11 Economics and Economic Reasoning

The data of trade should be summarized.

Explain the reasons for trade restrictions and why economists don't like them.

There are two trade agreements that support free trade.

Most economists oppose trade restrictions based on the theory of comparative advantage.

The public and politicians are more dubious.
Donald Trump's election as president caused free trade to come under scrutiny.
He said that the United States had signed free trade agreements that were bad for America and that he was going to pull America out.
Such issues are sider in this chapter.
We begin by considering the pattern and nature of trade, then we discuss the variety of trade restrictions that governments can impose, and why most economists would advise President Trump against pulling out of the United States' previous trade deals.

Let's begin with some numbers to understand the nature and dimensions of international trade.

The ratio of world trade to U.S. GDP was close to 60 percent.

The ratio fell to less than 30 percent in 1935.
It was only 20 percent in 1950.

With world trade amounting to $42 trillion, it is about 220 percent.

International trade has been growing, but with significant fluctuations.

When output rises, interna tional trade rises, and when output falls, international trade falls, there are two reasons.

The decrease in world income during the Depression of the 1930s caused a large decrease in trade and it was worsened by a worldwide increase in trade restrictions.

The table below shows the importance of the shares of exports and imports for different countries.

The Netherlands has the highest exports compared to total output, while the United States has the lowest.

The Netherlands' imports are the highest percentage of total output.
The U.S. exports are the lowest.
The relationship between imports and exports is not random.
In most countries, imports and exports are equal, but in any particular year that can be rough.
In the last few years, imports have been significantly more than exports for the United States.
As I'll discuss, that situation can't continue forever.

The majority of U.S. exports and imports involve large quantities of goods.

Most of the international trade is in manufactured goods.

The Figure 10-1 shows the trading partners of the United States.

Canada, Mexico, and Canada make up the largest percentage of U.S. exports to other countries.

The Pacific Rim and the European Union are the largest regions in which the U.S. exports.

China, Canada, and Mexico are countries that the United States imports a lot from.
The countries we export to are also the countries we import from.

Canada, Mexico, the European Union, and the Pacific Rim are some of the major countries that trade with the United States.

The nature of trade between the United States and other countries is constantly changing.

In the last few years, imports from China, India, and other East Asian countries have increased.
2.5 percent of all U.S. merchandise imports were from China in the late 1980s.
They make up 20 percent of the total.
India's imports have increased 20-fold from 0.1 percent to 2 percent of all goods imported.

Goods and services that the United States imports have changed.

The nature of the U.S.

China's imports of technologically advanced goods have changed recently.

The nature of the goods that a country produces and exports up the technological ladder is typical for developing countries.

In the post-World War II era, it characterized Japan, Korea, and Singapore.

Foreign companies that were Subcontractors for U.S. companies are now competitors of U.S. companies.

In the future, you can expect a lot of Chinese companies to become household names because of the development of major global firms.

We can expect the nature of trade to change even more in the future, as technological changes in telecommunications continue to reduce the cost of voice change even more.

There is no need for production to occur in the area where the goods are consumed.

Financial accounting, typesetting of texts, and research can be done almost anywhere with the click of a mouse.
The customer service calls for a U.S. company and it can be answered in India, which has a large English-speaking population and low wage rates.
India trains its employees to speak with a Midwest U.S. accent to make it less apparent that the call is being answered in India.

There has been a lot of discussion about outsourcing to China and India recently, and it is worthwhile to consider what is and is not different about trade with China and India.

What isn't different is the existence of out source.
For a long time, manufacturers have used overseas suppliers.
The potential size of outsourcing to China and India is different than it was to Japan, Singapore, and Korea in the 1980s and 1990s.

China and India have a combined population of over 2 billion people and many of them are well educated and willing to work for less than the U.S. workers.

As technology opens up more areas to trade, and as India and China move up the technology ladder, U.S.-based firms will likely experience much more competition.

The economic policy issue for the next decade will likely be how U.S. companies deal with this competition high-tech competition.
The economic policy issue for the next decade will be defined by the new technolo.

Difficult adjustment will need to occur if they don't.

The U.S. has a trade deficit.

Since the 1970s, the United States has had a trade deficit.
The U.S. trade deficit means that the United States is consuming more than it is paying for and will have to pay in the future.

A trade deficit isn't bad.

It's not necessarily good while you're doing it.

If you were a country, you'd be running a trade deficit since you're consuming more than you're exporting.

One aspect of trade that is important not to forget is the U.S. economy.

International trade has social and cultural dimensions.

Much of the chapter deals with eco back in the 1800s.

If the reference period were earlier than the late social implications of trade, the statement would not be nomic.

Let's look at an example from history in the 1600s, 1700s and most of the 1800s.

Greek ideas and philosophy were lost to Europe more than they were to the US in the Middle Ages.
The American nation grew when barbarians invaded.

The Renaissance of these ideas and philosophy was only possible because of the trade between gold, agricultural produce, and natural resources.

Many of our traditions came from tariffs.

The Renaissance was imported from abroad and international issues played a significant role in the wars fought on U.S. soil.
Influenced by international trade until the 1900s.
Had there been no study of the U.S. economy indepen trade, our entire philosophy of life would have been disrupted.

We don't focus on these immigration in economics courses.

The United States is a country of immigrants.

The United States adopted technical issues such as the reasons for trade in the late 1800s.

The U.S. economy has broader implications as it becomes more integrated with the world economy.
The isolationist aspect to the story that otherwise might be forgotten is added by them.

Living off past savings, getting support from your parents or spouse, or borrowing.

There are the same options for countries.

They can live on foreign aid, past savings, or loans.

In the past, the United States has had a trade deficit.

It acquired a lot of foreign assets.

The United States is a large debtor nation because of its large trade deficits.
The United States has borrowed more from other countries.

The cushion of being a creditor has been replaced by the trials of being a debtor and having to pay out interest every year without getting anything for the payment of interest by the debtor nation.

