Unit 1 Test Economics

Explain the concepts of comparative advantage and absolute advantage.

Absolute advantage refers to lowering the production cost of a specific good in comparison to competitors. Comparative advantage specifically refers to the lower opportunity cost of production of specific goods in comparison to competitors.

Define economics

The study of how people seek to satisfy their needs and wants by making choices

Describe Adam Smith's Invisible Hand and how these concepts contribute to our economic concept of capitalism.

The term "invisible hand" comes from a small passage in his book. Per Smith, "every individual endeavors to employ his capital so that its produce may be of the greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it...he is led in this as if by an invisible hand to promote an end that was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it." (Summary- He argued for the private ownership of capital and for free trade uninhibited by government policy. These arguments laid the foundation for future proponents of laissez-faire capitalism.)

Why is the study of economics important to individuals?

it helps us to become better decision makers

How are economic growth, price stability, and unemployment measured?

we can use the basic production possibilities curve diagram to illustrate their effect on a nation's potential output and its current equilibrium level of output.

What is the difference between trade deficit and trade surplus?

A country has a trade surplus when it exports more than it imports. Conversely, a country has a trade deficit when it imports more than it exports. ... Either situation presents problems at high levels over long periods of time, but a surplus is generally a positive development, while a deficit is seen as negative.

Explain what happens in the Factor Market

A factor market is a market in which companies buy the factors of production or the resources they need to produce their goods and services. Companies buy these productive resources in return for making payments at factor prices. This market is also referred to as the input market.

Describe how foreign exchange of currency and exchange rates affect trade.

A lower-valued currency makes a country's imports more expensive and its exports less expensive in foreign markets. A higher exchange rate can be expected to worsen a country's balance of trade, while a lower exchange rate can be expected to improve it.

Define an entrepreneur.

An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards

Look at Production Possibility Graph

Be able to identify Production frontier, Underutilization, growth, Cost of producing one product over another, and Effects of technology and increased resources on the Production Possibility Curve.

Explain the difference between scarcity and shortage,

Scarcity and shortage are not the same things. Shortage conditions exist when the demand of a good at the market price is greater than supply. ... Scarcity is the concept that we have limited resources and cannot meet the unlimited demand - it has nothing to do with a market price.

Define the importance of specialization for trade.

Countries become better at making the product they specialize in. Consumer benefits: Specialization means that the opportunity cost of production is lower, which means that globally more goods are produced and prices are lower. Consumers benefit from these lower prices and greater quantity of goods.

What is NAFTA is, who does it involve, and what does it do?

Description. The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States and entered into force on 1 January 1994 in order to establish a trilateral trade bloc in North America.

Explain economic interdependence as it relates to the circular flow model?

Economic Interdependence is when business and individuals work together to meet the needs of society. Households, in the Resource Market (factor market), are the owners of the productive resources (factors of production) in the circular flow model.

What are the three primary goals of a capitalist economic system?

Economic freedom, voluntary exchange, private property rights, the profit motive, and competition. (Often described as free enterprise, free market, and capitalism)

List and define the different types of trade restrictions (trade barriers).

Embargos- a government order prohibiting the movement of goods to a country (Cuba to the US) Inspections- Many imported foods are subject to health inspections, that are far more rigorous than those given to domestic foods Licenses- Some governments require license on imports and the license are either slow to give out of too high Health Concerns- country say it isn't safe in their country Nationalism and Culture- " I'm American and I only will want American products"

Explain how the exchange rates affect the value of the dollar and demand for U.S. products.

Exchange rates outside of your own country are relevant because they influence the cost of goods being imported to and exported from your country. This impact on your currency buying power can be broken down into two models of exchange rates: ... This will make its exports cheaper while increasing the cost of its imports.

What are the payments for land, labor, and capital?

Factor of Payments (or wages...maybe)

Provide examples (countries) for each of the different economic systems.

Free Market- United States current Command- USSR and old China Mixed- Agricultural subsidies, which exist in many countries (including the United States), are a common way governments intervene in the economy. In some cases, these policies are designed to keep food prices low without bankrupting farmers. In other cases, they work to protect domestic agriculture. Even the price of milk is strongly influenced by government policy in the United States.

Explain the major trading blocs (free trade zones) in the world.

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. They are.... European Union (EU) - a customs union, a single market and now with a single currency. ... Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay and Venezuela. ... Pacific Alliance - 2013 - a regional trade agreement between Chile, Colombia, Mexico and Peru.

