BruReff Guide to Fundamental Macro Models

Transcription

Basic
Economic
Macroeconomics
Concepts
in
©Dick Brunelle and Steve Reff
Economics is a social science that focuses on
decisions in how to use the resources of
individuals, firms, and society.
Microeconomics deals with the decisions of
individuals and firms and specific markets.
Macroeconomics deals with the decisions of all
individuals and all firms and the aggregation of
all markets.
Although the microeconomic foundations of the
big picture economy can be important, it is not
always useful to think of the macro-economy as
just a bigger view of the various micro markets.
Beware of one of the key fallacies that can lead
to false conclusions: the fallacy of composition.
It is wrong to think that what is true of the
individual is true of the whole and vice-versa.
What is true for an individual or a firm or a
particular market is not necessarily true for the
aggregate economy.
In studying the basic economic concepts for
Macroeconomics we cover topics that are
relevant to both microeconomics and
macroeconomics.
What are the resources that are relevant?
Land
=
Natural Resources
Labor
=
Human Resources
Capital =
Capital Resources
The production of goods and services by an
economy is dependent on combining available
resources.
At any given time the productivity of these
resources is limited by the technology available.
What is the role of money?
Money is important but it is not considered to
be a real resource. If we are talking about an
individual or a firm, then having more money
than others allows one to buy more goods and
services or in the case of the firm buy more of
the available resources. Money is a claim on
resources and outputs. We will look at the role
of money in much more detail in another
section.
At any given moment in time an economy has a
finite quantity of labor, capital, and natural
resources. The limited quantity of resources
means that decisions have to be made
regarding the use of these resources. What
goods and services should be produced? How
will these goods and services be produced?
Who will get the benefit of these goods and
services?
The answers are simple, right? You make the
goods and services and I get them! Well this
might work for me but it probably does not
work so well for you.
The Economic Problem is the problem stated
above: What to produce? How to produce it?
And for whom is it produced?
It is assumed that consumers have unlimited
wants and that economies have limited
resources. In economic jargon this means that
there is scarcity. Resources are scarce and so
people, firms, and society have to make
choices.
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Because we all have to make choices every
decision has a cost. If you have $100 to spend
on a shopping trip to buy clothes for school,
there will be items that you want but will not be
able to buy. If after buying several items you
have to choose between a blue sweater or a
green sweater, both of which you want, you will
have an opportunity cost. If you buy the blue
sweater, you will have to forego the green
sweater. Conversely, if you buy the green
sweater you will have to forego the blue
sweater.
Historically the answers to the what, how and
who questions have been categorized into
three types of economies:
Tradition: Custom determines the answers to
these questions.
Command: Government decides the answer to
these questions.
Markets: Markets decide the answers to these
questions.
In any economy we can find examples of all of
these decision-making influences. Despite this
one type usually dominates.
In the United States and in many other
countries the majority of economic decisions
are made by markets with a significant amount
of decisions made by government. For the most
part, markets have proven to be a most
efficient way to allocate resources for a
majority of goods and services. Some goods and
services are more efficiently produced by
government: police, fire departments, schools,
roads, etc.
Now we can always debate where to draw the
line but we will leave that up to you.
The fact is that the United States and other
advanced nations are mixed economies where
both private markets and government provide
some of the goods and services.
Markets are extremely important to the
economic efficiency of a country.
But we need to understand that there are many
different markets and that markets do not exist
in a vacuum without government and
institutions.
It is important that you do not engage in
thought terminating clichés such as “the
market” or “the government”. There are many
types of markets and many types of
governments.
When markets work well they have support of
institutions.
Markets work best
conditions exist:
when
the
following
1. There are many suppliers with none
capable of influencing the market. In
other words there is a great deal of
competition that encourages efficient
use of resources, quality of product,
and normal profits.
2. There are many consumers with none
capable of influencing the market.
3. Both sellers and buyers have perfect
information.
4. There are no externalized costs and
benefits.
5. Both sellers and buyers live up to their
agreements.
When the above conditions
present markets can still work
be as efficient as they would
conditions are met. This is
are not all
but may not
be if all the
a topic for
2
Microeconomics
but
it
is
worth
remembering
as
we
go
through
macroeconomics.
Models
The models that we are dealing with under
conditions of ceribus paribus are similar to the
above simplistic description of archery. We
understand how the arrow goes in the right
direction.
Our job in this introduction of
macroeconomics is to understand some of
the basic models that are prevalent in the
discipline.
But being an expert archer requires the ability
to take other variables into consideration.
A model is a simplified view of some theory
in economics. It is important for the
student to understand and be able to use
these models.
What is the direction of the wind?
Models are not perfect replicas of reality.
Nonetheless, they help us understand some
of the economic concept and theories. A
model is useful if it helps us predict a
possible outcome.
What is the weight of the arrow?
For the most part the principles of
economics deal with models that are
limited by the restriction of ceteris paribus.
This means that we are going to assume
that only one variable changes as we
predict a result.
Let’s try our hand at creating a model to
explain the limitations of ceteris paribus.
Analogy of the Arrow
Let’s compare the simple models in the
principles of Macroeconomics to shooting an
arrow with a bow. For those of you who have
never shot a bow or who have only shot a bow
in gym class, the objective is to pull the
bowstring back, aim at the target, and release
the bowstring. You should get the arrow going
in the right direction.
What is the pressure of the bowstring?
What is the strength of the wind?
What is the density of the air?
What is the specific distance of the target?
I am sure that expert archers could add to this
list.
And after all variables are considered
sometimes an unexpected gust of wind comes
up.
So what we need to accomplish is the mastery
of the simple models. We need to understand
how to predict the direction of the
macroeconomic arrow by understanding the
following models.
Remember, economics is not a branch of
theology. These are not some sort of
absolute truths. The models can help us
understand the economy. But we should
also be aware of the limitations of these
models. We should realize that not all
models work all the time.