Reducing imports is one way countries try to reduce trade deficits.

That was one of the goals that President Trump had when he talked about trade.
The trade restrictions can keep a country from having to make adjustments to improve its comparative advantage such as reducing wages or allowing its currency to depreciate.

I will review the geometric analysis of each.

Quotas are limits on imports.

In the same way a tax encourages the consumption of domestically produced goods, tariffs make imported goods more expensive than they would have been, and so encourage the consumption of domestically produced goods.

The average increase in the price of imported goods is less than 3 percent.

The Smoot-Hawley Tariff of Demonstrate with a supply and demand 1930 raised tariffs on imported goods to an average of 60 percent.

The curve was passed.

It didn't work.

Similar tariffs were imposed by other countries.

The effects of the tariffs convinced many economists that free trade is better than trade restrictions.

The WTO has an enforcement system that is weak.

Rounds of negotiations resulted in a decline in worldwide tariffs.
The negotiations that began in 2002 did not lead to an agreement.
The focus of economists was to save existing trade agreements, not add new ones.

The effect of a quota on equi librium price and quantity is the same as the effect of a restriction on trade.

Both increase price and decrease quantity.
The supply curve is shifted up by the amount of the tax, as shown in Figure 10-4.

There is a difference between tariffs and quotas.

The government doesn't collect revenue in the case of a quota.

The price to fill the quota is called P1 T. Firms compete very hard to get the Quotas.

Trade patterns are affected by tariffs.

Light trucks from Japan have been subject to a tariffs in the United States.

Most of the trucks you see are produced in the United States.

By Q1 Q0, you can get a lot of insight into the patterns of trade, as there are many similar examples.

If you assume that the country being considered is small relative to the world economy and that imports compete with domestic producers, the issues of tariffs and quota can be seen in a slightly different way.

The world price of good is unaffected by this country's supply.

We can distinguish the world supply from the domestic supply.
The world price of $2 is the domestic price.
100 units of the good would cost $2 from domestic suppliers.
100 units are being imported.

Domestic consumers pay all of the tax shown by the shaded region since the world supply curve is elastic.

Price goes up to $2.50 and quantity goes down to 175.
The domestic quantity will be increased from 100 to 125 and the imports will be reduced from 50.

The world supply is elastic because of the small-country assump tion.

The world supply shifts up by 50 cents with a 50 cents tariffs.
Domestic quantity demanded falls to 175 and domestic quantity supplied rises to 125.
50 units are left to be supplied by foreign suppliers.
The revenue is shown in the shaded area.
Consumers demand 175 units and domestic firms produce 125.
The revenue from the higher price is collected by the domestic government.

Any increase in demand would not affect the price.

Imposing new tariffs and quota is not allowed by the WTO.

To avoid new tariffs on their goods, some countries restrict their exports.

Japan has agreed informally to limit the number of cars it exports to the United States.

They increase the price of good and help domestic producers by limiting the quantity of imports.

When the United States encouraged Japan to impose a voluntary quota on the number of cars it exports to the United States, Toyota benefited from the quota because it could price its limited supply of cars higher than it could if it sent in a large number of cars.
U.S. car companies benefited from less competition.
They were able to increase their prices because of Toyota.
We can expect similar pushes for Chinese voluntary restrains as Chinese car companies develop.

Sanctions are usually established for international political rea or exports of a country's goods.

The U.S. embargo on trade with Iran in 2010 was not imposed for economic reasons.

Iran was able to negotiate limits on its nuclear activity in exchange for the lifting of the trade sanctions.
The United States imposed limited sanctions on Iran in an attempt to curb its missile program.

Sugar Regulations health and safety of a country's residents are protected by one type of regulatory trade restriction.

A country might restrict imports of vegetables if they know that other countries use pesticides.
The import of vegetables would be stopped.
Building codes are an example.
U.S. building codes require that plywood have fewer flaws than other materials.
Canadian codes require that plywood have less than five flaws per sheet.
Trade in building materials between the United States and Canada is difficult because of the different building codes.

How might a country benefit from the time and effort it takes to import?

Since Toulouse is a provincial city far from any port and outside the normal route for imports after they enter France, the inspection process took months.

Imported electronics were not allowed to take market share from French companies.

Some regulatory restrictions are imposed for legitimate reasons and others are designed to protect domestic producers from international competition.

It's difficult to tell the difference.

The debate about hormones and economics has been going on for decades.

Nationalistic appeals can help restrict international trade.

"Buy American" campaigns are examples.
To get around this tendency, foreign and U.S. companies often go to Buy American.
For example, components for many autos are made in Japan but shipped to the United States and assembled in Ohio or Tennessee so that the finished car can be called an American product.
"Buy American" policies can be required.
The "Buy American" clause was included in the U.S. government'sStimulus package of 2009.

The question is if trade is beneficial, as the theory of "Buy American" trade policies.

In 1997, Hormones and Economics Trade restrictions were more in favor of the United States.

The EU is not what they seem in textbooks.
In 1999 the WTO stood by its earlier ruling and the United States reimposed the 100 percent tariffs.
The EU has stood firm and conducted studies that are more politically acceptable.
The WTO continues to rule that growth hormones are safe despite the fact that there is a fight going on.
In 1988 the EU replaced its ban on U.S. beef with a ban on imports until it had more information.
The ban on animals treated with growth- visional, not permanent, met the WTO rules.

The EU banned the export of meat in January 2009.

The EU significantly increased restriction, and the United States claimed that the ban was actually a trade reached.

The United States was supposed to retaliate against the EU by imposing be resolved.

The United States claimed in 2016 that the EU was going to retaliate against the US with tariffs on European goods.

The EU made cent tariffs on $100 million of U.S. walnuts and dried all the more confusing because of Britain's decision to Fruits, but instead entered into bilateral meetings with the pull out.

