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33 Cards in this Set
- Front
- Back
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Free Trade
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When the excess supply of one country equals the excess demand of another country.
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Market Clearing Points in 2 countries
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Where there is no excess supply or demand (equilibrium in each country)
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Explain Demand Shift (for Country A & B)
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Country A: price decreases, demand increases.
Country B: price increases, demand decreases. |
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Balance of Trade
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The difference between exports revenue and imports expenditure. <0=deficit
>0=surplus =0=balance |
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autarky price
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the price without trade. domestic price. means self sufficient (without exporting in a local market)
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why does demand increase?
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substitution effect: consumers look for alternatives to substitute one good for another.
income effect: the purchaseof an expensive item eats up a big portion of budget. demand for other items increase. |
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What factors affect Demand Curve?
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-Consumers Taste
-Numbers of Consumers -Price Expectations -Consumers Income -Price of Related Products |
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What affects Supply Curve?
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-Technology
-Number of Firms -Prices of Input -Price Expectations |
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Marginal Cost
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Addition cost of producing one more unit of output. Slopes upwards because:
1) Diminishing marginal productivity (labor, resource, capital) 2) increasing output |
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the basis of international trade
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in one country, there is a shortage, and another country has a surplus....so we trade.
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market clearing mechanism
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governments cannot interfere to set prices.....
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opportunity cost
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the value of your best alternative. Lower = Better = Specialized.
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absolute advantage
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a country over another country in the international trade is the use of lower labor in production process.
produce something for less. |
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comparative advantage
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countries spend time and resources on activities with lower opportunity costs. (????)
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RELATIVE PRICE OF SERVICES- in terms of M (MEXICO)
RELATIVE PRICE OF GOODS, in terms of S (MEXICO) |
S (3) / M (4) - Mexico
M (4) / S (3)- Mexico US (S/M)= 1 US (M/S)=2 MX (S/M) .75 MX (M/S) 1.33 The US will buy its services from Mexico- but produce goods domestically. SOO- |
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Constant Cost Theory
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Labor: one input: machinery, natural resources.
inputs = fixed proportions in production. |
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TOTAL LABOR IN ECONOMY SYSTEM
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if you increase total labor
L = 2S + 3M = (2*30) + (3*20) = 120 ALS=2 ALM=3 OUTPUT(S)=30 OUTPUT(M)=20 |
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RELATIVE PRICES
AUTARKY PRICES |
S= M/S M=S/M
S= S/M S=M/S |
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PPF
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SLOPE= ABSOLUTE PPF
CURVED= OPPORTUNITY COST |
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IMPROVED TECHNOLOGY IN SERVICE PRODUCTION
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PRODUCTIVITY IMPROVEMENT--> ECONOMY PRODUCES HIGHER COMBINATION OF BOTH GOODS
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LABOR FORCE GROWTH
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THE ECONOMY EXPANDS TO HIGHER PPF- with constant inputs, it is parallel.
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INTERNATIONAL DIFFERENCES IN PRODUCTION
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L = Als(s) + Alm(m)
foreign country 120= 3s* + 2M* home country 120=2S + 3M |
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COMPLETE SPECIALIZATION IN TRADE
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tt = terms of trade
when the home country sacrifices M to produce more S |
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real gains from trade
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measured by using autarky prices
d= domestic price line (parallel to ppf) value of consumption of each product the two endpoints of d = real value of consumption - REAL VALUE OF AUTARKY (PPF LINE ENDPOINTS) |
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PPF with INCREASING OPPORTUNITY COSTS
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PPF = MRT = marginal rate of transformation
complete specialization in manufacturing (point on m axis) |
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INDIFFERENCE CURVES AND CUSTOMER EQUILIBRIUM
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shows bundles of different goods: consumer is indifference.
SAME LEVEL OF UTILITY (SATISFACTION) curve III - highest utility level curve II - intermediate level |
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MRS
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SLOPE of indifference curve.
marginal rate of substitution = represents demand in an economy system of "SERVICES FOR MANUFACTURING" |
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MRT
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customers optimum = MRT
Marginal Rate of Transformation (PPF) and represents supply in an economy system. how many units of manufacturer M must be given to rpoduce an additional unit of services. |
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Real Income
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when income is expressed in terms of goods
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FINDING REAL INCOME
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slope of tangency = - rise / run
inflation/higher prices/higher nominal income/fallilng real income |
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INTERACTION OF SUPPLY/DEMAND
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RELATIVE PRICES
OPTIMAL PRODUCTION/CONSUMPTION NATIONAL INCOME |
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ECONOMIC GROWTH
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provides more consumption, higher utility, higher national income.
depends on either resource expansion, technology improvement, international specialization/trade |
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ERP
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EFFECTIVE RATE OF PRODUCTION
ERP = (TP* -tp*) / V |
