Econ Unit 3

Use the small-country model to illustrate the effect of a tariff on international trade.

A tariff raises the price at which foreign firms can sell a good by adding a tax. Domestic producers can then also raise their prices. This causes an increase in market price, an increase in domestic quantity supplied, and a decrease in both the domestic quantity demanded and the quantity of imported. A tariff benefits producers, and hurts consumers.

Terms to know

Barrier to trade: A policy designed to reduce the imports of foreign goods or services. Tariff: A tax or fee that must be paid on imported goods. Quota: A limit on the amount of a good that can be imported. Free Trade: Trade between nations that has no barriers, regulations, tariffs, or quotas. Tariff Revenue: The revenue collected from the imposition of a tax.

Calculate the CPI

CPI Year 1: Value of a Market Basket in Year 1/ Value of a Market Basket in Base Year x 100. The US. uses 1982-84 as a base period.

How do supply and demand for labor interact to generate equilibrium wage?

Changes in productivity and price of output affect MRP, and therefore change demand. Changes in availability of labor effect supply. Remember MRC of labor= wage; MRP curve = demand!! Increase of demand for labor = (right) higher wages + higher demand for workers. Decrease of demand for labor= (left) lower wages + less workers. Increase of Supply of labor = wages fall + quantity supplied rises. Decrease in supply of labor = wages rise + quantity supplied falls. Equilibrium: Quantity supplied = quantity demanded. (Intersection of supply and demand on a graph.) firm will pay wages up to MRP. MRP depends on productivity and price.

Be able to determine which country has a comparative advantage in the production of a good.

Comparative advantage: The ability to produce a good or service at a lower opportunity cost. Absolute Advantage: The ability to produce a good using fewer resources. Opportunity Cost: The value of the next best forgone alternative. Autarky: When a country is closed to any/ all international trade. When a country has a high Opportunity Cost for a product, it tends to produce less and import more of it.

How does a change in a determinant of resource demand affect the demand for a resource?

Derived demand- the demand for resources which is based on the services provided by those resources. (Ex: Employees make burgers, if the demand for burgers rises, more employees will be needed.) Increase in resource demand- rightward shift on a graph. Decrease- Leftward shift on a graph. Demand for a resource depends on three main things. -The demand for the good or service it produces. -its productivity -the price of its substitute and complimentary resources. Increased productivity= increased demand for resources. When a complimentary item increases in price so does the demand for a resource, and vice versa.

The Natural Rate of Unemployment (DO NOT need to know this for Exam#3!)

Frictional unemployment= workers who are searching or waiting for jobs. Structural unemployment= The skills that the workers have to offer don't match the skills needed by the economy. Cyclical unemployment= Unemployment resulting from fluctuations in the business cycle. Full employment: The employment rates in an when the economy is operating at its natural rate of unemployment. Natural Rate of Unemployment= # of frictionaly unemployed+ # of structurally unemployed/ by size of labor force x 100. A fully employed economy operates at this rate.

Be able to illustrate gains from trade in a Production Possibilities Model and by calculating them numerically.

Gains From Trade: The benefit or wealth made by trading. Not always monetary. Gains from trade can be calculated by determining who has the comparative advantage in producing something, what they should specialize in, how much their goods should be traded for, and by comparing the levels of consumption available before and after the trade.

How do productivity and product prices determine wages?

If MRP of a worker is greater than or equal to the wages; the firm will hire more workers. If it is less, the firm won't hire anymore and may actually let some go. MRP= MR*P MRP has 2 important components; the marginal product of labor (productivity) and the dollar value of the output produced (price). If productivity or price increases= MRP increases= wages increase, or more employees are hired. However if prices fall= wages fall as well/ emplyees are fired.

Relationship with Price

If demand increases prices will increase. If demand decreases, prices will decrease.

Using producer and consumer surplus, how do imports affect economic welfare in the small-country model?

If the world price is lower than the domestic price, consumers will buy imported goods. As a result, domestic producers will have to lower their price to match world prices, and they will make less and have to sell less. Because of the world market consumers are able to purchase more than the domestic supply curve. Overall, consumers will benefit more than the loss faced by producers. Consumers can use their increased wealth to buy other goods domestically.