What are the pros and cons for "Protectionism and Free Trade" advocates?

Free Trade- Pro (allows for a complete open competition across the global with foreign business.People can buy things cheaper over seas) Con (If consumers decide to with a foreign product this contributes to the trade deficit. Takes money out of domestic businesses) Protectionism- Pro (Benefits business by creating trade barriers. Tariffs discourage foreign businesses from investing in your country. Consumer's don't see the tax.) Con (Does not benefit consumers, as it gives the domestic business the opportunity to create a monopoly. Consumers have to deal with higher prices and have very few alternatives.)

What is gross Domestic product and how is it determined?

Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate. GDP can be calculated in three ways, using expenditures, production, or incomes. (Hint- like product market)

Define the economic term "Guns and Butter."

Guns and butter generally refers to the dynamics involved in a federal government's allocations to defense versus social programs when deciding on a budget. Both areas can be critically important to a nation's economy.

Define and describe the three factors of production.

In economics the term factors of production refers to all the resources required to produce goods and services. ... Though the number and variety of the different resources businesses require is limitless, economists divide the factors of production into three basic categories: land, labor, and capital.

Define Infant Industry.

In economics, an infant industry is a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad.

Define factors of production

In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function. All factors of production like land, labor, capital and entrepreneur are required in combination at a time to produce a commodity.

What are the characteristics and definition of a traditional economic system?

In the first economic system, tradition guides economic decisions such as production and distribution. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They use barter instead of money.

Explain the concepts of opportunity cost and trade-offs.

Making decisions requires trading off one item against another. In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative. A trade-off involves a sacrifice that must be made to get a certain product or experience.

What is National Income and how is it determined?

Monetary value of all the final goods and services produced in an economy during a financial year= National Income (Hint- like Factor Market)

In which market is the "how to produce" and "who will consume it" questions answered in a free enterprise system?

Product Market

What is the circular Flow Model?

The circular-flow diagram (or circular-flow model) is a graphical representation of the flows of goods and money between two distinct parts of the economy: This market represents the place where money and goods are exchanged. In this case, the flow of money (green arrow in the diagram below) goes from households to firms, in exchange for finished products, which flow from firms to households (red arrow). *Green and Red flow in opposite directions*

What is the Current Account and what does it indicate about a country's trade?

The current account is a country's trade balance plus net income and direct payments. The trade balance is a country's imports and exports of goods and services. The current account also measures international transfers of capital.

Explain the concept of laissez fairy according to Adam's smith's invisible hand

The invisible hand is part of laissez-faire, meaning "let do/let go," approach to the market. In other words, the approach holds that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.

What are the different types of economic systems and the characteristics of each? Who controls the factors of production in each of these different economic systems? What is the role of government in each of the different economic systems?

There are three main types of economies: free market, command, and mixed. In Free-Market Economies, which are essentially capitalist economies, businesses and individuals have the freedom to pursue their own economic interests, buying and selling goods on a competitive market, which naturally determines a fair price for goods and services. A Command Economy is also known as a Centrally Planned Economy because the central, or national, government plans the economy. Generally, communist states have command economies, although China has been moving recently toward a capitalist economy. In a communist society, the central government controls the entire economy, allocating resources and dictating prices for goods and services. A Mixed Economy combines elements of free-market and command economies. Even among free-market states, the government usually takes some action to direct the economy. These moves are made for a variety of reasons; for example, some are designed to protect certain industries or help consumers. In economic language, this means that most states have mixed economies.

Who are the Asian Tigers and why are they important?

They are (Hong Kong, South Korea, Singapore, and Taiwan) known because they had very high growth rates (they became rich very fast) and fast industrialization between the early 1960s and 1990s. Four economies are currently well rich economies (developed countries).

Who are the three participants in the circular flow model?

Thus, the three-sector model includes (1) households, (2) firms, and (3) government. It excludes the financial sector and the foreign sector. The government sector consists of the economic activities of local, state and federal governments. Flows from households and firms to government are in the form of taxes.

In which market is the "what to produce" question answered in a free enterprise system?

Traditional Economy

What are the three economic questions every system must answer?

What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Describe the process of finding the opportunity costs for a country producing two products.

When economists refer to the "opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource.

Explain what happens in the Product Market

product market. The marketplace in which a final good or service is bought and sold. A product market does not include trading in raw or other intermediate materials, and instead focuses on finished goods purchased by consumers, businesses, the public sector and foreign buyers.