Macroeconomics Lecture

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MacroeconomicsLecture 2

• Homework 1
• Chapter 2 Choice, Opportunity
• Costs, Specialization

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Homework

• Which of the following are economic goods?
  Explain why each is or is not an economic good.
• Steaks
• Houses
• Cars
• Garbage
• T-shirts

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Answer

• Steaks, houses, cars, t-shirts are economic
  goods since they are scarce and people are
  willing to pay for these goods.
• Garbage is not an economic good since people do
  not desire garbage are willing to pay to have
  less of it.

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Homework

• 5. Indicate whether each of the following
• statements is true or false. If the statement
• is false, change it to make it true.
• Positive analysis imposes the value judgments of
  one individual on the decisions of others.
• Rational self-interest is the same thing as
  selfishness.
• An economic good is scarce if it has a positive
  price.
• An economic bad is an item that has a positive
  price
• A resource is an ingredient used to make factors
  of production.

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Answer

• False - Positive should be replaced with
  normative
• False - It can be in ones self interest to be
  generous.
• True
• False A bad is something that people pay to
  have less of.
• False Resources factors of production are the
  same thing. They are used to produce goods and
  services.

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Homework

• 6. Are the following statements normative or
  positive? If a statement is normative, change it
  to a positive statement.
• The government should provide free tuition to all
  college students.
• An effective way to increase the skills of the
  work force is to provide free tuition to all
  college students.
• The government must provide job training if we
  are to compete with other countries.

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Answer

• Normative
• Positive If the government provides free
  tuition to all college students, more students
  will attend college.
• Positive
• Normative
• Positive If the govt. provides job training,
  then industries using those govt. trained workers
  will be able to produce less expensively and thus
  will be able to compete with foreign producers.

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Homework

• 9. Use economics to explain why diamonds are more
  expensive than water, when water is necessary for
  survival and diamonds are not.

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Answer 9

• Diamonds are scarcer than water.

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Chapter 2

• We will discuss
• Opportunity Costs
• The Production Possibility Curve
• Specialization Trade

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Opportunity Costs

• What are opportunity costs?
• Opportunity Costs are the highest valued
  alternatives that must be forgone when a choice
  is made.
• How are opportunity costs related to Economics?

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Opportunity Cost of Going to College

• What are the opportunity costs of going to
  college?
• Opportunity Costs
• Cost of tuition
• Cost of books
• Forgone salary
• Time with family and friends

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Tradeoffs

• Life is all about tradeoffs the giving up of one
  good or activity in order to obtain some other
  good or activity.
• What are some of the tradeoffs you have made
  decisions about in your life?

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Tradeoffs

• Every time we make a decision/tradeoff we are in
  essence weighing the costs and benefits of that
  tradeoff.
• Marginal means change, so when we compare the
  costs and benefits of a tradeoff we refer to them
  as marginal costs and marginal benefits because
  we are comparing the changes in both of them.

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Marginal Costs Marginal Benefits

• What are some marginal costs of going to college?
• What are some marginal benefits of going to
  college?

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The Production Possibility Curve

• Societies as a whole face scarcity just as
  individuals do.
• Thus, like individuals, societies must forego
  opportunities each time they make decisions
  (tradeoffs). They must weigh the marginal costs
  and marginal benefits of each choice/alternative.
• The tradeoffs facing a society are illustrated in
  a Production Possibilities Curve (PPC).

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Production Possibilities Curve

• A Production Possibilities Curve is a graphical
  representation showing the maximum quantity of
  goods and services that can be produced using
  limited resources to the fullest extent possible.

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Production Possibilities Curve
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Production Possibilities Curve

• The PPC showed us that more of one type of good
  could be produced only by reducing the quantity
  of other types of goods that are produced.
• How does the PPC represent the marginal costs and
  marginal benefits of alternate decisions?

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Marginal Costs Marginal Benefits

• If the govt. was initially producing at point B
  and decided to change production to point C, what
  are the marginal costs and marginal benefits?
• What would the marginal costs and benefits be if
  it changed production from point C to D?