The benefits of International Trade

Imports: Goods that are made abroad and sold here. Exports: Goods that are made here and sold abroad. Quota Rent: The income earned by whoever purchased goods in the international market and sells them for a profit domestically. Quota Rent: Quota Price - World Market Price x # of items. International Trade has three main benefits. Access to lower priced goods, access to a wider variety of goods, and access to scarce resources.

Using consumer and producer surplus, how do exports affect economic welfare in the small-country model?

In a small-country model, if the world price is greater, producers will export their products. If domestic consumers want the product they will need to pay the higher (world) price. This causes a decrease in domestic consumer surplus, as they pay a higher price and reduce consumption. Producer surplus increases as they sell more at a higher price. Because of the world market they can sell past the demand curve. The gains of the producers outweigh the loss of the consumers, and overall economic welfare increases.

Use CPI to measure the inflation rate.

Inflation measures how prices change from one year to the next. Inflation rate is simply the growth rate of the CPI over time. Inflation rate: The % increase in overall price from one time period to another. Hyperinflation: The inflation rate is positive and greater than 50% per month. Disinflation: The inflation rate is positive but declining over time. Deflation: The inflation rate is negative. Producer Price Index (PPI): A price index that measures change in prices of goods, services, and resources purchased by consumers. Inflation Rate of Year ?: CPI Year ? - CPI of previous Year/ CPI of previous year x 100. In the base year the CPI is 100.

Types of workers in the labor force

Labor Force: people over the age of 16, Who are not institutionalized, and who are either employed or unemployed but seeking employment. Employed: Number of people in the economy who are working either a full-time or part-time job. Unemployed: The number of people in the economy who have not had a job for over a week, but have been actively searching for a job within the past four weeks.

Equations you need to know..

MRC= Change in Total Resource Cost divided by Change in Resource Quantity. Marginal Product= Change in Total Product/ Change in Variable Resource. Marginal Revenue Product= Change in TR/ Change in Resource Quantity. Unemployment rate= Unemployed/ Labor Force (which is Employed+ Unemployed) x 100. Labor Force Participation Rate= Labor Force/ Pop over the age of 16. x 100. (Natural Rate of Unemployment= # of frictionaly unemployed+ # of structurally unemployed/ by size of labor force x 100. A fully employed economy operates at this rate.) -NOT INCLUDED ON EXAM 3!!! CPI Year 1: Value of a Market Basket in Year 1/ Value of a Market Basket in Base Year x 100. Inflation Rate of Year t: CPI Year t - CPI of previous Year/ CPI of previous year x 100. Real Income: Nominal income/ CPI (in hundredths). % in Change of Real Income= % change in nominal income - % change in Prices.

Determining optimal resource utilization using marginal revenue product and marginal resource cost analysis

MRP= Demand. Optimal resource utilization occurs where the MRP (also known as Demand) = MC. This is also demonstrated where demand crosses wage in a normal market.

What is the Derived Demand for Resources

Markets for resources are similar to goods and services market. The demand for resources is called a derived demand. It is produced as a result of the demand for the goods or services produced by those resources. Employers will choose to use additional resources (workers, etc.) until (MRP) Marginal Revenue Product= (MRC) Marginal Resource Cost.

Use CPI to compare nominal values over time.

Nominal income: The actual money you receive. Real Income: The amount of stuff you can buy with nominal income. It is also the inflation adjusted measure of income. Real Income: Nominal income/ CPI (in hundredths). % in Change of Real Income= % change in nominal income - % change in Prices. Real Income can be used to measure changes in the purchasing power of nominal income.

Explain nominal and real wages.

Nominal wage= the wage actually received. Real wage= The amount you can buy with your nominal wage. Purchasing Power: The value of money; expressed by how much it can buy. Real wage= nominal wage/ price of good.

Real GDP

Quantity of goods and services produced within a country during a period of time.

Quotas effect on the market..

Quotas raise the equl. price. They cause a decrease in Q demanded by consumers, and lower consumer surplus. Local producers are able to sell more at a higher price. Total economi surplus decreases. Quota Rent is earned by whoever domestically imports the product at the WP and then sells it at the higher domestic price.

Illustrate the small-country model in a supply and demand diagram.

