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| | Note also that a firm in monopolistic competition has some market power, and can increase his price above his marginal cost. So even in the long run, P exceeds MC for monopolistic competition. In contrast, price equals MC in a perfectly competitive market. | | Note also that a firm in monopolistic competition has some market power, and can increase his price above his marginal cost. So even in the long run, P exceeds MC for monopolistic competition. In contrast, price equals MC in a perfectly competitive market. |
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| − | ==Trade==
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| − | What is “trade”? It is an exchange of goods or services or money by one person for goods or services or money from another. When I give you an Alex (“A-Rod”) Rodriguez baseball card in exchange for your giving me a Derek Jeter card in return, this is called a trade. We would not make the exchange unless each of us felt we would be better off as a result. Maybe I have two “A-Rod” cards and the second one doesn’t mean as much to me as it would to you, for example.
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| − | When Pokeman cards were the big fad for children, they quickly learned to trade cards to improve their collections. Note that both sides must perceive a benefit for a trade to occur.
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| − | Dutch traders supposedly bought the island of Manhattan from Native Americans for only $24 in beads and trinkets over 300 years ago. At the time, Manhattan did not appear to be worth much. Land was plentiful, and it was difficult to get to Manhattan from the New Jersey side. If the story is true, then both sides felt they were better off from the trade. In the 1970s, New York City nearly went bankrupt. Would the Indians have taken it back?!
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| − | Trade benefits both sides to the deal. It appears “win-win” for both parties, or one would not do it (assuming there is not any trickery involved). Generally, economists favor “free” trade, which means trade without government interference.
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| − | Now move to the big picture. Consider the massive amounts of trade that occurs between companies and people located in different countries. “Exports” are the goods that companies in one country make to be sold in another country. Those goods exit the country of origin and are purchased by foreigners. “Imports” are the opposite: they are goods that are made in a foreign country but purchased here.
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| − | Whenever you hear new economic concepts, try to think of examples yourself. What are some imports that you buy? Look at where your clothes are made. Labels disclose this information when you buy the clothes. Clothes are usually imports, often made in Mexico or China (if inexpensive) or Italy (if expensive). What are some cars that are imported? Examples are Toyota (made in Japan), Hyundai (made in Korea), BMW (made in Germany), and Jaguar (made in England).
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| − | More difficult is to imagine goods that we export. You do not purchase any of those. Those are goods made in the United States for sale in a foreign country. Can you think of any examples? Music and movies are examples, as people around the world like to buy what Hollywood produces. Computer software is an other example, as the Microsoft monopoly exports its products to the rest of the world.
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| − | Here is something we export that is controversial: we export jobs. Called “outsourcing”, this consists of a company firing an employee in the United States and then hiring a replacement at much lower wages in a foreign country, such as India. The foreign employee can be hired free of many government regulations that make jobs costly here, such as social security taxes, health benefits, taxes, risk of lawsuits, pensions, and so on. An employee hired at a wage of $30,000 in the United States may cost the employer $60,000 when all the regulatory costs are added. Not so if the company can hire a similar employee in a foreign country.
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| − | Do we ever import jobs from foreign countries? Not many. The Japanese car company Toyota did build some car manufacturing facilities here in response to complaints that it was hurting our automobile industry. Generally, however, it is more expensive for foreign countries to hire workers here than it would be to hire them elsewhere in the world.
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| − | China is the fastest growing exporter of goods in the world, and India is second. In 1980, China exported $18.2 billion in goods to other countries. By 2000, China exported $249.3 billion in goods. Why? Because China has very cheap labor. But it is also a Communist country. Some of those profits go into building up its military, and menacing its democratic neighbors. It points nuclear missiles at our western cities, like Los Angeles.
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| − | You can export or import cash itself. We export dollars to pay for imported goods. More generally, exports are what we sell in exchange for imports.
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| − | Sometimes you will read on the news a mention of the “balance of payments” or “trade deficits.” These terms apply to the difference between how much we import versus how much we export. Because goods are made more cheaply in foreign countries, we typically import far more than we export. That means the United States has a large trade deficit (amount that total exports exceed total imports).
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| − | The “balance of payment account” consists of two accounts that keep track of the goods and services entering and leaving a country: the “capital account” and the “current account.” The capital account monitors physical and financial assets; the current account monitors goods and services. Familiarity with these terms suffices, and do not worry if you do not fully understand them.
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| − | ==“Free Trade” versus “Protectionism”==
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| − | One of the oldest political issues is the debate between “free trade” and “protectionism”. This has been debated in American politics for over 200 years. What is the controversy?
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| − | Supporters of “free trade” oppose government interference in trade between foreign countries. They feel that we should be able to import as many goods as possible from China, and export as many jobs as desired to China. They argue that trade makes both sides better off, so it should be allowed.
