, other countries are even more tied to international trade ​ Trade links societies and people and is a force for prosperity and world peace ​ Trade as an engine for development Why do we trade? Gains from Trade 1.​ A voluntary transaction, both receive something that they want, and both can be made better off ex. -​ Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing -​ The producer of the oranges receives income that it can use to buy the things that it desires Differences in climate and resources can explain why Brazil exports coffee and Australia exports iron ore. But why does Japan export automobiles, while the US exports aircraft? 1.​ Efficient use of time (labor productivity) a.​ countries can specialize in production, while consuming many goods and services through trade 2.​ More efficient use of endowments. Relative supplies of capital, labor and land a.​ exports goods which use its abundant resources and imports goods which use its scarce resources 3.​ More efficient due to large scale production Protectionsim v. free trade Trade is predicted to benefit countries in several ways, but trade may harm has within a country -​ International competition on domestic industries (import-competing industries) -​ Trade may therefore have effects on the distribution of income within a country -​ Less-skilled workers in the US have seen their salaries decline although the country has become richer -​ Some attribute this to the growing exports of manufactured goods from low-wage countries CHAPTER 2 European Trade trade within Europe is the largest, about 21% of world trade -​ EU trade within bc there are many countries located near each other -​ EU countries have elicited internal trade barriers -​ EU has 27 members European and US trade European and US trade account for 26% of world trade flows -​ differences among these countries explain some of the trade between them: “old” trade theory -​ despite this, industrialized countries like US and UK have many similarities and trade more among them: “new” trade theory Trade in the Americas Trade between north, central, and South America and the Caribbean totals 8% if world trade flows -​ one-half the trade within the EU -​ mostly within USMCA (US,Mexico, and Canada) -​ Unlike the EU, USMCA is unlikely to add new countries (distances are large) Trade with Asia All exports from Asia total 29% of world trade -​ historically japan has been the largest exporting country -​ exports from china alone has increased so much that since 2014, is the largest export country in the world! Other regions Middle East and Russia export around 9% of world trade -​ oil and natural gas are important goods exported from these regions Africa accounts for only 2% of world trade -​ very small given its size (20% of world land) and population (17% of world population) -​ getting Africa out of poverty may require improve its linkages with the world through trade (trade as an engine for development) ​ The five largest trading partners with the U.S. in 2015 were Canada, china, Mexico, japan, and Germany ​ the largest 20 trading partners of the U.S. accounted for 80% of the value of U.S. trade in 2021 The Gravity Model -​ Relation among international trade volume and the size of EU economies -​ helps tp see when two countries trade more than expected (or less) 3 largest European economies: Germany, UK, France these countries have the largest GDP in Europe ​ The size of the economy is directly related to its volume of imports and exports ​ larger economies produce more goods and services so they have a wide range of products to export  ​ larger economies generate more income from the goods and services sold, so they are able to buy more imports Distance -​ 1% increase in the distance between countries is associated with a decrease in the volume of trade of 0.7% to 1% *other things besides size and distance matter for trade and are not explained in the gravity model* 1.​ Cultural affinity a.​ if two countries have cultural ties it is likely that they also have strong economic ties 2.​ Geography a.​ Ocean harbors and a lack of mountains barriers make transportation and trade easier 3.​ Multinational corporations a.​ corporations spread across different nations import and export many goods between their divisions 4.​ Borders  a.​ crossing borders involves formalities that take time and perhaps monetary costs like tariffs or different languages, currencies..which reduce trade ex. The US and Canada there is a free trade agreement and they share a common language, still borders that reduce trade The gravity model can assess the effect of trade agreements on trade: does a trade agreement lead to significantly more trade among its partners than the gravity model? -​ because of NAFTA and distance the amount of trade between the US and Mexico and Canada has a fraction of GDP is larger than between the US and EU countries Today about 53% of the volume of trade is in manufactured products such as automobiles, computers, clothing, and machinery -​ services such as shipping, insurance, legal fees, and spending by tourists account for about 20% of the volume of trade -​ mineral products (coal, copper, etc.) and agricultural products are a relatively small part of trade Service Potential Service has the great potential to become the sector with the biggest share in trade as many services can be outsourced ex. Firms customer service centers Although service outsourcing is currently not a significant part of trade -​ about 40% of jobs are “tradable” and thus have the potential to be outsourced, of which 20% are in services. (e.g. Doctor’s opinion) -​ round 60% of jobs are non-tradable because they need to be done close to the customer. (e.g. Dentist)