Small Country Model- A model of international trade in which a country produces a small amount of a product when compared to the international market. As a result it is a price taker, and its production doesn't impact the global price. Thus it adopts the world price for it's domestic market. Domestic Price: The price of a good in the domestic market. In a small-country model, this price equals the world price if the country is open to trade. World Price: The price of a goo or service in the world market. When a country is closed to int. trade the domestic supply and demand determine the price of a good. When a country opens itself up to int. trade its prices are effected by the global market. In a small country model; If the world price is greater than domestic prices; domestic production will rise, and consumption will fall, and the difference will be exported. If the world price is less than domestic prices; domestic production will fall, consumption will rise, the difference will be imported.

Be able to use data to determine the pattern of specialization between two countries.

Specialization: A producer with low Opportunity Cost (comparative advantage) focuses all their energy on producing a single good or service. Specialization is very good for the global economy. Production Possibilities Frontier: A graph that shows the production possibilities.

Effect of a tarrif on Int. trade and economic welfare.

Tariff Revenue: Tarrif x Quantity imported. If Wp is less than domestic equl. P domestic consumption will rise. If it is lower, domestic consumption will fall. Overall tariffs create DWL which hurst the economy.

Identify the range of prices for which mutually beneficial trade will occur between countries.

Terms of Trade: The price of one good for another. Ex: 1lb. coffee for 5lb. bananas. In order for both parties to benefit, terms of trade must be less than the buyers opportunity cost, but greater than the sellers OC. Sellers OC <Terms of Trade </= Buyers OC.

Marginal Resource Cost

The additional cost with using an extra unit of resource. MRC= Change in Total Resource Cost divided by Change in Resource Quantity. In competitive markets the MRC is constant and represented graphically by a horizontal line.

The Business Cycle

The business cycle: short term fluctuations experienced in the economy due to changes in levels of economic activity. There are four general phases. Peak: maximum economic activity. Recession: real output declines for at least 2 consecutive quarters. Trough: The lowest point of economic activity. Expansion Phase: Times of Recovery and economic growth.

Inflation and CPI

Three Macroeconomic measurements: Real GDP, unemployment rate, and CPI/ inflation rate. Inflation is an OVERALL increase in the prices of goods and services. It's represents a reduction in your ability to buy goods and services. CPI: An economic indicator used to measure over time the average price of a basket of consumer goods and services. It's includes eight major groups of goods and services; Food and beverages, housing, apparel, Transportation, medical care, Recreation, education and communication, Other goods and services.

Effect of a quota on international trade.

To be effective a quota must be less than the amount normally imported. The smaller the quota that is set; the higher the new equl. price will be. Quotas are represented by a rightward shift of the domestic supply curve. Because quotas limit the amount of import sold, their price is always higher than Wp. As a result domestic producers can charge more and sell more. Consumers will purchase less.

Unemployment

Unemployment rate: The percentage of workers In the labor force who are unemployed. A good indicator of the overall health of the economy. Unemployment rate= Unemployed/ Labor Force (which is Employed+ Unemployed) x 100. Labor Force Participation Rate= Labor Force/ Pop over the age of 16. x 100.

More terms to remember.

Welfare effects: The effect that changes in the market have on the welfare of participants; found by comparing changes in consumer and producer surplus. Remember consumer surplus (area below the demand curve, but above the equilibrium price), producer surplus (area above the supply curve but below the price) , and overall economic surplus.

Calculating Marginal Revenue Product

When a company is determining output levels, they compare MB to MC. Marginal Product= Change in Total Product/ Change in Resource. Marginal Revenue Product= Change in Total Revenue/ Change in Resource Quantity.

Explain why individuals and societies may choose to establish barriers to trade.

When trade is open internationally someone always suffers; and they have an incentive to limit international trade. Since free trade builds wealth, sometimes a country will limit free trade to "punish" another country.

More terms to remember.

consumer surplus: The difference between the maximum price consumers are willing to pay, and what they actually pay. Demand Curve > CS >equl. Price. From 0 to # traded. (In a normal market, SC would end where supply or demand ends, not continue on until # traded.) Producer surplus: The difference between the price producers receive, and the minimum price they will accept. equl. Price > PS > Supply Curve; from 0 to # traded. Dead weight Loss: The economic surplus lost when the market isn't in equilibrium.

What is the impact of an inclusive union on wages and employment?

inclusive union: a group of all of the members working in a specific industry. This group then bargains for increased wages and benefits. The wages the Union bargains for are essentially a price floor. When unions effectively raise the wages of their workers, the quantity of labor demanded by firms will decrease. The higher wages will cause an increase in available workers. The result is unemployment.