Production Possibility Frontier, Comparative Advantage, Trade

Front 1

NAFTA

Back 1

North American Free Trade Association: Canada, United States, Mexico

Front 2

Arguments for Self-sufficiency (autarky)

Back 2

1. National Security

2. National Heritage

3. Infant Industry

4. Quality control and ethics

Front 3

Autarky

Back 3

Self-sufficiency, no trade

Front 4

David Ricardo

Back 4

Economist who formalized the theory of comparative advantage. He lived in England in the late 1700s/early 1800s.

Front 5

Production Possibility Frontier (curve) PPF

Back 5

A frontier showing the maximum combinations of two goods or two types of goods based on the available resources, appropriate technology, and institutions of the economy

Front 6

Being efficient in the PPF model

Back 6

If all the available resources are being used with the appropriate technology and given the institutions of the economy, then production is efficient and shown as a point on the PPF.

Front 7

Being inefficient in the PPF model

Back 7

If not all the available resources are being used, technology is not being used appropriately, new rules/laws are enacted that keep producers from doing the first two items than production is inefficient and shown as a point inside the PPF.

Front 8

Decreasing the PPF

Back 8

When the PPF decreases it is showing that the less it possible to be produced. At the economy wide level it is showing that the potential GDP has decreased. This happens if resources are no longer available for use (not just aren't being used), if technology is lost, or if the institutions of an economy become hostile to production. Demonizing businesses will eventually cause a decrease in the PPF.

Front 9

Shifts in PPF

Back 9

The PPF shifts when

1. available resources change

2. technology changes

3. institutions change

Front 10

opportunity cost formula

Back 10

if quantities are available:

The opportunity cost of 1 unit of good A =

# of good A/# of good B

Front 11

Comparative advantage

Back 11

A country/person/business has a comparative advantage in the good they have the lowest opportunity cost

When trade occurs one party cannot have a comparative advantage in both goods

Front 12

Absolute advantage

Back 12

A race or competition of who can produce the most in a given time period or finish producing the fastest. It is possible for one party to have an absolute advantage in both goods.

Front 13

Benefits of specializing and trading

Back 13

Specializing and trading allows both parties to the trade to consume more than they could if producing on their own. This is achieve without new resources, new technology or new institutions

Front 14

4 tigers

Back 14

1. Singapore

2. S. Korea

3. Taiwan

4. Hong Kong

These countries all went from being poor countries (areas) to being developed countries (areas)

Hong Kong is part of China but operates under different economic system

Front 15

Trade create _______ and conserves_______

Back 15

Trade creates wealth and conserves resources

Front 16

Catch-up effect (law of convergence)

Back 16

Poor areas will catch up to rich areas through faster economic growth. It is easier to copy new technology and ideas then it is to create new inventions and innovations so poor areas can grow faster than developed areas.

Front 17

Types of workers and trade

Back 17

1. Non-tradable: services jobs that have to be done on site. None of the costs and benefits of lower prices

2. Tradable:

a. in area of comparative advantage-workers have more demand for their services and benefits from lower prices

b. in area not of comparative advantage-lost jobs, still benefit from lower prices

Front 18

Federal Debt (Oct 2014)

Back 18

almost 18 trillion dollars

Front 19

Unfunded liabilities (Oct 2014)

Back 19

Unfunded liabilities are promises the government has made but has not money to fulfill them. Social Security and Medicare are the biggest unfunded liabilities. As of Oct 2014, $115 trillion

Front 20

Arguments against sweatshops

Back 20

bad working conditions, low pay, take jobs from own citizens

Front 21

Arguments for sweatshops

Back 21

1. lower prices and more choices

2. better opportunities than alternative jobs

3. way of advancement for economic growth

Pay and conditions in "sweatshops" are 2 to 3 times better than the alternatives and the alternatives can be quite dangerous. When sweatshops are closed many children, teenagers, young women end up in the sex trade

Front 22

What are the effects of increasing minimum wage?

Back 22

If it is binding or above what the market will pay on its own then

1. Higher unemployment

2. Higher price level

The decisions is whether workers who keep their jobs benefit more than the workers who lose their jobs or never get a job and the citizens who now have higher prices for what they buy even if their income did not increase.

This is subjective or normative.

Important to remember time lags in the economy can hide these effects for a little while.

Front 23

Tariffs

Back 23

Taxes placed on imported good

Front 24

quotas

Back 24

Numerical limit to how many goods can be imported into a country. Tariffs and quotas can achieve the same result however with tariffs the government gets tax revenue while with quotas the exporters in the other country can get higher prices for their goods

Both create distortions in the economy called deadweight loss.