Chapter 2 Notes: Model Building and Gains from Trade
Chapter 2 Notes: Model Building and Gains from Trade 2105
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This 3 page Class Notes was uploaded by Iris Son on Saturday October 17, 2015. The Class Notes belongs to 2105 at Georgia State University taught by Brian Hunt in Fall 2015. Since its upload, it has received 9 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at Georgia State University.
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Date Created: 10/17/15
Macroeconomics 2105 Fall 2015 Chapter 2 Model Building and Gains from Trade 1 TRADE CREATES VALUE 2 How Do Economists Study the Economy a Uses scienti c method to answer questions about observable phenomena b Positive analysis i Positive statement can be tested and validated 1 What is 2 Ex The unemployment rate is 70 is a positive statement bc it can be tested by gathering data 3 Economists concerned primarily with positive statements c Normative analysis i Normative statement cannot be tested or validated 1 What ought to be 2 Ex An unemployed worker should receive nancial assistance to help make ends meet matter of opinion d Economic Models i C eteris Paribus 1 Process of examining a change in one variable while holding everything else constant 2 Latin meaning other things being equal 3 Change one variable at a time to see what was responsible for the change ii Bestknown economic model supply and demand 1 Useful to explain how markets function iii Endogenous vs Exogenous Factors 1 Endogenous factors factors that we know about and can control 2 Exogenous factors factors beyond our control outside the model a If you add more exogenous variables to test model s performance the more realistic the test becomes iv 3 factors of an economic model 1 What we include in the model 2 The assumptions we make when choosing what to include in model 3 The outside conditions that can affect our model s performance v Danger of Faulty Assumptions 1 Can lead to spectacular policy failures a Ex Great Recession December 2007 3 Production Possibilities Frontier PPF a Economic model that illustrates combinations of outputs that a society can produce if all of its resources are being used ef ciently b Ceteris paribus technology available for production and the quantity of resources remain constant c Points represent a possible set of outcomes that the society can choose to use if it uses all of its resources ef ciently i Points along the curve show the economy is using all of its resources in the most ef cient way possible ii Points inside the curve represent an inef cient use of resources iii Points outside of the curve are desirable but not feasible unless quantity of resources were to increase new technology d Only way to get more of one good is to accept less of another if society is producing along the curve e PPF and Opportunity Cost i Opportunity cost what you gave up to acquire something else ii Since resources are not perfectly adaptable production does not expand at a constant rate iii Bowedout PPF re ects increasing opportunity cost of production 1 Law of increasing relative cost states that the opportunity cost of producing a good rises as a society produces more of it a Changes in relative cost mean that a society faces a signi cant tradeoff if it tries to produce an extremely large amount of a single good f PPF and Economic Growth i Economic growth the process that enables a society to produce more output in the future 1 Promoters of growth a New technology allows for a redeployment of the labor force that also increases production ii Factors that eXpand PPF outward 1 New technology 2 Population growth a More workers more productive 3 Quantity of resources increase 4 Benefits of Specialization and Trade a Gains from Trade i Each person will specialize in whatever they re good at and then will trade in order to acquire some of the goods that the other person produces ii Absolute advantage whoever can produce more of a good with the same quantity of resources iii Specialization leads to greater productivity 1 When they spend more time on what they do best they are able to produce more collectively and then divide the gain 2 Enables them to enjoy the gains from trade b Comparative Advantage i The ability to make a good at a lower cost than another producer ii Opportunity cost taken into consideration c Finding the Right Price to Facilitate Trade i Trade benefits both sides as long as the terms of trade fall between the opportunity costs of the trading partners 5 What is the Tradeoff Between Having More Now and Having More Later a Consumer Goods Capital Goods and Investment i Consumer good any good that is produced for present consumption 1 EX food entertainment clothing ii Capital goods help in the production of other valuable goods and services in the future 1 EX roads factories trucks computers 2 For households education capital a Time spent earning degree more attractive you are to future employers b Not a durable good but can be utilized in the future to earn more income iii Investment process of using resources to create or buy new capital 1 EX When you decide to go to college instead of working investing in your human capital 2 Effects a When relatively few resources invested in producing capital goods in the short run not very much new capital is created i New capital necessary ingredient for economic growth in the future so the longrun production possibilities curve only expands a small amount b With investment in new capital longrun production possibilities curve eXpands outward when society makes a choice to plan for the future by producing more capital good than consumer goods 3 Spend today invest tomorrow Invest today spend later Decisions decisions 4 Examples of investing in the future global economic powers of China and India a Invested significantly more on formation of capital goods than wealthier nations which resulted in much higher growth rates in these nations than in more developed countries
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