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Points Inside the Production Possibilities Curve

• If production is at a point within the Production
  Possibilities Curve then this indicates that
  resources are not being fully or efficiently
  used.
• Examples?

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Points Outside the Production Possibilities Curve

• A point outside the PPC is unattainable because
  it represents an amount of production that cannot
  be obtained with the current resources available.
• What must occur for production to take place at a
  point outside the PPC?

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Shifts of the Production Possibilities Curve

• If resources are not held constant, the PPC
  shifts.
• This could indicate an increase in resources or
  an improvement in resources.

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Marginal Opportunity Cost

• The marginal opportunity cost is the amount of
  one good or service that must be given up to
  obtain one additional unit of another good or
  service, no matter how many units are being
  produced.
• The bowed out shape of the PPC indicates that
  marginal opportunity costs increase with each
  successive good that is forgone.
• This is due to specialization.

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Example
As more and more non-defense goods are produced,
the more specialized resources have to be
switched. This means higher opportunity costs.
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Specialization

• Why does specialization occur?
• Because we cannot do everything, we specialize
  where our costs are lowest.
• Examples?
• If we specialize, then how do we get other things
  that we want?

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Trade

• In theory, by specializing in activities in which
  opportunity costs are lowest and then trading,
  countries or individuals will end up with more
  than if each tried to produce everything.
• Example Haiti Dominican Republic, pg. 32
• How do the countries decide who produces what?

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Benefits of Trade
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Benefits of Trade

• Because of the difference in opportunity costs,
  it be likely that Haiti would devote its
  resources to health care and the Dominican
  Republic would devote its resources to food
  production, and the two countries would trade.
• This same line of thinking can applied to all
  individuals, firms and nations. Through
  specialization and trade, more goods can be
  acquired.

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Comparative Advantage

• Economists refer to the ability of one person or
  nation to do something at a lower opportunity
  cost than another as comparative advantage.
• In the previous example, the Dominican republic
  had a comparative advantage in food production
  and Haiti had a had a comparative advantage in
  health-care provisions.

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Comparative Advantage

• Comparative advantage applies to all cases of
  trading or exchange.
• Can you think of any examples?

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Specialization and Trade

• In theory, specialization and trade enable firms,
  individuals, and nations to obtain more than they
  would without specialization and trade.
• Trading around the globe is monitored by the
  World Trade Organization (WTO).

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What is the WTO?

• The World Trade Organization (WTO) is the only
  global international organization dealing with
  the rules of trade between nations. At its heart
  are the WTO agreements, negotiated and signed by
  the bulk of the worlds trading nations and
  ratified in their parliaments. The goal is to
  help producers of goods and services, exporters,
  and importers conduct their business.
• Source www.wto.org 

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Quick Facts on the WTO

• Location Geneva, SwitzerlandEstablished
  1 January 1995Created by Uruguay Round
  negotiations (1986-94)   Membership
  149 countries (on 11 December 2005)Budget
  175 million Swiss francs for 2006Secretariat
  staff 635Head Pascal Lamy (Director-General)
  Functions Administering WTO trade
  agreements Forum for trade negotiations Handli
  ng trade disputes Monitoring national trade
  policies Technical assistance and training for
  developing countries Cooperation with other
  international organizations
• Source www.wto.org 

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WTO Conferences

• In general, ministerial conferences are the WTOs
  highest decision-making body, meeting at least
  once every two years and providing political
  direction for the organization.
• The Sixth WTO Ministerial Conference was held in
  Hong Kong, China, 1318 December 2005.

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Who Does Free Trade the WTO Benefit?

• Read Global Trade and the Common Good
• What are your thoughts on this article?
• How do you view global trading practices?
• Do you think the WTO benefits all countries
  equally?

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The Meeting of the World Trade Organization in
Hong Kong

• Read Hard Truths.
• What is your opinion of the last meeting of the
  WTO in Hong Kong?
• What is your view of global free trade?
• Do you believe things will get better or worse
  for developing/poor nations? Why?

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Homework 2

• Page 35, 4, 5, 6.