INR 2002 EXAM II STUDY GUIDE CHAPTERS 6 9 Chapter Six Division of labor specialization greater division of labor made societies wealthier Adam Smith Permits diverse segments of society to focus on different economic activities in ways that benefit society as a whole If households had to be self sufficient they would produce only a fraction of what they could if they specialized Specialization increases productivity and productivity fuels economic growth The division of labor depends on the size of the market Allows gains form international trade Comparative advantage the ability of a country or firm to produce a particular good or service more efficiently than other goods or services such that its resources are most efficiently employed in this activity The comparison is to the efficiency of other economic activities the actor might undertake not to the efficiency of other countries or firms Specialization to countries like people they should do what they do best A nation gains most by specializing in producing and exporting what it produces more efficiently It can earn as much as possible in order to pay for imports of the best products of other countries Absolute advantage the ability of a country or firm to produce more of a particular good or services than other countries using the same amount of effort and resources The ability to do something better than others It is not necessary for a country to have an absolute advantage in producing something for it to be profitable to produce and export it all that is necessary is the comparative advantage Opportunity cost the cost of any activity measured in terms of the value of the next best alternative forgone Sacrifice related to the second best choice available among several mutually exclusive choices Cost of the forgone products after making a choice Plays a crucial part in ensuring that scarce resources are used efficiently Can include monetary financial output time pleasure or benefit cost Factor endowments Factors of production land essential input into agricultural production labor undifferentiated and unskilled capital for investment machinery and equipment with which goods are produced and the financial assets necessary to employ this machinery and equipment human capital skilled labor enhanced by investment in training and education Heckscher Ohlin theory of trade the theory that a country will export goods that make intensive use of the factors of production in which it is well endowed Thus a labor rich county will export goods that make intensive use of labor The theory says that factor endowments determine national comparative advantage and what countries produce and export Likewise a country will import goods that make intensive use of the resources in which the country is scarce Abundant factor the factor in a country s endowment with which it is best endowed relative to other factors compared to other countries Scarce factor the factor in a country s endowment with which it is best least well endowed relative to other factors compared to other countries Protectionism the imposition of barriers to restrict imports Commonly used protectionist devices include tariffs quantitative restrictions quotas and other nontariff barriers Every country currently has at least some restrictions on trade with the rest of the world Protectionism has long been one of the most common govt policies worldwide 1 INR 2002 EXAM II STUDY GUIDE CHAPTERS 6 9 Tariff tax on imports levied at the border and paid by the importer Raises the price on the import directly so that a consumer of the imported good has to pay more for it Quota quantitative restriction limits the quantity of a foreign good that can be sold domestically Reduced quantity typically causes an increase in its domestic price make the imported goods more expensive to domestic consumers Non tariff barrier obstacles to imports other than tariffs Examples regulations targeted at foreign goods or requirements that governments purchase from national producers restrictions on the number of products that can be imported quotas regulations that favor domestic over imported products and other measures that discriminate against foreign goods or services Effect of these policies is to shelter domestic producers from foreign competition Health and safety standards environmental standards Stolper Samuelson theory approach the theory that protection benefits the scarce factor of production If a country imports goods that make intensive use of its scarce factor then limiting imports will help that factor In a labor scarce county labor benefits from protection and loses from trade liberalization If a country exports goods that make intensive use of a factor of production that the country has in abundance then trade is particularly good for those who own that factor of production Artificially restricting trade will hurt owners of abundant factors by artificially restricting the market for the goods they make Ricardo Viner theory approach specific factors model a model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature of the factor itself This differentiates it from the Heckscher Ohlin approach for which the nature of the factor land labor capital is the principal consideration Focuses on why whole industries often act together Some factors of production tied to their industry are specific to their industry Owners workers and farmers have a strong incentive to safeguard their current use The interests of an individual flow from the sector of the economy in which he or she is employed Factor mobility the degree to which a factor of production such as labor or capital is able to move either among industries or among counties in response to differences in its factor price thus tending to eliminate such differences Movement toward a Pareto frontier Pareto improvement makes everyone better off or at least unharmed and nobody worse off Result of Heckscher Ohlin approach trade will tend to make wages profits and other earnings more similar across countries factor price equalization prices of factors of production tend to become more equal Negative externality a harmful externality a harmful effect of one economic agent s actions on another Examples pollution from factories Embedded liberal compromise compensation from trade winners to trade losers government as trade winner Compensation social spending unemployment compensation job re
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