The meetings allowed the EU to trade with Trump's "America First" approach to trade, in which the EU was allowed to trade with Trump's "America First" approach to trade, in which the EU was allowed to trade with Trump's "America First" approach to trade The United States removed tariffs on various goods from other countries, but retained its allies.

As Europe's im from obvious, far ulation seemed to be growing rapidly.

The United States and the EU have increased their po ports of dog food.
The United States asked the WTO to review the EU ban.
In reality, it is more complicated than in textbooks.

The gains of trade are not equally distributed.

I.T.
is an example of the argument for trade discussed in the previous chapter.

In Saudi Arabia, some oil workers will have to become farmers.

When they see the same kinds of goods coming into their country from abroad, they lobby to prevent foreign competition.

It has real costs.

The costs of trade are temporary, which is why economists favor free trade.
The costs will be gone once the adjustment is made.

International trade is still a deal you can't refuse because the benefits for the large majority of the population outweigh the costs to some individuals.

The table below shows economists' estimates of the cost to consumers of saving a job through trade restrictions.

It would seem that transition costs could be forgotten because of the benefits.

The benefits of trade are scattered among the entire population.

In benefits of trade, costs of free trade fall on small groups of people who loudly oppose scattered among the entire population.

This creates a political push against free trade.

The cost of relaxing trade restrictions has led to a number of programs to assist those who are hurt.

It's difficult to limit the adjustment assistance to those who are hurt by international trade, even though governments have tried to use it to facilitate free trade.

People who have been hurt in trade are likely to try to show that they deserve help.
Losses from free trade are exaggerated.
Much more is demanded than the gains when it comes to trade adjustment assistance.

It's not good to tell people who claim to be hurt that they aren't.

It's not a good idea to restrict trade as a way to relieve pres because they aren't really being hurt.

The International Economic Policy Issues Haggling by Companies over the Gains from Trade are related to the fact that each side is pushing for a larger share of the gains from trade than the other side thinks should be allotted.

Let's consider the original deal that I.T.

had with companies haggling over the gains of trade.
The US received an additional 100 tons of food and 60 barrels of oil.
Saudi Arabia received an additional 100 barrels of oil and 60 tons of food.

The Saudis might have said, "Why should we be getting only 100 barrels of oil and 60 tons of food?"

The United States might have said, "We want an addi gains from trade for the side that drives 300 tons of food and an additional 300 barrels of oil, and we won't go through the hardest bargain, but it also can make the deal fall through."

If either the U.S. or Saudi Arabian company takes this position, I.T.

Gains from trade can be hard to achieve because of tough bargaining positions.

The side that drives the hardest bargain gets the most gains, but it also risks making the deal fall through.

It goes on all the time.

Everyone is worse off if the deal falls apart if you aren't successful.

Bargaining between coun tries is a type of trade bargaining that limits trade.

The threat of trade restrictions is important in that kind of haggling.
Sometimes countries have to impose trade restrictions in order to make their threats credible.

Other countries try to get trade restrictions reduced by threatening to increase them.

Sometimes countries must impose or increase trade restric bargaining in order to make the threat credible.
China allowed significant to be unreasonable.

China was put on notice by the United States to stop copying.

The United States threatened to impose 100 percent tariffs on Chinese goods if they didn't comply.

The United States did not want to put on these restrictions but felt that it would have more bargaining power if it were threatened.

President Trump tried to get better trading rules for the U.S. with all of his trading partners.

The under lying gains from trade that a country would receive depends on the skills of the negotiators.

A country that only gets a small portion of trade gains is in a better bargaining position than a country that gets a lot of trade gains.
It's easier for the latter to leave trade.
President Trump's "America First" policy, which was a policy of trying to improve the bargain the United States struck in previous trade deals, is that other countries will retaliate with a " Their Country First" policy, and make any deal impossible.
No country is first and all lose.

Regardless of whether trade is free or not, President Trump doesn't like cultural changes in trade.

The argument is that they are bad deals.
It is unlikely to stop them.

There are goals involved in trade.

Most developing countries have different groups.
Some argue that trade hurts companies by making it hard to move production to other countries.
Some argue that it hurts the perspective of the devel er's when they argue that earning $4 a day can be used to exploit poor work in other countries.

Many economists agree with Trump and argue that trade takes jobs away from the United States.

The clarity of the antiglobalization groups' views is an appeal to each of these arguments.
To effect positive change, one must both be involved in the trade and oppose it.
These arguments have stood the test of time and have little impact on the views of most policy makers and realistic plan for a better alternative.
President Trump's ap economists are more of a disruptive approach when weighing the costs and benefits of trade.

He thinks that foreign countries gain more from it.

Many of the trade costs between the United States and Globalization are the result of technological changes.

Critics argue that the push for better bargaining position in telecommunications and transportation is only a small gain.

The loss of trust and centuries will inevitably involve difficult social and cooperation that a disruptive approach brings about, and this has been going on for small gain.

There is a chance that strategic trade policies can backfire.

One rule of strategic bargaining is that the other side must believe in you.
It is possible for a country to support free trade to impose trade restrictions just to show how strongly it believes in it.

International Economic Policy Issues specialize in the production of watches or cars for South Korea.

Much in trade is not explained by comparative advantages.

Take watches to Switzerland.

The person who started the watch busi ness lived in Switzerland.
People in the area became skilled in making watches.
It was attractive for other watch companies to start up because of their skill.
Swiss watches were the best in the world as more and more members of the labor force became skilled at watch making.

Switzerland became the watch making capital of the world because of its reputation.

Austria might have been the watch capital of the world if the initial watch production had taken place in Austria.

It's difficult to attribute inherent comparative advantage to a country when there's learning by doing.

If it will, country B has a strong reason to limit trade with country A in order to give its own workers time to catch up.

As output increases, it is determined whether an inherent comparative advan output goes down.

