· How Trade Creates Wealth
o Trade: a non-technical form of production
o Trade also makes it possible for many types of production
o A reshuffling of stuff between people who value it more may make society “richer”
o Example: Time to do yardwork
· Production Possibilities Frontier
o Properties:
§ 1) All points on or inside of graph are achievable
§ 2) Absolute Advantage
§ 3) All points to right of graph are not achievable
§ 4) Points on the PPF are the most “productively efficient”
§ 5) The slope of the PPF curve has meaning
§ 6) The Change in slope has meaning
o Country A can produce either 1000 guns or 2000 units of butter
o However, if he budgets his time in between, he can produce a maximum of total goods along a curve
o Any point to the left of the curve is possible to manufactured by Country B
o However, Country B can produce 500 guns or 3000 units of butter
o Conclusion: Country B has an absolute advantage in producing butter while Country A has an absolute advantage in producing guns
o Along the PPF: there are combinations of producing goods which are the best possible output
§ At one point on the curve is at the point where you produce the most advantageous number of goods
o Law of Diminishing Returns/Law of Increasing Opportunity Costs: Tradeoffs for good get worse over time as you work towards the x- or y-axis of graph because with each additional good given up to produce the other good, there is a decrease in marginal returns
o PPF takes into factor three things:
§ 1) Resources
§ 2) Technology
§ 3) Trade
o Effect Economic Growth has on PPF:
§ Can move curve totally outward or inward
§ Can move parts of curve farther right or left based on
o Comparative Advantage
§ Rochester Grads or Cornell Grads
§ Can produce either wine or cameras
§ Rochester: 10 bottles of wine max or 5 cameras for year max
§ Cornell: 5 bottles of wine max or 4 cameras for year max
o Absolute vs. Comparative
§ Computers vs. Grass cutting
§ Person A: 3 computers and 10 lawns of grass cutting
§ Person B : 1 computer and 5 lawns of grass cutting
§ Person A has absolute advantage in both, but comparative advantage in computers
§ Person B has comparative advantage in lawns of grass cutting
· Normative vs. Positive Statement
o Normative statements: Describes what the world ought to be
o Positive Statements: Describes how the world is
o Europeans say we live in a “Coca-Cola” civilization
§ Our society is incredibly consumerist
o Example:
o Normative: Universal Health Care spreads resources out over a larger population -à Positive: More people will receive health care at a lower quality
o Normative: Universal Health Care needs to be paid for à Positive: We need to increase taxes to pay for UHC
· Efficiency
o Getting the most out of life
§ Or
o Making the “pie” as big as possible
o Includes use of resources, what we produce, and relative costs
o All voluntary exchanges are efficient
§ Applies to individual choices
§ If we act in the best way our knowledge allows us to
· Equity (not equality)
o Economic outcomes cannot be
o Vertical vs. Horizontal (in terms of taxes)
§ Horizontal Equity: the idea that people with a similar ability to pay taxes should pay the same or similar amounts
§ Vertical Equity: the idea that people with a greater ability to pay taxes should pay more
o Most people think that everyone should be treated the same
§ Almost never followed
· Y = C + I
o C = consumption
o I = investment
o Y= Gross Economy
o What’s more important, consumption or investment?
· Output equals Income according to the circular flow model
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