Models are a good way of simplifying
complex ideas.
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Here are the key models that you must
master as part of your study of this unit on
basic concepts:
A. The production possibilities model
B. The comparative advantage model
C. The circular-flow model
Skills to master in this unit:
1. Interpreting a production possibilities graph
2. Converting a table of information into a
productions possibilities graph
3. Computing comparative advantage
4. Using a table of information to compute
comparative advantage
5. Using constant cost production possibilities
to compute comparative advantage
6. Understanding the flows of outputs,
resources and income in the circular flow
model
MODEL ONE: PRODUCTION POSSIBILITIES
You have probably heard the expression “a
picture is worth a thousand words”; well, to an
economist a graph is word even more.
Pretty simple graph, isn’t it?
It has a vertical axis, a horizontal axis and a
curved line.
The objective of this graph is to illustrate the
production choices of an economic entity.
Since we are studying macroeconomics let’s
make the entity a country. Let’s called the
country Simpleland, Heck, this is our model we
can call it anything we want.
One of the important things to do with any
graph is to make sure that the graph is labeled
correctly. So let’s add our label for the graph’s
identity:
The first graph that we will deal with is the
production possibilities graph (PP graph).
The following PP graph incorporates the
concept of increasing cost.
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Now this graph needs two more labels. One is
for the vertical axis and one is for the horizontal
axis.
Now it becomes apparent that this is a very
simple model and we are making the
assumption that the country of Simpleland can
only produce two goods with its resources. (or if
we want two categories of goods like capital
goods and consumer goods.)
Frequently you will encounter ppc graphs
without the quantities specified on the vertical
and horizontal axis. But we should remember
that the axes represent the quantity of output
with zero output at the origin.
Decisions, decisions, decisions, this is already
getting like economics. We could label one axis
apples and the other one oranges, or we could
use televisions on one and computers on the
other, etc. As long as we understand that we
are making the assumption that this is a two
product market.
Let’s go with gadgets and widgets.
We can eliminate the label for production
possibilities curve because we understand that
the
curve
represents
the
maximum
combination of gadgets and widgets that can be
produced by the country of Simpleland.
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So let’s include the quantities:
Note that the quantities are expressed
in units of a thousand (000).
The above graph illustrates 5
combinations of output.
Remember that anywhere on the ppc
represents a combination of outputs
that fully employs the resources.
Combinations B, C, and D represent
possible combinations of gadgets and
widgets that could be produced if
resources were fully and efficiently
employed.
Combination A represents an output
that is below the PPC. Oh, oh, the
country of Simpleland is in a recession.
Combination E represents a level of
output that is not attainable currently
in the country of Simpleland. There are
not enough resources to produce this
output combination under the current
level of technology.
On the above graph:
Point a = 3,000 gadgets and 1,000 widgets
Point b = about 5800 gadgets and 1,000 widgets
Point c = about 4400 gadgets and 3,000 widgets
Point d= 2,000 gadgets and about 5,100 widgets
Point e= 6000 gadgets and about 4,500 widgets
Let’s make sure we understand exactly
how to interpret a PPC graph.
Look at the following graph:
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Now what we want is the opportunity cost
of producing each additional unit of
widgets. We can estimate this by dividing
the change in lost gadgets (foregone
gadgets) by the change in additional
widgets.
Look at the ppc graph above. There are 8
production possible levels illustrated: points A
through H. All are on the ppc. Therefore, all
are economically efficient. At point H,
Simpleland is producing 6 widgets and 0
gadgets. What if it wants to produce some
gadgets? It has to forego the production of
some of the widgets. Let’s look at the possible
combinations on the above graph.
As we move from 0 production of widgets to
1000 unit (combination B) we forego 300 units
of gadgets. 300 divided by 1000 = .3 unit of
gadgets foregone for every additional unit of
widgets produced.
At combination C we add an additional 1300
units of widgets and forego 1000 units of
gadgets. The opportunity cost = 1000 divided
by 1300 or .77.
The above table represents the 8
combinations illustrated on the graph
above.
We continue doing this and we see that as we
produce more widgets the opportunity costs
continues to increase: .3 to .77, to.83, to 1, etc.
Now let’s assume we start at point A where
0 widgets are produced and 6300 gadgets
are produce. Let’s measure the quantity of
foregone gadgets at each level of increased
production of widgets (B to C to D to E to F
to G and to H.
This illustrates the concept of increasing costs.
Increasing Costs: As additional units of one
product are produced an increasing quantity of
the other is sacrificed. This occurs because
some of the resources are more suitable to the
production of widgets and some are more
suitable to the production of gadgets.
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This is why the production possibilities curve is
bowed out (convex).
Now we can also use a constant-cost
production possibilities curve. Constant cost
means that the opportunity cost does not
increase. It remains the same as production
increases.
For each additional unit of wheat that is
produced ½ of a unit of barley is foregone.
For each additional unit of barley that is
produced 2 units of wheat is foregone.
The opportunity cost does not change as
additional units of wheat or barley is produced.
Therefore, we have a constant cost production
possibilities curve.
The production possibilities curve can also be
referred to as the production possibilities
frontier.
The Production Possibilities “Curve” is a straight
line on the graph above. The assumption is that
all of the resources are equally productive in
the production of wheat or barley.
The above table represents the data shown on
the above graph.
We can now calculate the opportunity cost (OC)
for producing additional units of wheat and that
for producing additional units of barley.
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Let’s take a look at some other variations of the
use of the production possibilities model.
The above graph shows that an increase in a
resource or in technology would shift the
production possibilities frontier from ppc1 to
ppc2.
The above model represents the potential
production possibilities of an economy at a
given moment of time with a given amount of
resources and a given level of technology.
So what can change?
A. One or more of the resources can change
over time.
This shift in the ppc outward represents
economic growth.
