AP Comparative Government: Economics Test Review Sheet
Format: 45-55 MC Questions, 1 frq.
All of the questions listed below can be found in the various readings I have given you over the course of the unit, as well as slides, your textbook and homework. Good Luck.
Supply, Demand and the Market:
What are the Laws of Demand and Supply? What is “utility”?
If price is high then quantity demanded will be low
If price is low then quantity demanded will be high
Utility: usefulness based odd individual incentives + interests
What causes the Demand and Supply curve to shift? Changes in income, substitutes, complements etc.
Demand:
B: # of Buyers (market size)
R: Related Goods (subs+ compliments)
I: Income (Normal + Inferior)
T: Taste of Consumer preferences
E: Expectation of price
Supply:
T: Taxes + Subsidies
E: Producer Expectations
S: # of sellers
T: Technology
I: Input Prices
N: Nature + Political Conditions
G: Gov Restrictions on Production
How are prices created? How do prices send signals to producers?
Prices depend on the demand of the product
Price is median between the highest that the customer will pay and the lowest that the producer will charge for it
Prices tell the producers whether to keep producing or not/ how much to produce
Production possibility curves
At any point on a supply curve, there is a specific amount of different products you can make. For example, if you increase amount of one product with a given amount of resources, you are decreasing the amount of the other product that you can make.
What type of price controls can the government place on Supply and Demand and what impact do they have on the market? Why does the government use price controls?
Taxes: people less likely to buy a product if it costs more
Subsidies: people more likely to buy a product bc they’ll be compensated for it
What are other steps the government take to “control” the market?
They can place regulations on production practicies
Ex: banning a certain pesticide might decrease the supply of crops that depend on the pesticide
Economic Philosophers:
What is Adam Smith’s core economic philosophy?
“Invisible hand”: people acting in their own self interests will ultimately benefit a society→ people work hard + will improve products (laissez faire)
Unseen force will always correct the economy
Competition is key to expanding economy
Gov role: protect society from invasion + violence, protect against injustice + oppression, erect + maintain public works + institutions
Why did Smith argue against government involvement in the economy?
He believed that people’s natural self interests would eventually promote economic prosperity
What are the basic tenets of Keynesian Economics? How does it help increase democratization?
Wants government intervention
Fiscal policy
Intervene
Public goods
Healthcare and education
Allows unions
Political benefit -> Unions are essential to democracy
This helps develop middle-class
Aristotle argues this is key to a fair society
Indicator of well-developed society
In the UK this was referred to as collectivism
How does “economic liberalism” differ from Keynesian Economics?
Pro globalization
Free market
Little government regulation
Great achievements come from pursuing self interests
Economic liberalism wants no gov intervention, keynes wants intervention to help with public goods and developing middle class
Economic Systems:
What are the basic tenets of Communism, Social-Democracy, Liberalism, and Mercantilism?
Communism:
Economic inequality will lead to revolution
After several steps a classless, equal society will develop, devoid of gov
“True communism” has never existed
Social Democracy:
Jobs protected through unions, basic standard of living for all, redistribution of wealth
State should pursue economic policies that promote economic equality
State controls certain factors of production
Private ownership is still part of economy just limited
Liberalism:
Political + economic freedom of the individual
Limited state power over the economy (low regulation + taxation)
Let the markets + property be free
Public goods are limited to those necessities:
Education, defense, some infrastructure
Mercantilism:
No free trade
State must protect + help develop the national economy
State must use economic barriers to protect domestic industries from foreign competition
Political Economy:
“Controlling the Market”:
In what ways can the state control the market? How do externalities influence or encourage government involvement in the market?
Criminalize drugs or activities (ex drugs or prostitution)
Taxation: “sin tax” (excise tax on product that’s discouraged)
Subsidies
Price Ceilings + Floors
Other Roles of the State: Property rights, Public Goods, Regulation.
In what ways does the State benefit from providing Public Goods? (Both Democratic and Authoritarian states) Public goods can increase legitimacy because people are provided more.
Why are providing Public Goods sometimes politically controversial?
People don’t think it’s fair to fund other people's public goods through their taxes (ex: healthcare)
Fiscal and Monetary Policy:
What are the general goals of Fiscal and Monetary policy?
Fiscal:
the use of government (executive/legislative) spending and taxation to influence the economy
States raise money through taxes: income, corporate, property sales
Categories:
Progestative: tax increase as income increase
Regressive: Tax decreases as income increases
Flat Tax: some % of income
Monetary:
a set of actions taken by a central bank to influence the amount of money in circulation and how much it costs to borrow money
Most central banks are outside of direct political pressure from Gov
Central banks control:
“Tight money”- raise interest rates control inflation
“Loose money”-Lower interest rates spur economic growth
What are the tools of Fiscal and Monetary policy?
Fiscal: legislative/executive branch
Monetary: central bank
Why are most Central Banks independent from the rest of the Government? Most central banks are independent from the rest of the government so they will not receive political pressure from the government. They have to make decisions that won’t always benefit everyone immediately.