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| − | But what about the jobs that are lost in the United States due to the shift to foreign producers of goods and the outsourcing of the work? Advocates of “free trade” point out that the people who buy the imports are better off, and they save money by obtaining goods at a lower price. They do not need to make as much money from jobs because their expenses are decreasing.
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| − | The free trade advocates also argue that our economy becomes stronger due to the imports, and new jobs will be created for those who lost their prior jobs. When jobs were lost in the steel industry due to cheaper imports, new jobs were created in the services industry. The dot-com internet boom created many new jobs in the 1990s. There are temporary dislocations, but these are like growing pains until better jobs arise. That’s the argument in favor of free trade.
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| − | Free traders cite the Law of Comparative Advantage: nations are better off by exporting goods it produces at a lower relative price than others, and importing goods that it cannot make as cheaply. If China makes trinkets more cheaply than we can, then let’s save money by buying them from China and let’s focus our work on what we do best.
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| − | Opportunity cost supports this view. You lower your opportunity cost by spending your time most efficiently working on what you do best. Ford Motor can make a car more efficiently than you can. But perhaps you can provide medical or legal services more efficiently than Ford Motor can. So spend your time making money as a doctor or lawyer, and buy your cars from Ford Motor. You’ll have extra money that way. If you spend all your time trying to build a car, then you’d go broke and incur enormous opportunity costs.
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| − | For the purposes of economics courses and the CLEP exam, “free trade” and the above arguments are the correct answers. There is much to be said in their favor. The free traders also think they are promoting peace. “If goods cannot cross borders, then soldiers will” is one of their favorite sayings.
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| − | However, there are many smart people who would be considered “protectionists” (though they would dislike the pejorative label). Can you think of reasons to oppose “free trade”?
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| − | The first argument is the simplest: money isn’t everything. Put another way, overall utility is about more than money. Even if free trade makes me wealthier, I may still not want to do it if it helps wrongdoing or promotes evil. Someone may choose not to buy lottery tickets even if he thinks he will win, if he is morally opposed to gambling. Many of us oppose how China persecutes Christians, promotes abortion, and points nuclear weapons at our cities. Even if we benefit from trading with China, we don’t want them to benefit and continue the activities we oppose. But you won’t hear economists making this argument.
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| − | The second argument for “protectionism” questions whether the foreign trade is really “free”. China is a Communist country. What is “free” about trading with it? It does not have free enterprise. Neither does India. Why should we let these government-controlled economies take jobs away from ours? With great risk and many failures through trial and error, we developed successful industries. Why should we allow foreign governments to be copycats for our successes, at our expense in siphoning away jobs? Let them promote free enterprise in their countries first. Perhaps less trade with government-controlled economies will encourage them internally to embrace free enterprise first, for their own benefit.
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| − | The third argument for “protectionism” is as follows. Workers facing the loss of jobs due to the outsourcing to other countries ask this: why aren’t the executive jobs exported in addition to the jobs of the employees? Sure, workers are cheaper in China and India than American counterparts. But moving the highly paid executive jobs to those countries would save even more money (per worker)! The advocates of free trade appear to be selective about which jobs they support moving offshore. Why not start with moving their job to a foreign country first? They do not seem to be volunteering for that.
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| | ==Tariffs== | | ==Tariffs== |
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| | ==Assignment== | | ==Assignment== |
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| − | Please read and, if necessary, reread the above lecture. Then complete 6 out of the following 7 questions (leave TWO blank): | + | Please read and, if necessary, reread the above lecture. Answer the first question, and then 5 out of the following 7 questions: |
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| − | 1. Which is true about the average fixed costs (AFC) of a firm? | + | 1. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more? |
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| | + | 2. Which is true about the average fixed costs (AFC) of a firm? |
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| | (a)a firm can eliminate these costs by shutting down in the short run. | | (a)a firm can eliminate these costs by shutting down in the short run. |
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| | Briefly explain your answer. | | Briefly explain your answer. |
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| − | 2. Some politicians complain about how people are losing their jobs to workers in China. Is this problem the result of "free trade" or "protectionism"?
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| | 3. What is one of the primary responsibilities of the Federal Reserve Bank? | | 3. What is one of the primary responsibilities of the Federal Reserve Bank? |
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| | 6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason. | | 6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason. |
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| − | 7. Suppose I loaned you $1000 today, and interest rates are 5% per year (compounded annually), and you repaid the loan plus interest in 2 years, then what is the total you would pay to satisfy this debt? | + | 7. Review: is the cost of the bus for a trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we may have several buses). |
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| − | 8. Review: is the cost of the bus for a trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we may have several buses).
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| − | 9. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?
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| − | 10. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.
| + | 8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work. |
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| | ===Honors:=== | | ===Honors:=== |