If an economy were to experience a decrease in
resources or a loss of technology, we could
illustrate this regression by an inward shift of
the ppc curve:
B. The level of technology can change over
time.
How would we illustrate an increase in
resources or an increase in technology?
Any increase in the above would be illustrated
by a rightward shift of the ppc:
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What if a technology was developed that only
had an effect on the production of one good?
technology that only impacts the production of
capital goods.
A last note on technology: technology makes all
the resources more productive. This is what
economists refer to as factor productivity. It is
the key to sustainable growth if it is done
correctly and does not create other problems
such as pollution.
Comparative Advantage Model
The comparative advantage model is used to
illustrate why specialization by each of two
entities in the production of two goods will lead
to more total production of both goods.
The above graph illustrates the effect of an
increase in technology that only impacts the
production of consumer goods. Note that the
ppc 2 only shifts out on the horizontal axis that
represents the production of consumer goods.
This
model
is
frequently
used
in
microeconomics to show why individuals or
firms should specialize in producing the good at
which that entity has the lowest opportunity
cost of production. In macroeconomics it is
used frequently to illustrate why a country
should specialize in the production of the good
at which it has the lowest opportunity cost.
The important skills that each student needs are
the ability to
A. differentiate between absolute advantage
and comparative
B. calculate comparative advantage and
determine which entity should specialize in
which product
C. determine what terms of trade are
acceptable to both parties
In the above, the curve shifts out on the vertical
axis that represents the production of capital
goods. This illustrates the development of
Let’s look at an example,
Reffland can produce 4,000 tons of corn or
8,000 tons of wheat using all of its available
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resources. Bruland can produce 2,000 tons of
corn and 6,000 tons of wheat using all of its
available resources. (Yes, they could each
produce some combination of both corn and
wheat.)
If the information gives two different output
quantities for the products involved, then it is
an output problem.
Putting this in a matrix we get the following:
If the problem stated that Reffland can produce
1,000 bushels of corn on 10 acres of land and
Bruland can produce 1,000 bushels of corn on
15 acres of land, the problem is describing a
difference in inputs to produce the same
amount of output (corn). Inputs are resources.
They are human, natural, or capital resources
that are used to make the product that is the
output described.
We have transferred the information to the
table above. We can determine who has the
absolute advantage in the production of corn
and of wheat.
Some other typical inputs used in an input
problem:
Reffland had the absolute advantage in the
production of corn because 4,000 tons is
greater than 2,000 tons. Reffland also has the
absolute advantage in the production of wheat:
8,000 tons is greater than 6,000 tons.
Above, we have different outputs for corn and
wheat for each country. It is an output
problem.
Man-hours
Units of Labor
Machine-hours
Units of capital
Quantity of land (acres)
Absolute Advantage = ability to produce more
of a product than the other entity.
OK, so we agree that the following:
But to determine who should specialize in
which product the student of basic
macroeconomics must be able to determine
which entity has the comparative advantage.
Comparative Advantage = ability to produce a
product with the lowest opportunity cost.
Calculating Comparative Advantage
is an output problem.
First determine if the problem is an output
problem or an input problem.
We set up the matrix to include a box for the
opportunity cost for each country in the
production of both goods.
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We now are trying to determine how much
wheat is foregone for each unit of corn
produced and how much corn is foregone for
each unit of wheat produced.
We can simplify the math by reducing the
numbers proportionally.
The opportunity cost (foregone wheat) for
every unit of corn produced by Reffland is 8/4
or 2 units of wheat.
The quantities are expressed in thousands of
tons. We can eliminate the tons and the
thousands and deal with the basic numbers as
follows:
The opportunity cost (foregone corn) for every
unit of wheat produced by Reffland is 4/8 or ½
of a unit of corn.
Now since this is an output problem, we create
a fraction with the number in the box of the
foregone good in the numerator (top of the
fraction) and the number of the good being
produced in the denominator (bottom of the
fraction.
The opportunity cost (foregone wheat) for
every unit of corn produced by Bruland is 6/2 or
3 units of wheat.
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Remember to calculate comparative advantage
we determine the lowest opportunity cost by
simplifying the numbers, creating a 4 X 4 matrix,
putting the number of the foregone good in the
numerator.
What about an input problem?
The opportunity cost (foregone corn) for every
unit of wheat produced by Bruland is 2/6 or 1/3
of a unit of wheat.
Once we have made these calculations we can
determine the comparative advantage in the
productions of wheat and corn.
Let’s try one.
Reffland can produce 1,000 units of corn on 6
acres of land and 1,000 units of wheat on 8
units of land. Bruland can produce 1,000 units
of corn on 3 acres of land and 1,000 units of
wheat on 2 acres of land.
Let’s put this information in a table:
In our matrix we have determined that Reffland
has an opportunity cost of 2 units of wheat for
every unit of corn produced and Bruland has an
opportunity cost of 3 units of wheat for every
unit of corn produced.
Reffland has the comparative advantage in the
production of corn!
Bruland’s opportunity cost of producing wheat
is to forego 1/3 of a unit of corn; but Reffland’s
opportunity cost of producing wheat is to
forego ½ of a unit of corn. 1/3 is less than ½.
Bruland has the lowest opportunity cost of
producing wheat.
Bruland has the comparative advantage in the
production of wheat!
Note: the numbers in the box for an input
problem are the amount of inputs it takes to
produce the same quantity of output. In this
sample the resource or input is acres of land.
To determine absolute advantage when
different inputs are given, it is the entity that
requires the fewest units of input that has the
absolute advantage.
In the above, Bruland has the absolute
advantage in the production of corn. 3 acres are
less than 6 acres. Bruland also has the absolute
advantage in the production of wheat. 2 acres is
less than 6 acres.
Now to determine comparative advantage we
need to compute the opportunity cost. Since
this is an input problem we will put the number
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of the foregone good in the denominator of our
fraction (bottom).