Globalization:
What are the benefits of global trade? comparative advantage (specialization), competition, better jobs & standard of living, more markets (domestic and abroad), diplomacy, stability, climate change is easier to deal with
What historical events led to the implementation and growth of globalization?
Election of conservative governments in U.S. ad Great Britain who adopted Neo-Liberal economic policies (Reagonomics)
The fall of the soviet Union and end of the cold war
Countries began to democratize and adopt capitalism and neo-liberal (pro globalization) economic policies
Downfall of societ union
Numerous countries now free to choose democracy and capitalism
China and india move away from socialism and toward market based economies
What are the characteristics of a developed, newly developed, and developing country? (Review Econometrics worksheet)
What are the key components of “neo-liberal” (economic liberalization) economic policies?
Free market
Privatize government owned businesses
↑ FDI (foreign direct investment) -> what everyone wants
↑ trade
↓ government regulation
↓ tariffs
Why do MNC’s and FDI drive globalization?
They stimulate the economy
International trade
Job creations
Better quality of life
Technological exchange
Lower prices = higher purchasing power
MNCs dominate international markets
What “barriers” can governments erect to avoid economic integration?
Tariffs
sanctions
What are the key institutions that promote and govern the global economy? What are their specific economic responsibilities?
IMF (international monetary fund)
Works on giving loans to struggling countries
Monitors global economic stability
World bank
gives funding for developing countries for their developments
What is “Contagion” and “Vulnerability”?
Vulnerability and contagion are when a country is experiencing economic failure, so nearby countries are also effected because of interlinked trade. This can be felt by a lot of countries if the failure persists for a long time
What is the “Race to the Bottom”? Why do many groups, particularly labor, argue that globalization creates this phenomenon?
Companies and nations compete to lower working standards/regulations as much as possible to achieve the cheapest production possible. Many groups argue that globalization creates this because as globalization increases the international flow of goods and services, more competition is created to create the cheapest products.
Why do many developing nations argue that the rules that govern globalization are inherently unfair to developing countries and constitute “colonialism”?
Its unfair because:
MNCs exploit natural resources of developing countries
Exploit labor in developing countries
Globalization leads to homogenization -> normally its developed countries putting their MNCs and companies on developing countries so they become more similar to developed countries
Advanced tech can make developing countries dependent on developed countries
MNCs can dominate markets in developing countries, crushing local markets
Review “Good News About….”: Why do we trade, how should we address displaced workers, why does protectionism only hurt economies in the long run?
We trade because we can specialize in certain goods and get other goods for cheaper from other countries that specialize in them. We can address displaced workers by retraining and relocating them and providing development assistance in communities harmed by the loss of a major industry. Protectionism (trade barriers) creates slowed economic growth in the long run because it is a tax on imported goods. And ______________________
Economic Policies of Trump and Harris.
TRUMP HARRIS |
|
Key terms you should know and be able to apply:
Scarcity: unlimited wants with limited resources
Utility: it is what determines value → each person’s “preferences” and what each person does to maximize that utility
Opportunity Cost: foregone value of the next best alternative not chosen (what your decision cost you)
The value of the next best alternative given up in order to enjoy a particular good/service
Trade-offs:
easy decisions are between positives and negatives
Most decisions often involve more than one positive
Ex: do I work an extra shift, which will make my boss happy and earn me some of the extra money I want for college
Comparative Advantage: a country focuses on making stuff they are most efficient in
Factors of production: TESTING; taxes and subsidies, expectations of producer, sellers (entry and exit), technology, input prices (resources costs), nature and political conditions, government restrictions on production
Public Goods: roads, military, etc. → goods everyone can benefit from
Provided by state/government for various reasons
“Market failure” (inability of market to provide)
Moral implication (some goods should be provided to all members of society)
Aid economic development: infrastructure
Adds to legitimacy
“Social expenditures” aka “welfare
GDP: (Gross Domestic Product) the tally of monetary value of all products and services produced and sold inside a country, or the amount of money the nation raises (total economic consumption)
3 flaws:
It ignores crucial societal roles like childcare and volunteer work (because they don’t generate a salary), not to mention concepts like tolerance, freedom, and human rights.
It whizzes past any concerns about income inequality.
It increases with pollution, and then again with the subsequent cleanup. Worst of all, it treats the exploitation of natural resources like coal, oil, or rainforests as mere income.
Measures everything we consume → measuring consumption will also measure production
Consumer spending
Business Investment
Government spending
Add Exports
Subtract imports
Correct for inflation
Correct for changes in inventory (ex: if a shirt was made in 2023 but sold 2024)
Tax cuts can be used to increase spending
Tax cuts must be met with change in government spending
NO DEFICIT SPENDING
Slower growth results in slower increases in businesses, family income, and more
GDP Doesn't tell you how production is distributed to rich and poor, environmental factors, and the happiness of citizens
Crime often results in increases in GDP
Gini Index: measurement of the wealth gap, focusing on the divide between rich and poor (smaller number = smaller gap) → determines economic inequality
Shows that GDP doesn’t apply to everyone in the same way
Shows differences between people’s earnings & disparities between classes in a country
Social Progress Index: measures:
52 different factors
(ex: access to knowledge, wellness, personal safety, and environmental sustainability)
The higher the number the greater the social progress.
