ECO 330T Unit #1 Exam Review- Adam Smith

What does the shift from agriculture to industrialization involve?

• Shift from agriculture to manufacturing

• Higher productivity leads to higher wages

• Industrialization leads countries to become middle-class and prosperous.

What does the shift from industrialization to deindustrialization involve?

• In more advanced economies, the shift from industrialization to deindustrialization involves the shift from manufacturing to tech, retail, and finance.

• Employment shifts from factories to stores and offices

When/why did deindustrialization begin in the West?

• Began in the 1980s under the Reagan and Thatcher administrations

  • Thatcher liberalized the financial sector in the 1980s

• Opened up their markets to foreign competition

How/why have governments been trying to reverse deindustrialization in recent years?

• Governments realized a huge reliance on the financial services sector.

• When banks collapse, the impact on the economy is far too great (2008 Global Financial Crisis

• Attempt to rebalance the economy and move back to the manufacturing sector.

How does division of labor lead to specialization & wealth?

• Division of labor allows people to specialize in jobs they are good at and produce more output.

• Productivity moves from focusing on multiple tasks to one, making it easier to produce more goods

• It also leads to a surplus of products which means firms can sell what they don’t need

How does the invisible hand explain how markets operate?

• Demonstrates the self-regulation of markets and the interactions between firms and households.

• The market determines the price of a good and how much of it consumers are willing to buy.

• The invisible hand means that the market can self-regulate itself

Why did Smith assign no role for services in his time? Would he think differently today?

• At the time of Smith, the main industry sectors were manufacturing and agriculture.

• The services sectors were essentially non-existent (the arts) and thus had no value.

• Mass consumption was not possible in the 18th century

• Would think differently today because services

What limited role did Smith assign for government intervention?

• Overall, Smith was critical of government regulation and the protection of monopolies. Allowed government to provide basic rules so the market could work.

• Banking (supervision)

• Transport (promote competition and break up monopolies)

• Education (provision over universal education.

Why is rebalancing the economy a bad idea?

• Rebalancing the economy means moving the economy from the service sector back to manufacturing.

• Can’t separate domestic sectors from foreign trade

• Trade specialization is affected by globalization (outsourcing)

• Global supply chains are integrated

• Smith would have opposed the rebalancing of the economy if it meant distorting market efficiency.

  • Would affect the specialization of products and the overall production of products

  • Also it would mean government interference, which Smith was highly critical of.

Would Smith have approved of outsourcing?

• Global trade in labor allows smaller quantity of labor (specialists) to produce a greater quantity of output.

• Some are adversely affected by outsourcing, but society is better off

• Outsourcing allows for the optimal allocation of resources across countries.

Which factor contributed to deindustrialization in the West?

• Technological advancements and automation

• Deindustrialization is the shift from manufacturing to services. Employment shifts from factories to offices/stores. Technological advancements and automation has driven this process.

What is the division of labor?

• The allocation of work tasks among individuals to increase efficiency and productivity

• The division of labor allowed for specialization. Productivity gains come from focusing on 1 task – not several.

According to Adam Smith, what is the role of self-interest in the economy?

• Self-interest leads to competition, which promotes innovation and efficiency

• Adam Smith believed that self-interest, when channeled through the market mechanism, would lead to optimal outcomes for society as a whole.

What is the main principle behind laissez-faire economics?

• The market should be left alone to operate freely, without government intervention

• Laissez-faire means to leave to the market, i.e. minimal government intervention.

What is mercantilism?

• An economic theory that emphasizes the accumulation of gold and silver as a measure of a country’s wealth.

• Mercantilism is the idea of trying to run a trade surplus (exports > imports), which required government policies to promote exports at the expense of imports, e.g. via tariffs. Nations which ran huge trade surpluses accumulated (hoarded) large amounts of gold & silver.