• the basics of world trade
• countries buy and sell goods and services from one another constantly

Incentive: pursuasion, bonus, motivation, money

• incentives are more than money
• incentives drive markets
• underpin effective policy
• incentives change behaviors

• limited resources, unlimited wants
• opportunity cost
• value of the next best alternative

• additional unit, one unit more
• incremental unit
• marginal benefit vs. marginal cost
• marginal benefit > marginal cost -> keep going/continue activity
• "all or nothing" cost or "on the margin"
• ex: if building a second factory will increase revenue, it's a good decision to build the new factory: the additional unit

• the foundation of trade is mutual gain
• trade moves goods from those who value them less to those who value them more (preferences, demand)
• trade introduces variety, creates wealth
• trade fascilitates higher levels of production and consumption = specialization, comparative advantages
• "low-cost" producer

trade can lower unit costs = benefit from large-scale production

• tax, middleman, regulations, transportaiton, currency conversions, time, physical obstacles (waiting, researching)

Law of supply - as prices rise, quantity supplied increases

• law of demand = negative relationship between price of a good and the quantity demanded (price more expensive, demand goes down)

• profit = revenue - cost total
• less productive uses should be discouraged (resources)

• provide others with what they value
• people with high incomes ->improve the well-being of many people
• Producers give consumers what they want, in order to earn income

• standard of living
• GDP per capita = the value of all new, final goods and services produced within a country within 1 year
• per capita: divide by the population
• ex: building luxury products versus people in Indonesia who have many, low-quality jobs
• quality of job does not necessarily contribute to high living standards

• investment in assets and skills enhance our ability to produce goods and services
• improvements in technology (Efficiency and innovation)

1. Improvements in economic organization (legal sys)

• property rights
• contract enforcement
• settlement disputes

• when directed by the invisible hand, remarkably, self interested individuals will have a strong incentive to undertake actions that promote the general prosperity of a community
• invisible hand = prices that are determined by competitive markets
• individual intends only his own gain, but is directed by the invisible hand of market prices to promote the goals of others = prosperity

• secondary effects or long-range consequences of short-run processes
• proponents of tariffs and quotas on foreign products almost always ignore the secondary effects of their policies - by limiting importation with tariffs and quotas, it initially protects US workers who make comprable products at highre cost, but secondary consequences afterward
• ex = steel quotas

• right to exclusive use
• legal protection against invaders
• right to transfer your property

1. Encourages

• wide stewardship (use of resources)
• productive use of property
• incentive to develop in beneficial ways
• wise development and conservation of resources

• open, free entry and free exit
• pressure to: opperate efficiently in markets to cater to preferences
• to out-perform rivalts
• keeps firms from: raising prices, supplying bad products, supplying bad service

3 ways regulation reduces trade

1. limits entry into business and occupations
2. substitutes political authority for rule of law (nationalize property where gov't takes all, protect certain industries and limiting effects of competition, selective waiving of tarrifs)
3. imposes price controls

• price ceiling = artificially low price relative to market equilibrium (rent control)
• price floor = articifially high (minimum wage)

1. capital market = market for stock, real estate, businesses, lonable funds
2. capital investment = construction and develoment of long-lasting resources designed to help us grow more in the future
3. efficient = channels investments into wealth-creating projects

• monetary policy = tool to change the supply of money. print more money, change required reserves, buying and selling of bonds

-high tax rates discourage work effort and reduce the productivity of labor

-people work less (work at home, work fewer hours, retire eariler, take jobs with lower pay but more perks, leave the countryand go work elsewhere)

-high tax ratess will reduce both the level and efficiency of capital formation

- the marginal tax rate is the share of additional income that is taxed away at any income level

• free trade = people are permitted to uy and sell as they want w/o restrictions. there are tariffs, quotas, or other barriers imposed. free trade is of course also voluntary
• seller that can produce at lowest cost has comparative advantage
• absolute advantage = indicates the nation that can produce the largest quantity of a good

