Eco 4314 Review Questions Chapter 6, 7, & 8

Use the following data to explain the difference between absolute advantage (Smith) and comparative advantage (Ricardo) and determine whether these two nations should specialize and trade. If they should, determine which should specialize in which good and why. What would be the "gains from trade"? Nation A- Wheat: 1/worker, Shoe: 1/worker Nation B- Wheat: 4/worker, Shoe: 8/worker

-Absolute advantage (Smith): ability of a country, individual, company, or region to produce a good or service at a lower cost per unit then another entity that produce that same good or service -Comparative advantage (Ricardo): the ability of an individual or group to carry out a particular economic activity more efficiently than another activity -Nation B has absolute advantage in wheat and shoes -Nation A has comparative advantage in wheat (specialize trade) -Nation B has comparative advantage in shoes (specialize trade)

Describe the role played by each of the three social classes in Ricardo's model. Who was "socially useful" and who wasn't?

-Capitalist i. Serve a socially useful function to initiate the process of economic growth by saving and investing ii.Contribute to the efficient allocation of resources iii.Initiated economic growth through saving and investing -Workers i. Earn subsistence wage -Landowners i. Ricardo called them 'parasites' to society because they provide no useful function to society (get money for doing nothing but collect rent which is payment for the marginal and indestructible powers of soil) ii. Rent exists due to the scarcity of fertile land and diminishing returns -Workers were socially useful and landowners were not useful

Malthus's two postulates

-Food is necessary to existence of man -The passion between sexes is necessary and will remain nearly in its present state

Preventative checks (Malthus)

-Goal to decrease birth rate -Vice: judged prostitution, birth control, postponement of marriage, etc. to be immoral -Moral restraint (alternative to vice): if people practice this (wait until married when they can support kids and postpone any immoral activities prior to marriage) its okay

Positive checks (Malthus)

-Increase death rate (famine, plague, misery) -Instead of expressing regret or remorse you should find an optimistic outlook -Tornado kills 10 people= 10 less people to feed Instead of looking for cures allow diseases to wipe out groups of people naturally

Intensive Margin vs. Extensive Margin (Ricardo)

-Intensive- effect of adding successive units of the variable input (labor) on the same land -Extensive margin: push onto less fertile land -At margin there is no rent

Discuss the controversy surrounding the Corn Laws. Contrast the positions of Ricardo and Malthus.

-Malthus believed there was a possibility of overproduction and not enough money to absorb all of the produce and the economy would spiral down -The way out of the economy spiraling is if land owners get wealthier. ---Landowners are the only ones truly capable of producing wealth -Employers hirer workers bc they produce value that is greater than the wage you page them (so their income is not sufficient to buy back products they produced -Landowners are only ones truly capable of consuming the products from overproduction issues because they are able to become wealthier by increasing rents -Ricardo was against the corn laws because it increased the rent due to lower productivity as they worked against comparative advantage -Malthus was in favor of corn laws because he thought it'd allow the British to be self sufficient in food production and that high prices meant less population

Ricardo's rent (what it is and why it originates)

-Payment to landowner for the original and indestructible powers of soil -Rent arises for 2 reasons: ---Scarcity of fertile land ---Diminishing returns -Crucial to his theory of value -At the margin there is no rent

Alfred Marshall

-Principle of economics -Law of economics -Ideas of supply and demand, marginal utility, and cost of production ---Created the first graph that compared both supply and demand

Felicific calculus

-Quantitative measurement of the pleasures and pains associated with various actions or modes of behaviors -Bentham's method for calculating utility

Discuss some (at least 4-5) of the features/ideas commonly associated with the Classical tradition. (For example: Say's Law, stationary state, diminishing returns, etc.)

-Say's Law: deals with theory of markets, can be described as the products that are traded for product, money is negligible, hoarding money is irrational, and supply creates its own demand -Iron Law of Wages: wages are always at subsistence -Diminishing Returns: combined with Malthusian Laws of Population that led to the idea of Stationary State, diminishing returns is a must because more workers=less marginal productivity -Comparative Advantage: Ricardo came up with the idea that people should produce what they're good at to have the optimal output

Describe the steps of the Malthusian cycle. What was Malthus's position on the Poor Laws? Explain.

-Steps: Equilibrium between food supply and population, passion drive kicks in causing population to increase, food spread is thinner and thinner causing food prices to increase, unemployment increases and wages decrease, poor will get poorer and the amount of poor increases, population begins to grow slowly and cultivators grow more food, reach equilibrium between food supply and population again -Malthus does not favor Poor Laws but does favor Corn Laws i.Emphasizes birth rates but did not realize people were going to start living longer as well. Food is necessary for existence. -Malthus believed Poor Laws maintained the poor that was created and was inevitable.