It makes sense for one country to specialize in one good and another country to specialize in another good because of the economies of scale.

Learning by doing and economies of scale are important to most countries.

There are trade restrictions based on these two phenomena.

Many countries use this argument to justify their trade policies.

"You may have a comparative advantage, but that's simply because you've been at it longer, or are experiencing significant economies of scale," they argue.

We need trade restrictions to give our industry a chance to catch up.

The infant industry argument has been used to justify tariffs on high-tech products.

U.S. firms have pushed for tariffs on Chinese solar pan els so that they can develop the technology here in the United States rather than have the technology developed in China.

The argument for free trade assumes that resources are utilized.

Domestic aggregate demand can decrease when countries don't have full employment.
Domestic aggregate demand can be stimulated by exports.
There is a macroeconomic reason to limit imports when the economy is in a recession.
The pub lic's view of imports and exports is influenced by macroeconomic effects of free trade.
Pressure to impose trade restrictions increases when a country is in a recession.
There was a lot of pressure to design programs that would create jobs in the United States and not spend money on imports that would create jobs in other countries when there was a serious recession in 2009.

Trade restrictions are often justified on national security grounds.

There are two forms of these restric tions.

In a war, we don't want to be dependent on foreign oil.

National security considerations make sense for a number of goods.

The United States restricts the sale of certain military items to countries that may be 1.
The fighting of the United States will not be equal.
Where to draw the line about goods gains from trade is a problem.

Companies discuss the gains from trade.

We need to be careful when a country makes a national security argument for trade.

Learning by doing and economies of scale are included in specialized production.

Another reason for trade restrictions is international politics.

Increased revenue influences their political decisions.

The argument is that trade helps you.

President Trump was threatening to pull out of many of the trade agreements the United States had previously agreed to.

The final argument for a particular type of trade restriction is that tariffs bring in revenue.

In the 19th century, tariffs were the U.S. government's main source of revenue.
Many developed countries have other forms of taxes that are less important than they used to be.
Many developing countries still get their revenue from tariffs.
They are easy to collect and paid for by rich people.
Many countries justify their tariffs by saying they need the revenues.

Most trade restrictions are because economists discount them and support free trade.

The reason is that.
The harm done by trade restrictions outweighs the benefits.
This is true trade that increases output.

There will be restrictions on national U.S. wages in the future.

Most economists think that the United States will be abused.

Trade restrictions can be addictive.

The first argument for free trade is that it increases total output.

Even though most other nations are hurt, economists agree that certain instances of trade restrictions may help one nation.
When there is retaliation, trade restrictions cause both countries to lose.

There are many goods that depend on Chinese goods, and if the United States were to place a tariffs on them, those aspects of production that depend on Chinese goods would be hurt.

China would hurt both countries by placing tariffs on goods from the United States.
Both countries would be worse off because of the tariffs.

Most econo mists oppose trade restrictions because they reduce international competi tion.

Domestic companies are forced to stay on their toes by international competition.
Domestic companies become less efficient if trade restrictions on imports are imposed.

In the 1950s and 1960s, the United States imposed restrictions on imported steel.

The U.S. steel industries responded to this protection by raising their prices.
The U.S. steel industry used outdated equipment to make overpriced steel.

The steel industry was made flabby by restrictions.

The U.S. steel industry became unprofitable in the 1980s and 1990s.

Nonunion minimills, which made new steel out of scrap steel, did well, even though larger mills closed or consolidated.

In the late 1990s, minimills accounted for 45 percent of U.S. steel production.
In 2002 it looked as if a number of larger mills were going to declare bankruptcy, and enormous pressure was placed on the federal government to bail them out by taking over their pension debt and instituting tariffs.
The U.S. imposed tariffs on foreign steel imports.
The tariffs are unlikely to lead to a rebuilding of the U.S. steel industry because other countries have a comparative advantage in steel production.
Other countries would retaliate with tariffs.

The tariffs were instituted despite their opposition.

Major U.S. trading partners threatened to impose tariffs on U.S. goods.
The tariffs were withdrawn the following year.
Almost all of the world's steel is recycled, and only a small fraction of U.S. steel companies produce it.

The benefits of international competition are not limited to mature industries like steel, they can also accrue to young industries wherever they appear.

The historical record is used by economists to refute the infant industry argument.
The very few of the infant industries argument makes sense in theory.
Most of the infant industries protected by trade restrictions have never grown up.
Infant industries become grown up.

They are immature and uncompetitive.

The infant industry argument would only be supported if the trade restrictions included certain conditions.

The national security argument for export restrictions on war-related goods is supported by most economists.

It doesn't make sense for the United States to call someone a member of the axis of evil.

The argument is carried far beyond goods related to national security.

In the 1980s, the United States restricted sugar-coated cereals to the Soviet Union for national security reasons.
They were not likely to help the Soviet Union in a war.

The national security rationale is not supported by the argument that trade restrictions on military sales can be evaded.

A country buys goods for another country.
They limit the effectiveness of trade restrictions for national security purposes.

International trade makes war less likely, according to economists.

Some restrictions might benefit a country, but almost no country, but almost no country can limit its restrictions to the beneficial ones.

There are trade restrictions that affect the beneficial ones.

I have stated throughout the text that economists like markets and favor trade being as free as possible.

The production possibility curve shifts out when each country follows its comparative advantage.

Despite political pressures to restrict trade, governments have generally followed economists' advice and entered into a variety of international agreements.

Even though the WTO has taken its place, you will still occasionally see references to GATT.

There are some enforcement mechanisms in the WTO that are different from the GATT.

The EU is the most famous free trade area.

The barriers to trade between the EU's member countries were removed in 1992.
The United States, Canada, and Mexico formed the North American Free Trade Association in 1993.

Until Donald Trump's election as president, the United States was negotiating two new trade agreements.