For every unit of corn Reffland produces it will
forego the production of ¾ of a unit of wheat.
For every unit of wheat Bruland produces it will
have an opportunity cost of 2/3 of a unit of
corn.
For every unit of wheat Reffland produces it will
forego the production of 1 and 1/3 units of
corn.
For every unit of corn Bruland produces it will
have an opportunity cost of 1 and ½ units of
wheat foregone.
Comparing the opportunity costs of Reffland
and Bruland we see that Reffland has a lower
opportunity cost in the production of corn. ¾ of
a unit of wheat foregone is less than 1 and ½
units. Therefore, Reffland has the comparative
advantage in the production of corn.
production of wheat. Foregoing 2/3 of a unit of
corn is less than foregoing 1 and 1/3 units.
Specialization
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The term specialization is used to indicate
which party in a comparative advantage should
produce which of the two goods involved.
scooters it must get in return for trading at least
2 bicycles for every 1 scooter that it produces
and trades.
Therefore, one concludes that the party with
the comparative advantage in the production of
the product (the lowest opportunity cost)
should specialize in its production.
Bruland will specialize in bicycles because it has
the lowest opportunity cost (foregoes only 1/3
of a scooter. Bruland must get at least 1
scooter for every 3 bicycles it makes and trades.
Terms of Trade
Which terms of trade work?
In the Comparative Advantage model we
determine who specializes in which product.
The implication is that each party specializes in
one good and then the two parties will trade
with each other.
Let’s look at 5 possible options:
In order for the terms of trade to be acceptable,
each party must trade for the product that it
does not make and get at least what it is
foregoing by not producing that product itself.
The key then is the opportunity cost of making
the product it specializes in. One could argue
that a party should get at least a smidge more
than its opportunity cost, but let us keep it
simple.
Option A: 2 bicycles for 3 scooters
Option B: 5 bicycles for 2 scooters
Option C: 3 bicycles for 2 scooters
Option D: 10 bicycles for 4 scooters
Option E: 12 bicycles for 3 scooters
Can you identify which of the above 5 options
would result in trade between Reffland and
Bruland.
We must calculate the benefit that each
country receives from trade.
Let’s look at the following:
Let’s create a table:
In the above comparative analysis we
determine that Reffland will specialize in the
production of scooters because it has the
lowest opportunity cost (foregoes only 2
bicycles.) Therefore, if Reffland specializes in
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We have already decided that Bruland will
specialize in bicycles and Reffland in scooters.
Completing our table:
Bruland will export bicycles and import
scooters.
Reffland will export scooters and import
bicycles.
What we need to do now is determine the
benefit that each receives from the various
options listed. We calculate the benefit by
dividing the quantity imported by the quantity
exported. This gives us the benefit per unit
exported.
We have calculated the benefits that each
country receives if it exported under the terms
of trade options A through E.
Now let’s see which options work for both
countries:
In option A above we determine that if Bruland
exports bicycles and imports scooters it will
receive 1.5 scooters for each bicycle exported.
In option A above we determine that if Reffland
exports scooters and imports bicycles it will
receive 2/3 of a bicycle for each scooter
exported.
We compare the benefit of specializing and
exporting to the opportunity cost of producing
the good exported.
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Option A: works for Bruland but not for
Reffland. No trade occurs. Reffland would gain
more by producing the bicycles itself.
Option B: works for both. Trade will occur.
Option C: works for Bruland but not for
Reffland. No trade will occur.
Option D: works for both. Trade will occur.
The above production possibilities graph
indicates that Bruland can produce 8 million
computers and 0 HD TVs, or 0 computers and 6
million HD TV’s, or some combination along the
constant cost PPC curve. Reffland can produce 6
million computers and 0 HD TVs or 0 computers
and 3 million HD TVs or some combination
along the constant cost PPC curve.
Let’s put this information into a table
Option E: works for Reffland but not for
Bruland. No trade will occur.
Know how to calculate acceptable terms of
trade.
Combining PPC model and the
Comparative Advantage Model.
Students must be able to use the information in
a production possibilities curve to calculate
comparative advantage.
We have transferred the data from the ppc
graph to the above table.
Bruland has the absolute advantage in the
production of both computers and HD TV’s.
Now calculate the comparative advantage.
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Remember this is an output problem so the
number of the foregone good becomes the
numerator (put it on top).
Dorkland has the comparative advantage in the
production of snappets (2/3 is less than 1.)
A note on using constant cost PPC in
comparative advantage models.
At the
introductory level of Macroeconomics it is
customary to use constant cost models because
the math used to determine opportunity cost is
simple.
Reffland has the comparative advantage in the
production of computers (1/2 is less than ¾).
production of HD TV’s (1 and 1/3 is less than 2).
If an increasing cost model was used we would
have to use more complicated math to
determine at which point as costs increase
would the comparative advantage shift to the
other producer. Whew! We do not need to do
this.
Now let’s look at one more PPC graph with two
countries involved:
Circular Flow Model
The circular flow Model in Macroeconomics is
used to illustrate that sectors of the economy
are both producers and consumers and that the
income that is spent on consumption becomes
income for production (or vice-versa if you are
so inclined.)
Sectors of the Economy:
Households
Business
Government
In the above graph neither has the absolute
advantage in the production of snippets. Each
can produce a maximum of 6,000 snippets. But
we can still compute the comparative
advantage.
Orkland has the comparative advantage in the
production of snippets (1 is less than 1 and1/3.)
Foreign
Households represent all of people in an
economy organized by living groups. If you are
single living alone you are a household of 1. If
you are part of a family of 6 living together you
are a household of 6.
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Business represents the producers of goods and
services and this includes sole-proprietors,
partners, and corporations in the private sector.
Government represents all of the political units
of the economy. In the U.S. this includes city,
county, state, and federal governments.