1. people of a nation benefit if they can acquire a product or service through trade more cheaply than they can produce it domestically
2. int'l trade allows domestic producers and consumers to benefit from the economics of scale typical of many large operations
3. int'l trade promotes competition in domestic markets and allows consumers to purchase a variety of goods at lower prices

factors that cause the average cost of proucing something to fall as the volume of its output increases

- ex: cost of proudcing a good is unrelated to the number of that good sold

-look at int'l trade ex's in text

relationship to GDP? as EFW gets higher, GDP is usually higher too

• index that measures the extent to which a country's institutions and policies are consistent with economic freedom; that is, with personal choice, private ownership, voluntary exchange, and competitive markets
• reflects elements of economic progress

• food stamps
• social security
• medicare
• gov't taking money from one source and transferring it to another

America only producing one product and import other products. Only produce the product they are best at producing.

-Ex: US making pharmaceudicals and importing TV's

• Outsourcing is cheaper, so they can produce more efficiently
• transition to other jobs in US

• protecting domestic producers
• consumers lose from tariff and foreign producers
• domestic producer and gov't win

• Most common arguments:

1. trade reduces the number of US jobs
2. it's wrong to trade with countries that use child labor
3. we need to keep some industries for reasons of nat'l security
4. we need to keep some "key" industries b/c of beneficial spillovers onto other sectors

• Trade and Jobs

1. Tariffs raise the price of protected goods
2. consumers have less money to spend on other goods
3. jobs are lost in other industries, hard to see

• increased imports into US result in higher exports from the US

1. the US dollars we spend on other country's good are used to buy our goods
2. jobs are created in US exporting industries

• Child labor

1. restricting imports made by child labor may do more harm than good
2. children work out of necessity-what else will they do?
3. Alternatives are worse

• Child labor is a poverty problem not a trade problem

• Trade and Nat'l Security

1. some industries probably should be protected
2. subject to great abuse - almost every industry can make this argument for protection

• Key industries

1. some industries are characterized by large spillovers to other industries
2. example: computer chips are alway sused in some other product, protection benefits a large # of firms

• two comments

1. subsidy is a better option than a tariff
2. hard to determine which industries are key

Selling exports at a price that is too low, a price "below value" or "fair value

• either = 1) export price is lower than the price charged for comparable domestic sales in the home market of the exporter

2) the export price is lower than the full unit cost (including a profit margin)

• ex: Golf carts coming from Poland, no market for golf carts in Poland so they are dumped in US

• Firm uses temporarily low prices to drive out competition, and then raise the price when they are the only firm winning
• very risky, highly unlikely due to large losses

• Occurs during a recession = demand drops
• if firms want to move their goods they have to drop the price
• natural type of dumping

• Clear out excess inventories
• ex = low prices ater Valentine's Day
• Natural

• Contrasts predatory
• Permanent low-prices
• ex: price in US is always lower than the price of that thing in Japan (If the price is always low, we should be happy to take it)

• IMF = Financial Stability

• World Bank = Ending Poverty
• Text says that these organizations are ineffective and wasteful
• Governments recieving money and very corrupt

• "But America wasn't wealthy because the other nations were poor."

1. US Standard of living higher, not at expense of poorer nations pg. 94
2. Poor countries have benefited as well = creating employment opportunities that didn't exist before
3. their standards of living is higher now too from trading with US

• Why?

1. Self-sufficiency = providing everything that you need. Household vs nation self-sufficiency
2. Making everything for yourself takes too much time and effort, decrease variety to consume
3. ex = Ed's wife making bread
4. If US stopped importing, impossible to produce the same volume of goods

• What is "The Choice?"
• "If a group of Americans do not compete well in the global market b/c their skills are readily available around the globe, how should America respond?"
• Hamburger flippers vs. computer software engineers. can't turn computer software person into flipper by banning software

1. The Choice = making decisions about the future of US economy
2. Choice between protectionism and free trade