The TTIP would lower tariffs and trade restrictions between European countries and the United States, while theTPP would lower tariffs and restrictions for 12 countries bordering on the Pacific, including the United States, Japan, Australia, and Canada.
The heads of state agreed on the Trans-Pacific Partnership in 2015.
With President Trump's election, the deals were abandoned because the U.S. Congress was slow to approve them.
The United States would pull out of other trade deals.

Dumping the WTO causes countries to impose trade restrictions on workers if they can show that the goods are being dumped.

Pressure for trade restrictions will be amplified because of the large macroeconomic repercus of it, who could complain about someone who wants to sions.

The first objection is that learning is difficult.

To remain competitive, a country must keeptures and determine costs of producing a good.
Dumping by another country can be complicated.
There are legitimate debate producers out of business.
The foreign producer dominates the debate because they have the field to themselves and economics.
President can raise the price.
Dumping is a form of preda Trump imposed steep tariffs on washing machines.

The second argument against dumping is that these products were dumped on the American market.

The solar panel tariffs may end on the importer.

Dumping up costing American jobs is not a preliminary to predatory pricing and can displace industry in installation.

President Trump's aggressive trade bargaining, in which he tries to negotiate better trading terms for the United States with the threat of tariffs if other countries don't give in, highlights some issues that are not often discussed in introductory courses.

Free trade is more complicated than it seems.

Economists have differing opinions.

Econo mists see free trade between regional countries as beneficial, but suggest that regional free trade associations may impose trade restrictions on non member countries and thus reduce free trade.
According to economists, bilateral negotiations between member nations tend to replace multilateral efforts.
The net effect of these bilateral negotiations is subject to debate.

Intellectual property rights are the second issue.

All firms involved in trade face the same regulations because of the harmoni zation of laws and regulatory structures among trading partners.
Production of food must meet the same requirements.

How the regulatory issues are resolved will affect the division of the gains from trade.

Intellectual property rights are important in today's economy.
The United States requires other countries to accept U.S. intellectual property rights laws in trade agreements.
The result is to limit the firms' ability to compete.

Significant portions of U.S. production at the time involved copying European technologies with out paying for their use, improving upon those technologies, and selling their goods back to Europe.

The current free trade agreements restrict that type of competition.

Whether the positive effects of recent free trade agreements are stronger than the negative effects is again subject to debate.

Free trade is more nuanced than can be presented in a principles course, so be careful about extending simple arguments to complicated issues.

The difficulties that globalization and trade bring to a country lead many lay people to support restrictions on trade to protect jobs.

Some short-run problems might be alleviated by such policies.
Other countries will retaliate and take advantage of trade.
Other countries will emerge as competitors if the United States closes trade with China.

When we don't face up to those problems and don't deal with the political problems that an expansion of trade creates, the problem comes.

The problems have been avoided by the United States for the last 20 years.
One problem is the increase in income inequality in the United States, with those workers facing global competition losing out, and those protected from it (or being in a position to take advantage of it) gaining.
Over the past 20 years, large trade deficits have given us great benefits, but they have also had costs.

The nature of trade is constantly changing.

There are reasons why countries impose trade restrictions on the United States, including the fact that companies in East Asian countries get a better deal on goods and services than those in India.

The costs of trade, national security, international China and India are so large that increased revenue brought in by outsourcing is possible.

Economists generally oppose trade restrictions sanctions, voluntary restraint agreements, regulatory because of the history of trade restrictions and their trade restrictions, and understanding of the advantages of free appeals.

Two organizations that support free trade are GATT quantity of goods.

Who gets the WTO is different.
Higher price results in revenue for two important trade associations.

What about chickens imported from the United States?

Volkswagen van sales were hurt by the suggestion about the importance of trade policies.

Which countries have fast trade.

This change affected equilibrium price and quantity of imported garments.

The end of the quota system benefited U.S. consumers graphically.

How are economies of scale, comparative advantage and producers?

Name three reasons economists support free.

Questions from Alternative Perspectives 1.

The text states that free trade is good for discussion.

After the Civil War, the United States imposed tariffs on imports that averaged tion, property, and labor.

What is b?

One would expect certain assumptions.

What should the government do about this?

Suggest an equitable method of funding trade adjustment.

The Smoot-Hawley Tariff was 4 a month later.

The United States put a temporary price floor in place.

The tomato growers in Florida and other states will be helped by the tariffs.

Should the US restrict 8?

International economic policy issues are answered to margin questions.

It is possible that an inefficient customs mainly low-tech goods to technologically advanced agency could help the country because the type of goods being imported has changed.

A debtor nation won't be running trade firms that will benefit from trade restrictions.

If coun are more likely to combine their efforts.

The number of consumers is large and the cost of a surplus is still a debtor nation.

The supply of a good up is shifted by the less incentive to take action.

The equilibrium quantity has fallen.

Sometimes equilibrium price rises are a result of strategic trade bargaining.

There is a fee for a philosophy or logic class.

Trade restrictions may mean that the industry can inflate its costs.

Quotas are preferred by Importers because they receive 9.

The WTO and GATT were replaced by the brings in revenue for the government.

The same effect can be had by an inefficient customs agency.

The EU and a trade restriction are important trade associations.

Explain the relationships among the cost curves.

One of the strongest arguments for using the market as a means of organizing society is the ability of market economies to supply material goods and services.

You need to coordinate the delivery of a Starbucks Frappuccino in the morning.
The paper had to be processed and made into cups and printed with the Starbucks logo.
Coffee beans were grown, picked, roasted, and ground.
The parts for the espresso maker had to be made.

The ingredients were produced in 20 different countries and shipped to Starbucks near you at the right time and in the right quantities.

Markets are able to channel individuals' imagination, creativity, and drive into the production of material goods and services that other people want.
Incentives are given to people to supply goods and services.

All supply comes from individuals.

