Principles of Economics - Ch.5 + Ch.6

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Economics

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23 Terms

1
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Ricardian Model
- Productivity is based on technology difference
- Analyzes interational trade under the assumption that opportunity costs are constant
2
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Hecksher-Ohlin model
- A country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country. This would lower production costs.
3
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Trade
- trade increases world production of both goods, allowing both countries to consume more
- move towards production of good of comparative advantage
- trade liberates both countries from self-sufficiency
4
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Pauper Labor Fallacy
- The concept states that when a country imports goods from an economy where the workers are lowly paid, it affects workers standards of living in such a country. (which is a myth)
5
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Consumer surplus
Consumer surplus is the difference between the highest
price a consumer is willing to pay and the actual market price
of the good.
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Producer surplus
Producer surplus is the difference between the market price
and the lowest price a producer would be willing to accept.
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Sources of comparative advantage
- differences in climate (can also lead to absolute advantage)
- differences in factor endowments (land, labour, capital, managerial talent which is management)
- technology
- productivity levels
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Factor intensity
Factor intensity of a good is a measure of which factor is used in relatively greater quantitites than other factors in production.
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Tariffs
- tax or duty to be paid on a particular class of imports or exports
- can be bad for free trade (free trade creates more GDP,
and less loss, and more efficient allocation of resources)
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Quota
With a quota, licenses are sold to companies that wish to import
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Arguments for protectionism
• National Security (including food; high tech)
• Job Creation (to help low skilled workers, and less mobile populations)
• Infant Industry argument—argues that to jump start a sector, it has to be protected until it can stand on its feet (this does hold true, esp. in developing countries: the question is, how much protection is fair?)
12
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Free trade agreements
• WTO
• Replaces GATT in 1994
• Attempts to enforce statutes
• NAFTA – also signed in 1993
• EU – Monetary Union by 2001
• TPP
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Off-shoring
- Relocate (a business or department) to a foreign country to take advantage of lower taxes or costs
- It makes it very difficult to collect revenue
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Economic slump
- Keynesian econ: caused by inadequate spending, and they can be mitigated by government inter vention
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Monetary policy
Uses change in quantity of money to alter interest rates and affect overall spending
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Fiscal policy
Uses changes in government spending and taxes to affect overall spending
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Recession
- the state of the economy declines; a widespread decline in the GDP and employment and trade lasting from six months to a year
- output and employment are falling
- contractions
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Expansion
- The state of the economy improves
- output and employment rise
- recoveries
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business cycle (growth cycle)
A short-run alteration between expansions and recessions
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Business-Cycle peak
Economy goes from expansion to recession (can lead
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Business-cycle trough
- economy goes from recession to expansion
- represents a slowdown or decline in GDP which leads to rising unemployment
- can lead to inflation (people spend so there is upward pressure on prices)
- low interest rates can lead to too much borrowing; creation of bubbles
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Trade deficit
a country's imports exceed its exports during a given time period
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Trade Surplus
a country's exports exceed its imports during a given time period