Economic Issues • Economics is the study of how society allocates its scarce resources among competing demand to improve human welfare. • Scarcity exists because human wants exceed the resources available to satisfy them. • Scarcity implies that choices must be made and economics is the study of those choices. Specifically, economics studies how societies answer the following questions: – What will be produced? – How it will be produced? – For whom will it be produced?
Transcript
Economic Issues• Economics is the study of how society allocates its scarce
resources among competing demand to improve human welfare.
• Scarcity exists because human wants exceed the resources available to satisfy them.
• Scarcity implies that choices must be made and economics is the study of those choices. Specifically, economics studies how societies answer the following questions:– What will be produced?– How it will be produced?– For whom will it be produced?
Economic Thinking
• Economics as a social Science• The scientific method
– Observation, Theory, and Testing– Assumptions and ceteris paribus– Avoiding flaws in logical thinking
• Ergo hoc post proper hoc – Correlation does not equal causation
• Fallacy of Composition/Division
• Microeconomics vs. Macroeconomics
Economics and Economists
• Positive versus normative
• Avoiding unintended consequences
• Scientist, advisor and citizen
• Scientific judgment, values, perception versus reality
Economics Models and Issuesan Introduction
• The art of making models = making them simple and effective
• Example: circular flow – what, how and for whom questions.– overall economy, role of economic agents, output and
income, product and factor markets
• Example: production possibilities frontier (PPF) -efficiency, tradeoffs, opportunity costs, law of increasing
Opportunity Cost of going from 0 units of Pizza to 1 unit of pizza
Opportunity Cost of going from 1 unit of Pizza to 2 units of pizza
Opportunity Cost of going from 2 units of Pizza to 3 units of pizza
Figure 7 Illustrating Increasing Opportunity Cost
Production Possibilities Frontier
Pizza
So
da
0 1 2 3
10987654321
Opportunity Cost of going from 0 units of Pizza to 1 unit of pizza
Opportunity Cost of going from 1 unit of Pizza to 2 units of pizza
Opportunity Cost of going from 2 units of Pizza to 3 units of pizza
The Power of Trade
• Voluntary versus involuntary exchange
• An intuitive approach to gains in trade
• Using an economic model to demonstrate the gains from trade
Voluntary Exchange
• All parties to a voluntary exchange must be made better off
• Allow for specialization and division of labor
• Increase interdependence
• Promote cooperation rather than conflict
An intuitive Approach to Gains From Trade
• Self-sufficiency – Pros: independence– Cons: loss of efficiency, variety in consumption
and production
• Trade with Yakima?
• Trade with other states?
• Trade with other nations?
Gains from Trade: An Economic Model
• Good model building: prove the point and make it simple
• Assumptions = things held true during the analysis = simplification
• Assumptions can be changed later to explore their implications
The Model
• Assumptions:– Two individuals – rancher and a farmer– Two goods – meat and potatoes– Each work eight hours a day– Farmer takes 60min/oz meat and 15min/oz
potatoes– Rancher takes 20min/oz of meat and 10min/oz
of potatoes
• Absolute advantage– Rancher than farmer is more efficient and producing both meat and
potatoes
• Comparative advantage– The farmer is comparatively better at producing potatoes than the
rancher.
• Comparative advantage and opportunity cost– The person with the lower opportunity cost has a comparative
advantage– Someone always has a comparative advantage in the production of
a least one thing
PPF and Production in a Simple Economy
• How much can be produced?
• Need to know:– Total time divided by time/output = total
output, or– output/time multiplied by total time = total
output
Table 1 The Production Opportunities of the Farmer and Rancher
• Either way specializing and trading means either more meat or potatoes
History of Trade
• Tribal to feudal times
• Adam Smith (1776) and David Ricardo (1817)
• The costs of not trading (e.g. lamb example)
• Distribution impacts: consumers win but some producers and workers lose
• The cost of protectionism
NAFTA, GATT, and the WTO• NAFTA: North American Free Trade Agreement
– An agreement between the United States, Canada and Mexico to have substantially free trade. (Some tariffs and quotas are permissible under certain circumstances.)
• GATT: General Agreement on Tariffs and Trade– A multi-nation agreement specifying conditions under
which tariffs, quotas and non-tariff barriers are permissible.
• WTO: World Trade Organization– An organization designed to settle trade disputes.
The Benefits of Free Trade
• Free trade makes each trading partner better off than it would have been without trade.
• Countries export goods to other nations because the producing country can make the good at a lower opportunity cost than the importing country.
Why Do We Need Trade Agreements?
• It is logical to ask “if trade is so good why do we need an agreement to engage in it?”
• The answer is that a country can make itself better off by engaging in Strategic Trade Policies designed to get more of the benefits from trade in a country than would exist under free trade.
• Countries that do this increase the gains from trade to themselves but it is less than the losses to everyone else.
Example of Strategic Trade • Boeing vs. AIRBUS
– Boeing had significant market power in the production of airliners prior to the existence of AIRBUS.
– Britain and France gave AIRBUS protection against Boeing’s exports to European airlines.
– In doing so they might have made themselves better off. Boeing was worse off by more than AIRBUS (and the European consumer and taxpayer) were made better off.
What Trade Agreements Prevent (or discourage)
• Tariffs– A tax on imports.
• Quotas– A limit on imports.
• Non-tariff barriers– A regulatory means of limiting imports.
Alphabet Soup: NAFTA
• North American Free Trade Agreement• Creates a (relatively) free trade zone in North
America.• Includes Canada, Mexico and the United States.• Passage
– Envisioned by President Reagan in the 1980’s.– Negotiated by President Bush (G.H.W.) in the late
1980s and early 1990s.– Enacted by President Clinton.
Alphabet Soup: GATT
• General Agreement on Tariffs and Trade• Came into existence shortly after WWII
– Uruguay Round set the latest rules
• A world agreement between more than 100 nations.
• NOT a free trade agreement – It sets conditions under which tariffs, quotas and
non-tariff barriers are acceptable.
Alphabet Soup: WTO
• World Trade Organization
• Set up with GATT but had little power until the Uruguay Round of GATT.
• Serves as a “court” where countries can argue who is in the right in a trade dispute.
• Has no enforcement authority.
The Battle in Seattle (and other similar protests)
• December of 1999 riots broke out in the streets of Seattle with protestors voicing displeasure at– NAFTA
– WTO
– Globalization
– The effect of trade on American jobs.
– The effect of trade on the environment, worker safety and child labor standards.
Are Trade Agreements Working?
• The effects of these agreements are often overstated because trade was increasing before they were enacted.
• Trade agreements have (in isolation from the trend) increased trade somewhat, but have not had the – Dramatically positive impacts envisioned by free-trade
advocates.– Dramatically negative impacts envisioned by detractors
of globalization.
The Politics of Free Trade
• There are winners and losers from freer trade.– The winners have tended to be people who are
educated and highly skilled.– The losers have tended to be people in
manufacturing who have little education.– Cost of Saving a Job
• Free trade’s winners are harder to identify that its losers.– A person who loses a job when the plant they work for
moves to a different country can easily identify themselves as a loser in free trade.
– People who are hired because of an increase in exports may not see the reason.
– People who are hired because of higher national incomes usually do not attribute their hiring to free trade policies.
The Bottom Line• Trade increases the GDP of the trading countries.• Trade can hurt key constituencies with political power.• Because the gains to the winners of free trade more
then offset the losses to the losers, economists generally view free trade agreements as good.
• Economists suggest that the losers from free trade agreements (unemployed workers) can (and should) be compensated with retraining opportunities. The implementing legislation of NAFTA provides for this.