The factors of production include land, labor, and capital.
They want something in return.
Industry's ability to supply goods depends on individuals' willingness to supply the factors of production they control.
The connection was obvious when consumer goods were hard to come by in Russia.
People in those countries stopped working.

The analysis of supply is more difficult than the analysis of demand.

People first give their factors of production to the market in the supply process.
GM or 3M transform the factors into goods that consumers want.

The supply of factors of production and the supply of produced goods are separate from each other to simplify the analysis.

The analysis of the supply of produced goods can be simplified by assuming that the prices of factors of production are constant.

If you remember that factor supplies are behind any produced good, there's no problem with doing this.

Firms are not responsible for supply.

I devote two chapters to considering production, costs, and supply, even though the analysis is so simplified.

The production process and short-run cost analysis are introduced in this chapter.
In the next chapter, I look at long-run costs and how cost analysis is used in the real world.

The law of supply is easy to understand because of the goods that already exist.

Their supply to the market depends on people's opportunity costs of keeping their houses and time for themselves and of supplying them to the market.

The factors of production must be conceived and produced.

The production of such goods affects the supply.

One needs a theory of production to support the theory of supply.

The firm is a key concept in production.

Goods and services can be sold.

A firm organizes factors of production and/or produces goods and sells them to individuals, businesses, or the government.

Depending on the cost of doing each activity and the cost of sub contracting the work out to another firm, which combination of activities a firm will undertake depends.

Some firms don't have a physical location and don't "produce" anything; they simply sub contract out all production.
Perdue chickens are an example.
Perdue doesn't raise chickens of its own.
Farmers are hired to raise chickens.

It gives the farmers a set of instructions on how to raise chickens.

Perdue puts its label on the processed chickens and ships them to supermarkets.
Firms like Amazon and Perdue don't produce goods, but they do organize production, sales, and distribution.

Contract manufacturing and contract fulfillment process are more and more being done to separate actual production structures from the production.

In Chapter 3, we talked about the types of firms that exist in transaction cost, and how they are one of the most matched a need, negotiating pay, and paying for the employee important of.

They are training that employee.
When a firm needed consumer goods, organizations that translate factors of production into transaction costs were low.
There are different types of real-world firms, including sole it assigned the project in-house, providing additional train proprietorships, partnerships, corporations, for-profit firms, and when necessary.
The original transaction cost could be nonprofit firms.
There are a number of projects for each type.

There is a need for research in economics.

One of the reasons why the ternet sites such as upwork.com for free nature of firms changes over time is considered in those areas of research.

The firm doesn't have any research that is based on the work of pay for the service, which lowers the Chicago economist Ronald Coase, who transaction cost enormously.

You can post the project online.

As transaction costs production involves command and control and is not change, the efficient structure of firms changes, which is subject to the competition of the market.

The efficient firms used to be small and fragmenting produc hired employees for the long term.

The goal of firms is to maximize profit, according to economists.

If a firm sells 1,000 pairs of earrings for $5 each, its total revenue is $5,000.
The total cost is $3,000 if the firm paid $2,000 to employees to make the earrings and $1,000 for the materials, rent, and interest.

Accounting focuses on explicit costs when determining what to include in total revenue and total costs.

Economics focuses on able measures that go into a firm's income statement.
You can think of both implicit and explicit costs.

The earring firm made an accounting profit of $2,000.

The production cost of inputs bought from other firms is treated as if it were a one-stage other firm in this book.

If a process transforms a factor of produc $4,000 on component parts into a consumer good, it's a good example.

33 1/3 percent of the analysis is managed by keeping the value added at $6,000.

Keeping in mind that reality is stages of production is more complicated.

Most goods value added of all firms must equal 100 per production.

The bottom left and bottom right are examples.

I discuss the production of desks.

One firm transforms raw ma in this book, to relate that dis terials into usable raw materials (wooden logs), another cussion to reality, you should think of that firm as a com firm transforms usable raw materials into more usable positions.

It brings home how tailer sells to consumers.

A good is complicated.
If any stage gets through the first five or six stages.

ducing a better mousetrap isn't enough if you add up all the sales of the firms.

The firm would overstate how much production was needed to get it out to consumers.

The tak model doesn't bring home how much total production is actually.

The contribution that each stage of production makes is what value planning to go into business for yourself is about.
The final value of a good is determined by many people's dreams.
A firm's value added has been affected by this reality.

Economists have different measures of revenues and costs than accountants do.

The economists' specifica tion of revenues and costs is based on opportunity costs.
Both explicit and implicit costs and revenues are included by economists.

Their measure of profit is both explicit and implicit.

implicit costs are costs that you don't directly pay but that are part of the opportunity costs of a decision Net wealth is increased bylicit revenues that you don't receive.
implicit costs and implicit revenues are included in economists' measure of profit.

Let's look at some examples.

If the owner of the earring firm didn't own the firm, she could have made more money working elsewhere.

The cost to work in her own business is over a thousand dollars.
It is an implicit cost of doing business.
The total cost of the earring firm is between $3,000 and $4,500.
Calculating implicit costs is not directly measurable, which is why accountants don't include them.

There is an increase in the value of assets.

The kiosk's market value increases from $10,000 to $11,000.

The earring firm has total revenue of $5,000 in explicit revenue and $1,000 in implicit revenue.

In this case, the economic profit is between 5000 and 15000.

The difference has to do with measurability.

General accounting rules do not permit inexactness because they might allow firms to misstate their profit.

I stated at the beginning of the chapter that supply is the key to the market's ability to provide the goods people want.

Firms are important because they control the production process.

The firm can choose the size of the plant it wants, the type of machine it wants, and the location it wants.

They refer to the degree of flexibility the firm has in changing inputs.

The firm can make production decisions in the long run.

The flexibility that existed in the long run is no longer available in the short run.

Some inputs are so expensive to adjust that they are fixed in the short run.

Real-world production tables are complicated.