Foreign sector represents all households,
businesses, and governments that are not part
of the national identity.
Business and government buy these resources
from households. Money is sent to the
households in return for the use of resources.
(Labor receives $ wages, capital receives $
interest, natural resources receives $ rents).
The money allows the households to purchase
the goods and services from businesses (income
to the firms) and from government (fees and
taxes to the government).
We see that income is used to buy goods and
services ($ expenditures) and that income is
earned from providing resources to business
and government. For most of us, the bulk of
our income is earned by providing labor. For
some of us income is earned through
investment made with funds available because
of wealth.
We could also include another market, the
capital market, to illustrate that accumulated
wealth is used to generate income. Do not
confuse the capital market with economic
capital. The capital market deals in financial
securities such as:
The above graph illustrates the concept of
circular flow. In the above graph we are dealing
with a closed economy to keep it simple. By
that we mean an economy without a foreign
sector.
We are looking at the resource market and the
product market. The resource market (also
called the factor market) is where government
and Firms (businesses) purchase resources from
the households. It is assumed that households
own all resources. These resources are:
a. buying stock, shares of ownership in private
corporations
b. buying bonds, loans to private firms and the
government.
In this market the financial resources are
provided to help businesses, government, and
households to acquire real capital resources
and real output.
We will look at the circular flow model in more
detail later when we examine national output
and national income.
natural resources, labor resources, and capital
resources.
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Brureff Activity Section Unit 1
Brureff Activity Book
© Dick Brunelle and Steven Reff
Unit 1: Activity 1:
The country Practiceland has a simple agrarian economy that can produce both wheat and
soybeans. Given that the country fully employs all of its resources, the following is a table of
options that the country has in its possible production of wheat and soybeans. The quantities
represent tons.
Use the following grid to plot the production possibilities curve for Bruland.
20
Assume that Practiceland is fully employing its resources. Determine Practiceland’s opportunity cost for
increasing it production of wheat from 0 tons of wheat to the following production possible outputs of
wheat and its opportunity cost for increasing its production of soybeans from 0 tons to the following
production possible outputs of soybeans.
Unit 1: Activity 2
21
Unit 1: Activity 3
Estimate the per -unit cost of increasing wheat from 0 to 20, etc.
22
Unit 1: Activity 4
Estimate the per-unit cost of increasing the production of soybeans from 0 to 40, etc.
23
Unit 1: Activity 5
Graph the production possibilities Curve for Simpleland based on the table above.
24
Unit 1: Activity 6
Determine the opportunity cost and the per-unit opportunity cost for Simpleland on the table below.
25
Unit 1: Activity 8
1. Country A: Using all of its resources can produce 100 units of cars or 80
units of bulldozers or some combination of both.
Country B: Using all of its resources can produce 90 units of cars or 60 units
of bulldozers or some combination of both.
a. Which country has the absolute advantage in the production of cars?
b. Which country has the absolute advantage in the production of bulldozers?
c. Is this an output or an input problem?
_________
2. Country C: Can produce 8 units of oranges or 6 units of lemons or some
combination of both.
Country D: Can produce 8 units of oranges or 4 units of lemons or some
a. Which country has the absolute advantage in the production of oranges?
b. Which country has the absolute advantage in the production of lemons?
_________
26
3. Country E: Can produce 100 units of cloth using 8 units of labor and/or 100
units of paper using 4 units of labor.
Country F: can produce 100 units of cloth using 9 units of labor and/or 100
units of paper using 6 units of labor.
a. Which country has the absolute advantage in the production of cloth?
b. Which country has the absolute advantage in the production of paper?
__________
4. Country G: can produce 100 units of cellphones using 2 units of capital
and/or 100 units of radios using 1 unit of capital.
Country H: can produce 100 units of cell phones using 2 units of capital
and/or 100 units of radios using 2 units of capital
a. Which country has the absolute advantage in the production of cell phones?
b. Which country has the absolute advantage in the production of radios?
5. Country I: can produce 4 tons of cabbage on 6 acres of land and/or 4 tons
of beets on 8 acres of land.
Country J: can produce 4 tons of cabbage on 10 acres of land and/or 4 tons
of beets on 5 acres of land.
a. Which country has the absolute advantage in the production of cabbage?
b. Which country has the absolute advantage in the production of beets?
27
Unit 1: Activity 9
Put the following information into a production possibilities graph with both
countries on the same graph:
1. Country A: Using all of its resources can produce 100 units of cars or 80
units of bulldozers or some combination of both.
Country B: Using all of its resources can produce 90 units of cars or 60 units
of bulldozers or some combination of both.
28
Put the following information into a production possibilities graph with both
countries on the same graph:
Country C: Can produce 8 units of oranges or 6 units of lemons or some
Country D: Can produce 8 units of oranges or 4 units of lemons or some
29
Unit 1: Activity 10
Refer to the above table of information regarding the production possibilities of cars and trucks.
A. Determine which country has the absolute advantage in each product.
B. Determine the comparative advantage in each product.
C. Determine which country should specialize in cars and which should specialize in bulldozers
.
D. Determine what the lowest limit in the terms of trade would be acceptable to the country that
specializes in the production of cars.
E. Determine what the lowest limit in the terms of trade would be acceptable to the country that
specializes in bulldozers.
30
Refer to the above table of information regarding the production possibilities of oranges and lemons.
C. Determine which country should specialize in oranges and which should specialize in lemons
.
specializes in the production of oranges.
specializes in lemons.
31
Refer to the above table of information regarding the production possibilities of gadgets and widgets.
C. Determine which country should specialize in gadgets and which should specialize in widgets
.
specializes in the production of gadgets.
specializes in widgets.
32
Refer to the above table of information regarding the production possibilities of gloves and scarves.
C. Determine which country should specialize in gloves and which should specialize in scarves.
.
specializes in the production of gloves.
specializes in scarves.
