Midterm 1 Notes PDF

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ECON 3 taken with Rita Madarassy, Fall 2019, in class lecture notes up until the first midterm....

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MIDTERM 1 NOTES ● Maximize material welfare through specialization ● Gains in consumption from trade ○ Assume only trade and specialization change ● Competitive advantage v.s. Comparative advantage ○ Competitive advantage = comparative advantage ■ When prices of inputs/outputs are accurate indication of relative scarcity ○ Competitive advantage ≠ comparative advantage ■ When markets fail to correctly value inputs and outputs ● Gains from trade - improvement in national welfare ● Mercantilism - zero sum game (one nation gains at the expense of another nation) ● Adam smith modern trade - believes trade is a positive sum game (mutually beneficial) ○ Access to foreign markets creates wealth ● Trade barriers decrease: ○ size of potential market ○ Specialization ○ Technological process ○ Wealth creation ● Imports help countries obtain goods they couldn’t produce themselves ○ If no imports, each country limited to home country market ● Ricardian model (simple trade model) ○ Goal: show gains in consumption from trade

○ Assume… ■ Markets are competitive, firms are price takers ■ Technology is constant, static world ■ Labor is mobile, can move back and forth ■ Full specialization ● Production possibilities frontier (PPF) ○ Graph that shows combination of 2 goods an economy can produce at a given time ○ Slope of ppf = OC x-axis ○ Below ppf = unemployment ● Full specialization - only produce one thing ● Opportunity cost - what must be given up to obtain the item ○ Steeper the slope of ppf, higher the opportunity cost ● Society faces tradeoff = getting more of one good requires sacrificing some of the other ● PPF might be bow shaped because… ○ Shifting from production of one good to another gets more difficult to retrain workers ■ Opportunity cost increases ● Productivity - amount of output obtained from a unit of input ● Labor productivity - unit of output / hours worked ● Absolute productivity advantage - advantage held by country that produces more of a good per hour

● TT line = price line / trade line ○ Slope = Pworld, always touches point of production ● Opportunity cost of both countries ⇒ lower OC ⇒ comparative advantage ⇒ specialize ⇒ export ● Resource curse - factors of production are attracted to the single natural resource ○ Countries specialize in one good and product little - nothing else ○ Risky business because don’t develop other sectors of economy ■ Avoid resource curse through diversification & education ● What if a country has no absolute advantage ? ○ They can still benefit from trade ● Autarky - complete absence of trade, nations can only consume goods produced at home ● Economic restructuring - changes in economy that may require some industries to grow and others to shrink / disappear ● If trade results in net gain, a country will be better off by trading but some sectors may lose ● Trade adjustment assistance (TAA) - helps losers by providing unemployment benefits and retraining ○ Use subsidies to take resources from other sectors and use it to create a competitive advantage ● Differences in national standards can become sources of conflict 1. Harmonization of standards - countries agree upon common set of standards

2. Mutual recognition of standard - each country keeps its own standard but recognizes and accepts other country’s standards 3. Separate standards - each country has its own standards and doesn’t accept or recognize other standards ● There are not general rules for setting standards ○ Rich and poor countries have different abilities, preferences, & needs ■ Poor countries worry about standards designed to eliminate their comparative advantage ● Labor standards ○ Working conditions ○ Hours of work ○ Environment that you’re in ○ Wages ○ Age of workers ● International labor office (ILO) basic rights: ○ Prohibition of forced labor ○ Freedom of association ○ Right to organize and bargain collectively ○ Cessation of exploitation of child labor ○ Nondiscrimination of employment ● Trade rules are not an effective way to...