They usually involve hundreds of inputs, hundreds of outputs, and millions of combinations of inputs and out puts.
Expertise and experience are required to determine which is best.
Business schools teach operations research and production analysis, engineering schools teach industrial engineering.

The managers of a firm look at a production table.

Short-run production analysis in which one of the factors is fixed is a requirement for introductory economics.

We can capture some important technical relationships without getting tied up in numbers.
The number of assumed fixed inputs has already been determined.

The firm can make 17 pairs of earrings with 3 workers.

It's important to distinguish marginal product from average product.

The workers are divided by the amount of input.

Let's look at the case of 5 workers.

The average product is 5.6, divided by 5.
If we change the number of workers, how much additional output will be forthcoming?
If we change from 4 to 5 workers, the additional worker's marginal product will be 5; if we change from 5 to 6 it will be 3.
The marginal products are written between levels of output.

The information in a production table is summarized in a production func tion.

The maximum amount of output that can be derived from a given number of inputs is told by the production function.

The number of workers is on the horizontal axis while the earrings are on the vertical axis.

The marginal and average productivities are increasing, but eventually decreasing.

It exhibits negative marginal productivity eventually.

The same information can be gathered from Figure 11-1(a), but it's a bit harder to Q-2.

The production function is still rising between 2.5 and 7.5 workers.

Extending a line down to Figure 11-1(b) shows the diminishing mar ginal productivity in this range.
The marginal productivity is negative.

The area of diminishing marginal productivity is the most important.

Firms are most likely to operate in that area.
Firms will be able to increase their existing workers' output by hiring more workers if they can get out of that range.

It stays out of that range.

The range of the relationship between fixed and variable inputs is so important that economists have formulated a law that describes what happens when more and more of one input is added to a fixed amount of another input.

In the absence of diminishing marginal productivity, we could take a flow additional output one gets from the erpot and keep adding seeds to it, get more and more food per seed until we had additional input will fall.

A flowerpot is capable of produc ing only so much food, no matter how many seeds we add to it.

When we add more and more seeds, they will produce less food than before.
It's the law of diminishing marginal productivity.
The total output, not just the output per unit of input, decreases as inputs are increased as the pot reaches a stage of diminishing absolute productivity.

In any firm, owners and managers talk about costs more than anything else.

The firm is trying to figure out ways to lower costs that are too high.
Table 11-1 shows costs associated with making between 3 and 32 pairs of earrings.

Their costs are variable.

Say you make earrings.

The fixed cost is the amount of money you spent on the machine.

All fixed costs are assumed to be sunk costs.

Column 2 of Table 11-1 shows fixed costs.

Fixed costs are the same regardless of the level of production.
Fixed costs are always $50, even if output is 3 or 32.

The silversmith needs to hire workers as well.

Column 3 shows the earring firm's variable costs.
Variable costs rise to $108 when the firm produces 10 pairs of earrings.

The total costs of the earring firm are shown in column 4.

The sum of the entries in columns 2 and 3 are in the same row.
Fixed costs are $50 and variable costs are $150, so the total cost is $200.

Total cost, fixed cost, and variable cost are important, but most of a firm's discussion is about average cost.

We want to make a distinction between total cost and average cost.
To arrive at the earring firm's average cost, we divide the total by the quantity produced.
Each of the costs has an average cost and we divide it by the total amount.

The average fixed cost and average variable cost are shown in Table 11-1.

Average total cost is shown in column 8.

The total cost of producing 16 pairs of earrings is $12.50.

The total cost can be divided by output.

The increase (decrease) costs that our earring firm considers when deciding how many pairs of earrings to produce are not the most important Marginal cost.

Not all entries have marginal costs since only selected output levels are shown.

There must be a marginal change in order for a marginal cost to exist.

The economic models in the textbook are about the production of physical goods.

It might require physical inputs.
Advertising that has little to do with the product becomes less important in the modern economy.

Starbucks is pro even though lower-price coffee might taste better, but it is also producing an image of just as good, or better.

The firm's name is associated with someone.

You are buying an image of yourself when you buy a car, for example, and you are not just positive.
Modern firms spend a lot of money.

The same medicine with a low price might seem inconsistent with these expenditures.

They are not variable costs since they affect both the structure of costs and how costs are not different with output of the product.

The modern econo was analyzed.
The more advanced models of costs capture require large expenditures not related to the distinctions.

If our earring firm increases production by 1 unit, we can find marginal cost.

The total cost has gone up from $150 to $158.
The marginal cost of produc ing the 10th unit is $8.

The owner of the earring firm wants you to show her what the numbers in Table 11-1 mean and she wants you to show her pictures.

A dollar measure of costs on the vertical axis and quantity on the horizontal axis are used to draw a graph.

The total cost curve Short-Run Cost Curves is upward-sloping.

The total fixed cost curve is determined by the two columns on the graph.

Plotting column 1 and column 3 is used to determine the total variable cost curve.

Variable cost is increased by increasing output.

The total cost curve is the vertical summation of total fixed cost and total variable cost.

The marginal cost curve goes through the minimum point of the average total Figure 11-2(b) presents the average fixed cost curve, average total cost curve and average variable cost average cost curve.

The ginal cost curve is associated with the cost figures in Table 11-1.

The case was the same.

The rate of increase increases as output increases.

To keep the presentation simple, we focus on the most important part of the total cost curve, that part that follows the simplest rules.

The total cost curve can be bowed downward.

All the firm's owner needs to do is look at this graph to find the various costs associated with different levels of output, since the graphical visualiza tion of cost curves provides a good sense of what happens to costs.

Let's start with the average fixed cost.
The average fixed cost is decreasing.

The average fixed cost curve is like a child's slide, with a steep decline followed by flatter and flatter curves.

As output increases, the same fixed cost can be spread over a wider range of output, so the average fixed cost falls.
The average fixed cost falls slowly.
The increase has a smaller effect as the numerator stays the same.