33
Refer to the above table of information regarding the production possibilities of potatoes and carrots.
C. Determine which country should specialize in potatoes and which should specialize in carrots.
.
specializes in the production of potatoes.
specializes in carrots.
34
Refer to the above table of information regarding the production possibilities of Loonies and Toonies.
C. Determine which country should specialize in Loonies and which should specialize in Toonies.
.
specializes in the production of Loonies.
specializes in Toonies.
35
Refer to the above table of information regarding the production possibilities of Loonies and toonies.
C. Determine which country should specialize in Loonies and which should specialize in Toonies.
.
specializes in the production of Loonies.
specializes in Toonies.
36
Refer to the above table of information regarding the production possibilities of cell-phones and
radios.
C. Determine which country should specialize in cell-phones and which should specialize in radios.
.
specializes in the production of cell-phones.
specializes in radios.
37
Unit 1 Activity 11
Refer to the above graph. Based on Comparative Advantage analysis, what country should specialize
in the production of cabbage and what country should specialize in the production of beets?
Country
Cabbage………………………
Country
Beets………………………
Explain why.
If the terms of trade are: 1 cabbage for 1 beet, will the countries trade?
Explain your answer using numerical evidence.
If the terms of trade are 2 cabbages for 3 beets, will the countries trade?
38
in the production of yammies and what country should specialize in the production of yummies?
Country
Yammies………………………
Country
Yummies………………………
Explain why.
If the terms of trade are: 1 yammy for 1 yummy, will the countries trade?
If the terms of trade are: 1 yammy for 2 yummies, will the countries trade?
39
in the production of shirts and what country should specialize in the production of slacks?
Country
Shirts ………………………
Country
Slacks ………………………
Explain why.
If the terms of trade are: 3 shirts for 2 slacks, will the countries trade?
If the terms of trade are: 2 shirts for 3 slacks will the countries trade?
40
in the production of gargoyles and what country should specialize in the production of totems?
Country
gargoyles ………………………
Country
totems ………………………
Explain why.
If the terms of trade are: 1 gargoyle for 1 totem, will the countries trade?
If the terms of trade are 2 gargoyle for 3 totems, will the countries trade?
41
in the production of cars and what country should specialize in the production of trucks?
Country
Cars ………………………
Country
Trucks
………………………
Explain why.
If the terms of trade are: 1 car for 1 truck, will the countries trade?
If the terms of trade are 3 cars for 5 trucks, will the countries trade?
42
in the production of wippets and what country should specialize in the production of woppets?
Country
Wippets………………………
Country
Woppets………………………
Explain why.
If the terms of trade are: 1 wippet for 1 woppet, will the countries trade?
If the terms of trade are 4 wippets for 5 woppets, will the countries trade?
43
Basic Concepts Test
1. The main economic problem that every economy
faces is:
___ (A) limited wants and unlimited money
___ (B) unlimited wants and limited money
___ (C) limited wants and limited resources
___ (D) unlimited wants and limited resources
___ (E) unlimited resources and limited money
5. A machine used to cut and shape wood
would be categorized as what type of input?
___ (A) labor resource
___ (B) capital resource
___ (C) human resource
___ (D) financial resource
___ (E) service resource
2. In economics it is important to consider the
opportunity cost of a decision. The opportunity cost
can best be described as:
___ (A) the dollar value of a decision.
___ (B) the next best option that has to be given up
by making a decision
___(C) the decision whether or not to use capital or
labor resources
___ (D) the decision whether or not the decision will
make you happy.
___ (E) the chance that consumers want this good
3. The real cost of producing a good or product is?
___ (A) the dollar cost of production.
___ (B) the labor cost of production.
___ (C) the resource cost of production.
___ (D) the capital cost of production.
___ (E) the land cost of production.
4. The production possibilities model illustrates:
___ (A) the consumption possibilities in an
open economy
___ (B) the labor cost of producing a good.
___ (C) only an economy that is at full
employment
___ (D) the opportunity cost of producing a
good
___ (E) the dollar cost of producing a good
6. Refer to the Brureff Electronics Col. Graph above.
This production possibilities graph illustrates the
maximum quantity of televisions and computers that
the Brureff Electronic Company can produced. If the
company is efficient and employs all of its available
resources it can produce:
___ (A) 70 computers and 140 televisions
___(B) 70,000 computers and 140,000
televisions
___ (C) Only 70 computers or only 140
televisions
___ (D) Only 70,000 computers or only
140,000 televisions
___ (E) 70,000 computers or 140,000
televisions or some combination of both
that falls on the production possibilities
curve.
44
7. Refer to the graph above. If the Brureff Electronic
Company decides to produce 30,000 computers the
maximum amount of televisions that it can also
produce is:
___ (A) 0
___ (B) 60,000
___ (C) 80,000
___ (D) 100,000
___ (E) 140,000
8. Refer to the graph above. If the Brureff Electronic
Company was fully utilizing all of its resources and
wanted to change the quantity of computers
produced from 30,000 to 40,000, the opportunity
cost would be:
9. Refer to the graph above. the Brureff Electronic
Company is at full production and producing
100,000 televisions. It decides to increase the
production of televisions what will be the
opportunity cost of each additional television that it
produces?
___ (A) 70 computers
___ (B) 10,000 computers
___ (C) 1/2 of a computer
___ (D) 70,000 computers
___ (E) 2 computers
___ (A) there is no opportunity cost
___ (B) 20,000 televisions
___ (C) 40,000 televisions
___ (D) 60,000 televisions
___ (E) 80,000 televisions
45
rights to haddock but chicken farmers do
not have private property rights to
chickens.
___ (D) Chicken farmers have private
property rights to chickens but fisherman
does not have private property rights to
haddock.
___ (E) There are not enough consumers
willing to eat haddock.
10. Refer to the two graphs for the production of
trucks and cars. Which of the following statements
accurately describes these two graphs?
