Short Summary:
Microeconomics – study of how individuals and firms make themselves as well off as possible in a world of scarcity and the consequences of those individual decisions for markets and entire economy
Three possible trade-offs:
Markets – an exchange mechanism that allows buyers to trade with sellers
Model – description of the relationships between two or more economic variables – used to predict how a change in one variable will affect another
Economic theory – development and use of a model to test hypothesis, which are predictions about cause and effect
Positive statement – a testable hypothesis about cause and effect – what somebody know that will happen
Normative statement – a conclusion as to whether something is good or bad – what somebody believes should happen
- Often call price&theory to emphasize important role of prices – it explains how actions of all buyers and sellers determine prices and how prices influence the decisions and actions of individual buyers and sellers
- Microeconomics is the study of the allocation of scarce resources
Three possible trade-offs:
-
Which goods/services to produce
- How to produce
- Who gets the goods and services
Markets – an exchange mechanism that allows buyers to trade with sellers
Model – description of the relationships between two or more economic variables – used to predict how a change in one variable will affect another
Economic theory – development and use of a model to test hypothesis, which are predictions about cause and effect
Positive statement – a testable hypothesis about cause and effect – what somebody know that will happen
Normative statement – a conclusion as to whether something is good or bad – what somebody believes should happen
Or read it below
9 Questions & Answers Regarding this Topic
Question 1 It is argued that small countries tend have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities.
Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country.
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Question 2: It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters.
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Question 3: International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book.
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Question 4: Some patterns of international trade are easier to explain than others. Give several examples and explain.
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious.
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Question 5: It is argued that small countries tend have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities.
Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country.
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Question 6: It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer:
The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters
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Question 7: Some patterns of international trade are easier to explain than others. Give several examples and explain
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious.
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Question 8: International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book
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Question 9: International Trade theory is one of the oldest areas of applied economic policy analysis. It is also an area for which data was relatively widely available very early on. Why do you suppose this is the case?
Answer: In ancient times, public finance was not well developed. Most of the population was not producing and consuming within well-developed market economies, so that income and sales taxes were not efficient. One of the most convenient ways for governments to obtain resources was to set up custom posts at borders and tax. Hence international trade was of great policy interest to princes and kings, as was precise data of their main tax base.
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Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities.
Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country.
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Question 2: It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters.
------------------------------------------------------
Question 3: International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book.
------------------------------------------------------
Question 4: Some patterns of international trade are easier to explain than others. Give several examples and explain.
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious.
------------------------------------------------------
Question 5: It is argued that small countries tend have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities.
Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country.
------------------------------------------------------
Question 6: It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer:
The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters
------------------------------------------------------
Question 7: Some patterns of international trade are easier to explain than others. Give several examples and explain
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious.
------------------------------------------------------
Question 8: International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book
------------------------------------------------------
Question 9: International Trade theory is one of the oldest areas of applied economic policy analysis. It is also an area for which data was relatively widely available very early on. Why do you suppose this is the case?
Answer: In ancient times, public finance was not well developed. Most of the population was not producing and consuming within well-developed market economies, so that income and sales taxes were not efficient. One of the most convenient ways for governments to obtain resources was to set up custom posts at borders and tax. Hence international trade was of great policy interest to princes and kings, as was precise data of their main tax base.
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Graphical and Quantitive Problems
1. The figure above is the Production Possibility Frontier (PPF) of Baccalia, where only two products are produced, clothing and wine. In fact Baccalia is producing on its PPF at point A. By and large the people of Baccalia are content, as both their external and internal needs for warmth are satisfied in the most economically efficient manner possible, given their available productive resources (and known technology). How much wine is being produced? How much cloth? If a person in this country wanted to purchase a liter of wine, what would be the price he or she would have to pay?
Judging from what you learned in the previous paragraph, can you indicate at which point (if at all) the Community Indifference Curve is tangent to the Production Possibility Frontier? Explain your reasoning.
Answer:
Judging from what you learned in the previous paragraph, can you indicate at which point (if at all) the Community Indifference Curve is tangent to the Production Possibility Frontier? Explain your reasoning.
Answer:
- 6 million liters of wine are being produced.
- 3 million square yards of cloth are being produced.
- The price of 1 liter of wine is one half of a square yard of cloth.
- The tangency is at point A. We know this because otherwise the country would not be producing at the point of maximum economic efficiency.
2. One day, Baccalia joined the WTO and joined the Global Village. They discovered that in the LWE (London Wine Exchange), 1 liter of wine is worth 1 square yard of cloth. What is the logical production point they should strive for?
Answer: 10 million liters of wine.
3. They wish to enjoy to the fullest from the gains from trade, but are not willing to give up imbibing even one drop of wine from the 6 million liters they consumed in their original autarkic state. If their new consumption point is a point we shall designate as point b, describe where this point would be found.
Answer: Vertically above point a
4. Where is the Community Indifference Curve family of curves tangent to their new Consumption Possibility Frontier?
Answer: At point b.
5. How can you prove that Baccalia has in fact gained from the availability of trade, and that their new situation is superior to the pre-trade situation (with which they were Quite content)?
Answer: The country was consuming at point a before trade. It is now consuming at point b with trade. Point b represents a superior welfare combination of goods as compared to point a, since at b the country has more of each of the goods.
Answer: 10 million liters of wine.
3. They wish to enjoy to the fullest from the gains from trade, but are not willing to give up imbibing even one drop of wine from the 6 million liters they consumed in their original autarkic state. If their new consumption point is a point we shall designate as point b, describe where this point would be found.
Answer: Vertically above point a
4. Where is the Community Indifference Curve family of curves tangent to their new Consumption Possibility Frontier?
Answer: At point b.
5. How can you prove that Baccalia has in fact gained from the availability of trade, and that their new situation is superior to the pre-trade situation (with which they were Quite content)?
Answer: The country was consuming at point a before trade. It is now consuming at point b with trade. Point b represents a superior welfare combination of goods as compared to point a, since at b the country has more of each of the goods.