Say's Law

-Supply creates its own demand -Inspired by Wealth of Nations -Products are traded for products and money is negligible

Comparative advantage

-The ability of an individual or group to carry out a specific economic activity (like making a specific product) more efficiently than another activity (at a lower cost than anyone else) -Produce what you're good at

Diminishing returns (Ricardo)

-The level at which profits or benefits gained is less than the amount of money or energy invested -Ricardo was the first to demonstrate how additional labor and capital to a fixed piece of land would successively generate smaller output increases -States that at some point adding an additional factor of production results in a smaller increase in output

Stationary state

-The state in which neither capital nor population can experience further growth -Ricardo believed that with technological progress and free trade the stationary state may lie far in the future

Jeremy Bentham

-Utilitarianism: the doctrine that an action is right in so far as it promotes happiness and that the greatest happiness of the greatest number should be the guiding principle of conduct -Wrote Principals of Morals and Legislation

Iron law of wages (Classical)

-Wage fund increases -> wages increase -> population increases (by dismal theory) -> labor force increases -W= Wage fund/ labor force -Smith said as economy grew more capital would be accumulated and workers would see wages steadily growing -Malthus said in the long run wages will always be at subsistence, if adjusted and go above/below it will go back to subsistence

David Ricardo

-Wrote Principles of Political Economy and Taxation -3 group of decision makers: Workers, landowners, and capitalists ---landowners= "parasites" to society because they provide no useful function -Assumed that changes in relative prices over time are due to changes in the labor cost- assuming labor cost theory -Said diminishing returns are for agriculture -Said constant returns of scale are for manufacturing -Comparative advantage.

Should Adam Smith be regarded as the father of modern economics or should it be someone else? Discuss.

-Yes -The ideas that came from Wealth of Nations was adopted by many cities, states, and nations and was use din the economic structures -Many ideas rom Adam Smith are still used in the modern economy today: division of labor, free trade -His works in Wealth of Nations solidified classical economic theory which became the dominance of economic thought throughout the Great Depression -Laissez faire: minimizing the role of government intervention and taxation in free markets -Invisible hand: guides supply and demand, look out for your own self interest and helps create the best outcome for all -His ideas drove the move from land based wealth to assembly line production methods driven by the division of labor -Created concept of GDP (gross domestic product) -Prior to Smith nations believed wealth was based on amounts of gold/silver they had

Robert Malthus (1766-1834)

Dismal Theorem: if the only way to stop population is misery -> the population will grow until it is too miserable to continue -Classical Iron Law of wages: wage rate in long run is completely horizontal (subsistence) Economy grows and more capital is accumulated so workers see wages growing but Malthus said it will always revert back to subsistence in LR

John Stuart Mill

English philosopher and economist remembered for his interpretations of empiricism and utilitarianism (1806-1873)

Jean Baptiste Say

Expanded Smith's productive labor to include those that enable good production this extends to his value theory (believed value of a good is its value in use-utility) -Say's Law: supply creates its own demand, inspired by Wealth of Nations, Smith adheres to Say's Law...but Smith came before it -Say's Immaterial product -Utility Theory of Value

Say's immaterial product

Products that express a utility produced, is not attached to any material

Discuss Ricardo's analysis of the distributive shares received by each of the social classes (Wages, rent, and profit) and probable long-run trend. Illustrate. What are the long-run implications for growth and how does this 'dismal' outlook contrast with Smith's vision?

Subsistence wage Long run-> rent and wage fund increases -> capital accumulation stop

Discuss the historical backdrop against which Ricardo (and Malthus) wrote, emphasizing the important changes that took place after the publication of The Wealth of Nations. What were some of the issues that The Wealth of Nations did not or could not address? Why did the interpretation of things switch from "half-full" to "half-empty"- that is from cheerful optimism to 'dismal science?

a. Before i. Agricultural productivity increases in first half of the 19th century and that increased population ii. Increase in demand for British exports 1. Era of unrest -> went from net exporter of food to importer iii. A lot of capital accumulation 1. Some people were worse off, a few got rich and a few gained slightly iv.Technological innovation 1. Steam engine, etc. v. Property rights b. After i.Agricultural unrest ii.Rapid industrial expansion 1.Change from domestic system to factories 2. Increase in population and a redistribution of population/cities

Discuss the 'principle of population' according to Malthus. What were his postula? What was his dismal conclusion regarding the relative growths of population and subsistence? What were the implications and how did that change the probable prospect for workers in the long run?

i. Malthus proposed that the principle that human populations grow geometrically while food production grows at an arithmetic rate ii. Postula: food is necessary for existence (grows arithmetically), passion between sexes is necessary and won't change (grows geometrically)

Discuss Bentham's felicific calculus. (What is it supposed to measure? What are the factors that cause quantitative differences?)

i. The quantitative measure of the pleasures and pains associated with various actions or modes of behavior, Bentham thought it possible to sum up pleasure and set them against pains, conceived as negative pleasures iii. Measured by the: intensity, duration, certainty, propinquity (how distant or remote), fecundity (pleasure leads to more pleasure), impurity (pleasure leads to pain and vice versa), and the extent iv. Tries to measure utility which varies form person to person V. Assigning numbers to different factors saying that sum of utility would equal total utility Vi. Absence of behavioral motives other than pleasure and pain