___ (A) Graph A is depicts an increasing cost
production possibilities and Graph B depicts
a constant cost production possibilities.
___ (B) Graph A depicts a constant cost
production possibilities and Graph B depicts
an increasing cost production possibilities
___ (C) Both graphs depict constant cost
production possibilities.
___ (D) Both graphs depict increasing cost
production possibilities
___ (E) On either graph only trucks have
increasing cost production possibilities.
11. Given that haddock (a type of fish) is
experiencing serious decline in its population
resulting from too many being taken by fisherman;
and that chickens are not experiencing a serious
decline in population despite being slaughtered and
brought to market in large quantities.
Which of the following gives the best economic
explanation of the flocks of chicken and the
depletion of schools of haddock?
___ (A) A hen will produce more offspring
than a haddock.
___ (B) People eat more haddock than they
eat chicken.
___ (C) Fisherman have private property
12. If a country can now produce more consumer
goods and more military goods without developing
new technologies that would make its factors more
productive, it must have been:
___ (A) outside its production possibilities
curve
___ (B) inside its production possibilities
curve
___ (C) on its production possibilities curve
___ (D) defying the concept of opportunity
cost
___ (E) overproducing consumer goods
13. If you stoop to pick up a dime on the sidewalk,
then an economist would conclude that:
___ (A) You are in desperate need of a
dime.
___ (B) You are unemployed.
___ (C) Your marginal cost of picking up the
dime exceeded your marginal benefit.
___ (D) Your marginal benefit of picking up
the dime exceeded or equaled your
marginal cost.
___ (E) Your marginal benefit equaled but
did not exceed your marginal cost.
14. An opportunity cost is
___ (A) only an explicit cost.
___ (B) only an implicit cost
___ (C) only a monetary cost
___ (D) an explicit and an implicit cost
___ (E) only the choice that did not appeal
to you
46
15. Refer to the production table for Brown farm.
If the Brown farm is employing all of its resources
and producing 2 tons of wheat and 17 tons of corn
decides that it will begin producing 3 tons of wheat,
the opportunity cost to the Brown farm will be:
___ (A) 14 tons of corn
___(B) 17 tons of corn
___ (C) 3 tons of corn
___ (D) 6 tons of corn
___ (E) 1 ton of wheat
16. Given the information in the table of production
choices for the Brown Farm located above, we can
conclude that the Brown Farm is experiencing
___ (A) constant cost production
possibilities
___ (B) increasing cost production
possibilities
___ (C) no opportunity costs
___ (D) no problems with scarce resources
___ (E) decreasing cost production
possibilities
17. Given the production possibilities graph for the
FR Textile Co., the opportunity cost of increasing
production of pants from 5,000 to 8,000 if the firm is
currently efficiently employing all of its resources is:
___ (A) 5,000 shirts
___(B) 2,000 shirts
___ (C) 3,000 shirts
___ (D) 5,000 pants
___ (E) 4,000 shirts
18. Refer to the production possibilities graph for the
FR TEXTILE Co. The company is efficiently using all of
its factors of production and decides to increase
production of shirts from 2,000 to 5,000. In order to
do this without additional factors and with the
present technology the firm will have to forego:
___ (A) 10,000 pairs of pants
___ (B) 2,000 pairs of pants
___ (C) 5,000 pairs of pants
___ (D) 3,000 pairs of pants
___ (E) 2,000 shirts
47
19. Given the ppc graph for computers and HD TV's,
increasing production from point A to point B would
___ (A) not have an opportunity cost of
foregone goods because the firm has
increased its technology.
___ (B) not have an opportunity cost of
foregone goods because the firm is not
using all of its available resources at point B.
___ (C) not have an opportunity cost of
foregone goods because the firm is not
using all of its resources at point A.
___ (D) not have an opportunity cost of
foregone goods because the firm is outside
its production possibilities curve.
___ (E) There is an opportunity cost of
foregone computers but it cannot be
determined.
21. The three basic economic questions that every
economy must decide concerning its use of available
resources are which of the following?
A. What money is available?
B. What do we make with our resources?
C. How do we combine our resources to make
what we need?
D. For whom do we make our products and
services?
E. How do we get everyone what they want?
___ (A) A, B, C
___ (B) B, C, D
___ (C) C, D, E
___ (D) A, B, E
___ (E) B, C, E
22. The economic problem of scarcity exists because:
20. Refer to the PPC graph for computers and HD
TVs. Which of the following statements gives the
most accurate description of how production at level
E could occur in the future?
___ (A) an increase in the technology for
producing computers is developed
___ (B) an increase in the technology for
producing HD TV is developed
___ (C) an increase in technology is
developed
___ (D) an increase in technology that
increases the productivity of factors used in
the production of computers and HD TV’s is
developed
___ (E) an increase in the supply of money
___ (A) wants are limited but resources are
not.
___ (B) wants are unlimited and so are
resources.
___ (C) wants are unlimited and resources
are limited.
___ (D) not every economic system is a
market economy
___ (E) not every individual, firm, or country
is rich
48
25. Refer to the PPC graph of Reffland and Bruland.
Assume that both countries have equal amounts of
resources.
23. Refer to Table B for the Brown Farm.
If you were to convert this table to a production
possibilities graph, the production possibilities
frontier (curve) would be:
___ (A) convex
___ (B) concave
___ (C) inverted
___ (D) horizontal
___ (E) straight
24. Refer to Table B for the Brown Farm. Which of
the following statements is always true given the
information in this table?
___ (A) There is a constant cost in
producing corn or wheat.
___ (B) It is better to produce corn.
___ (C) It is better to produce wheat.
___ (D) The opportunity cost of increasing
production of wheat from 3 tons to 4 tons is
6 tons of corn.
___ (E) The opportunity cost of producing
wheat is constant but the opportunity cost
of producing corn is increasing.