The marginal cost curve and average average cost curves are next.

The cost curve is expressed another way.

If you remember Figure 11-1 you can see that the output numbers we presented were similar to the ones we used in the cost analysis.

Another way of considering production analysis is cost analysis.
The laws governing costs and productivity are the same.

The output can only be raised by increasing the variable input.

The law of more and more variable input is added to a fixed input and causes the law of diminishing marginal productivity to enter in.
The key productivities can fall.
When marginal productivity falls, marginal cost must rise and average costs must rise.

Productivity falls is the same as cost rises.

If the law of diminishing marginal productivity holds true, then both the marginal cost curve and the average cost curve must be upward-sloping.

They are in our examples.
It's assumed that marginal and average productivities are increasing at low levels of production.

The marginal cost and average variable cost are falling.

They must be neither rising nor falling at some point.
The marginal cost curve and average variable cost curve are U-shaped.

The average total cost and able cost curve are the two variables that determine the distance.

After we cover the shape of the average variable cost curve, we'll discuss why.

The average total cost falls faster than the average cost.

The average variable cost curve and average total cost curve would almost meet if we increased output enormously.
The firm's owner cares about the average total cost.

There is a relationship between marginal product and marginal cost.

The shapes of the cost curves are reflections of the shapes of the productivity curves.

When one is increasing and the other is decreasing, the other is at a maximum.

Initially costs are going down.

There is a minimum point.
Costs are going up after that.

We can relate output to worker and output to worker.

We know that the average product of 2 workers is 5, and that 2 workers can produce an output of 10.
The workers' average productivity is 5 when the marginal cost is equal to the output.
We can construct the curves by continuing this minimum point of average variable soning.

The mirror image of the other is what you'll see if you look closely.

The marginal productivity curve is the maximum point.

The cost curves are falling when the productivity curves are rising.

The marginal cost curve on the one hand and the average variable cost and average total cost curves on the other are important relationships.

There is a relationship between marginal cost and average total cost.

The average total cost is falling even though marginal cost is rising.

The marginal cost curve is not happenstance.

If average total cost is rising or falling, the position of marginal cost tells us.

Think of it as your grade point average.

If you get a C on the next test, your grade point average will fall below a B.
Your average grade is falling because your marginal grade is below your age grade.
Your marginal grade is below average.

If marginal costs go down, it will go up.

The average grade will not change if your marginal grade is equal.

The marginal cost cost and average variable cost are related.

The intuitive explanation for the relationship is that age total cost includes average variable cost, but it also includes average fixed cost, which is falling.

The average total cost will fall if the short-run marginal cost is above average.
If average variable cost doesn't rise by more than average fixed cost falls, average total cost will still fall.

I'm going to cut off the chapter at this point because there's only so much that anyone can absorb in one chapter.

It's time to take a break.

You should go out and do something with your significant others.

Call the parents and tell them that you appreciate their expenditure on your education.
The opportunity cost of that education is not peanuts.
If you are married, you should tell your spouse that the cost of being away for another minute was so high that you couldn't control yourself.
You should go out and read a book with your kids.
If you've been conscientious about this course, you may not have paid enough attention to your kids.
We will return to the grind in the next chapter.

The fixed cost can't be recovered.

Costs per unit of production are fixed.

Costs can be different with production.

Accounting profit is less explicit than revenue.

The law of diminishing marginal productivity states thatlicit revenue includes the increases in the value that as more and more of a variable input is added to assets owned by the firm.

Implicit costs include a fixed input, the additional output the firm gets will affect the opportunity cost of time and capital.

In the long run, a firm can choose between all costs and total costs.

The law of diminishing marginal productivity causes costs to go up.

What costs and revenues are included when economists put them in this business.

The best cookies in the world are from Peggy-Sue.

Cookie 4 has offered her a job.

The short run from Monster, Inc. to $130,000 per year is different.

She is making her own cookies.

She has a revenue of $260,000 per year.

The free enterprise bug has affected Economan.

He started a firm about extraterrestrial affairs.

The cost of gas is $5,000.

What costs are being 14 is indicated by the following.

A firm has fixed and variable costs.

Offices leased.

hourly pay increases

$10 per hour is the price of labor.

Each plant is subject to an annual lump-sum tax.

Help him do it.

The average variable costs of a firm will increase by $5 for each unit if the firm has $100 in fixed costs.

Questions from Alternative Perspectives 1.

The cost tables are presented in the text.
Firms' role in shaping the decisions of firms is not emphasized in the text.

If it is true that firms are shaping.

A drug firm could increase its profit by marketing a "just-in-time" competitive strategy.

The retail giant relies on a drug that may have serious side effects.
It knows that it can't be prosecuted for doing so.

According to the analysis in the book, firms hire inputs that average seven hours of training and part-time workers that hold costs as low as possible.

Gloria who often work full-time hours without getting corre Steinem pointed out that men see benefits in reality.
How do women sell men's underwear in a "just-in-time" manner?

Labor and machines are not fixed but there are structures.

A 50 percent quick-order premium was paid for both workers minutes for $39.99 a month.
The machines were revealed in the fine print.
Only 350 of those minutes were anytime minutes, and they can't be returned.
The remaining were limited to the evening and weekend.

How will machines be fixed if they are variable?

Answers to Margin Questions 1.

The marginal productivity curve and average economic profit are both inverted.

Firms are likely to operate at that quantity.

Firms could increase workers' together by increasing the average fixed portion of the marginal productivity curve because on cost decreases, the two curves get closer and closer to each other.

Since the average productivity and marginal productivity hire more workers at least to the point where diminishing of workers are the mirror images of average costs and marginal productivity sets in.

The average variable costs would be $40.

The age productivity and marginal productivity curves are U-shaped and the marginal cost curve must be equal at that point.

It's not possible to say what's happening to the average total cost curve.

The magnitude of marginal costs relative to average total costs is important.