It describes issues like global warming, poverty, rights, and other social problems that GDP does not
Human Development Index: looks at the health of the population, and education levels in relation to the wealth of population (higher number = more developed)
Combines statistics on life expectancy, education, and income per capita t prank countries into tiers of development
Whether people are able to “be and do” desirable things in life
Production Possibilities Frontier:
Economic Liberalization (Neo-Liberalism): free market, privatize government-owned businesses, lower tariffs, increased FDI, increased trade, less government regulations
Upsides: comparative advantage, competition, better jobs & standard of living, more markets, diplomacy, stability, climate change is easier to deal with
Downsides: less developed countries get less benefits, “creative destruction”, competition, unemployment/displacement, decreased sovereignty
Interdependence:
Mutual reliance on each other for resources or goods
Labor (rely on places for labor, or companies may move to developing countries where labor is cheaper- labor mobility)
Trade
FDI/MNCs
Production (ex: parts for iphones come from a lot of different countries, you need each of these countries to make an iphone)
Excise Tax: increased
Taxes placed on specific items
Ex: tobacco, alcohol, luxury goods, fuel
Fixed amount per unit (not a percentage based on price)
Reasons to do it
Increase revenue to raise funds for public projects
Public health goods -> reduce alcohol consumption by increasing price
Environmental concerns: increase in fuel price -> lowers fossil fuels
Adjust for inflation
“Market Failures”: inability of market to provide
Negative Externalities:
Negative costs that can come from growing economies
Environmental effects
Pollution
crime
Economic Colonialism:
Where a country takes economic control of a foreign country and exploits it for economic gain
Using it for their resources (natural or labor)
Non-Governmental Organizations:
NGOs
Organizations that are focused on increasing human rights, healthcare, voter’s rights, helping the poor, preventing animal cruelty
Non profit
Economic “Vulnerability”:
Risks caused by outside impacts (from another country or environment impacts) on an economic system
Susceptibility to economic failure
Caused by
Dependence
Debt
Lack of resources
Geographic factors
Contagion: increased vulnerability and sensitivity
Historical examples:
Mexico ‘95: currency crisis implodes Mexican economy
Us pledges 50 billion to the rescue
Thailand ‘98: currency crash spreads around the world
For the first time, local businesses could get loans from foreign banks
Risky loans
Bank loans money to build something, they want to be paid back in U.S. dollars -> they have to get it from their central bank -> but does their bank have enough dollars?
Thailand money was overvalued (it was not as much as people thought)
People shorted the Thai currency to make money off the plummeting value
When currency collapsed everyone became broke
They had to get an emergency loan from the IMF (Emergency Crisis Bank)
The rules for borrowing money from them could make it worse
Could tell gov to cut programs or force them to make bad choices just to pay them back
Contagion: its neighbors (Malaysia, Indonesia, and more) were struggling because of Thailand's issues
A country needs to be stable and have a rule of law for a stable economy
P.I.I.G.S crisis in Europe
Pandemic
NAFTA- USMCA: free trade organizations → interconnectionism
North Atlantic Free Trade Agreement (USA, Canada, Mexico)
United States-Mexico-Canada Agreement
IMF/World Bank:
IMF: world crisis bank
Focuses on keeping economic systems stable
The rules for borrowing money from them could make it worse
Could tell gov to cut programs or force them to make bad choices just to pay them back
World Bank:
Provides loans to low-middle income countries
WTO:
World Trade Organization: enforces rules regarding international trade
Representatives in the World Trade Organization are not voted for -> slight loss of sovereignty because the people aren't voting for those who are making these decisions
FDI and MNCs:
MNCs: multinational corporations
Deliver foreign direct investments (FDI)
They want:
Access to new markets
Access to cheap labor (skilled and unskilled)
Access ot natural resources
Access to less regulated countries
Race to the bottom-> countries will lower standards to attract MNCs
Free trade agreements make it easy to move
There has been an increase in countries seeking FDI
MNCs economic power allows them to exert tremendous political pressure
Ex: coke trying to persuade pakistan not to develop nukes
Tariffs: taxes on imported goods
Good:
Ensures that jobs are going to be good paying
Short term discomfort -> long term will bring jobs back to the country
More FDI potentially
If we throw tariffs on Chinese solar panels then they might re-negotiate trade relationships to become more favorable
Can be used to level the playing field
Bad:
Other companies could retaliate with tariffs of their own, affecting our exports.
Retaliatiatory tariffs
They arent worth it for jobs and raise costs for consumers.
Affect low income households a lot more than those who are wealthy
French wine and spanish wine are more expensive -> local wine companies might raise their prices because people will still buy it
Companies can increase their prices because they can
Inflationary
If you increase tariffs you increase the value of the dollar -> we arent buying as much foreign currency, so other countries view american money with more value -> our exports would decline