Based on this graph, which of the following
statements is true:
___ (A) Reffland has the absolute advantage
in the production of soy and alfalfa.
___ (B) Bruland can produce an equal
amount of Soy as does Reffland but with
fewer resources.
___ (C) Bruland has the absolute advantage
in the production of soy.
___ (D) Bruland has the absolute advantage
in the production of alfalfa.
___ (E) Reffland has the absolute advantage
in the production of alfalfa.
26. Refer to the PPC graph for Reffland and Bruland.
Which of the following statements is true?
___ (A) Reffland has the comparative
advantage in the production of soy.
___ (B) Bruland has the comparative
advantage in the production of soy.
___ (C) Neither country has the
comparative advantage in the production of
soy
___ (D) Neither country has the
comparative advantage in the production of
alfalfa.
___ (E) Bruland has the comparative
advantage in the production of alfalfa
49
27. Refer to the PPC graph of Reffland and Bruland.
Bruland's opportunity cost of producing a ton alfalfa
is
___ (A) to forego 8 tons of soy
___ (B) to forego 8 tons of soy
___ (C) to forego 4 tons of soy
___ (D) to forego 1/4 ton of soy
___ (E) to forego 2 tons of soy
__ (A) 8 soy for 1 alfalfa
___ (B) 1 alfalfa for 1 soy
___ (C) 2 alfalfas for 3 soy
___ (D) 2 alfalfas for 5 soy
___ (E) 1 soy for 1/5 alfalfa
Reffland's opportunity cost of producing 1 ton of
alfalfa is:
___ (A) 1/2 ton of soy
___ (B) 8 tons of soy
___ (C) 4 tons of soy
___ (D) 2 tons of soy
___ (E) 1/4 ton of soy
Based on a comparative advantage analysis, which of
the following statements is true?
___ (A) Both countries should produce soy
and alfalfa.
___ (B) Reffland should specialize in the
production of soy.
___ (C) Bruland should specialize in the
production of alfalfa.
___ (D) Bruland should specialize in the
production of soy.
___ (E) There are no possible terms of trade
that would allow for specialization.
If each of the countries specializes in the production
of the product that it has the comparative advantage
in the production of, then which of the following
terms of trade would encourage the countries to
trade?
31. Refer to PPC #5 Graph
Given that farmer Reff and farmer Bru can engage in
mutually beneficial trade, which of the following
statements is true?
___ (A) Farmer Reff should specialize in the
production of wheat and farmer Bru in the
production of corn.
___ (B) Farmer Bru should specialize in the
production of wheat and Farmer Reff in the
production of corn.
___ (C) Neither farmer should produce
wheat since neither has the comparative
advantage in the production of wheat.
___ (D) There is no way that either farmer
could benefit from trade.
___ (E) Both farmers are experiencing
increasing cost in the production of corn.
50
32. Refer to PPC #5 graph.
Based on the information in PPC #5 graph, which of
the following statement is true?
___ (A) Reff's farm can produce more corn
per acre than can Bru's farm.
___ (B) Bru's farm can produce more corn
per acre than can Reff's farm.
___ (C) Reff's farm can produce more wheat
per acre than can Bru's farm.
___ (D) Bru's farm can produce more wheat
per acre than can Reff's farm
___ (E) Neither farm has the comparative
Which of the following statements is true?
___ (A) Reff has the absolute advantage in
the production of corn.
___ (B) Bru has the absolute advantage in
the production of corn.
___ (C) Bru has the comparative advantage
in the production of wheat.
___ (D) neither one has the comparative
___ (E) neither one has the comparative
advantage in the production of corn.
34. Refer to PPC #5 Graph
Reff's opportunity cost of producing 1 bushel of
wheat is?
___ (A) 1.5 bushels of corn
___ (B) 2/3 bushel of corn
___ (C) 9 bushels of corn
___ (D) 9000 bushels of corn
___ (E) 4000 bushels of corn
Who has the comparative advantage in the
production of corn?
___ (A) Both have the comparative
advantage in the production of corn
___ (B) neither one has the comparative
advantage in the production of corn
___ (C) Bru has the comparative advantage
in the production of corn
___ (D) Reff has the comparative advantage
in the production of corn
___ (E) The farmer that foregoes the most
wheat
36. Refer to PPC #5 Graph.
Bru's opportunity cost of producing a bushel of
wheat is?
___ (A) 1.5 bushels of corn
___ (B) 4 bushels of corn
___ (C) 4000 bushels of corn
___ (D) 9 bushels of corn
___ (E) 9000 bushels of corn
37. A technology that improves labor productivity
will always
___ (A) increase the number of jobs.
___ (B) increase the output per worker.
___ (C) decrease the use of natural
resources.
___ (D) shift the production possibilities
curve inward.
___ (E) lower a worker's wage.
38. Which of the following is most likely to be Sally's
opportunity cost for getting to school on time this
morning?
___ (A) The A she gets on the exam period
1.
___ (B) The detention she avoids by being
on time.
___ (C) The extra half hour of sleep she
would have had if she were late.
___ (D) The jealous comments by
classmates who only got a D on the exam
period 1
___ (E) The satisfaction of doing the right
thing
51
39. The reason money is needed for a business startup is:
__ (A) It allows the business to hire the
factors of production
___ (B) it guarantees the business a profit
___ (C) It guarantees the business revenues
___ (D) it is a symbol of wealth
___ (E) it is an economic resource
40. Assume that there are two countries, Eden and
Paradise that have potential for trade. Both
countries can produce widgets or gadgets. Each
country should specialize in the product that:
___ (A) It has the absolute advantage in
producing.
___ (B) It has the greatest opportunity cost
in producing.
___ (C) It has the lowest opportunity cost in
producing
___ (D) it uses the most resources to
produce
___ (E) it has the least use for
52

BruReff Guide to Fundamental Macro Models

Transcription

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