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Essentials of Investments9th EditionAlan J. Marcus, Alex Kane, Zvi Bodie 689 solutions Principles of Economics7th EditionN. Gregory Mankiw 1,394 solutions Principles of Economics8th EditionN. Gregory Mankiw 1,335 solutions As you have read, natural resources include those materials found in nature that people use to make goods and provide services. Natural resources include arable land (land that can be farmed), mineral deposits, oil and gas deposits, water, and raw materials like timber. It is easy to see why a region with fertile soil, such as the central United States, is likely to have an economy based on agriculture. Similarly, you can predict that a region with large oil and natural gas reserves—such as Southwest Asia—is likely to have an economy based on income from the sale of these resources. Natural resources, as well as climate and location, help determine what goods and services an economy produces. They are not, however, the only influences. Five major economic activities are producing, exchanging, consuming, saving, and investing. Patterns of production, distribution, and use develop as the economic activities become concentrated in urban, industrial, or agricultural areas. Geographic and human factors also influence patterns of economic activity. Ski resorts develop in the mountains, farming in the valleys, and mining where there are ore deposits. Saving and investment also follow patterns, becoming concentrated in areas of potential growth. Specialization occurs when producers—either individuals or nations—decide to produce only certain goods and services, rather than producing all the goods and services they need. Specialization is determined by a nation's natural resources and by its human and physical capital. For example, the world's wheat is grown in regions with a cool climate. In the United States, we grow wheat, soybeans, and other crops for which we have appropriate soil and climate conditions. We cannot, however, produce diamonds or coffee. When nations specialize in producing only certain goods, they obtain the goods they don't or can't produce through trade. For example, Costa Rica specializes in producing coffee and exports a large quantity of coffee beans. The country then uses the money it earns from coffee exports to buy products that it does not produce. What about a nation that enjoys an abundance of resources, including a rich natural environment, a well-educated work force, and the latest technologies? It can, in theory, produce almost all that it needs by itself, without trade. If you were in charge of such a country, would you engage in large-scale trading? Or, would you decide to rely mostly on your country's own resources and be largely self-sufficient? Although self-sufficiency may sound appealing, it actually is better for countries to specialize in some products and trade for others. o determine comparative advantage in the example involving Kate and Carl, you need to look at the opportunity costs of producing T-shirts and birdhouses. Kate's opportunity costs In an hour, Kate can make either six T-shirts or two birdhouses. She therefore sacrifices three T-shirts for every birdhouse she produces. In other words, the opportunity cost of a birdhouse is the three T-shirts she could have produced instead. Conversely, the opportunity cost of a T-shirt is one third of a birdhouse. As you have read, each person should produce the good for which he or she has a comparative advantage—that is, a lower opportunity cost than another person. Carl's opportunity cost for producing a birdhouse (one T-shirt) is lower than Kate's (three T-shirts), so it is sensible for Carl to produce birdhouses. Kate's opportunity cost for producing a T-shirt (one third of a birdhouse) is lower than Carl's (one bird-house), so Kate should produce T-shirts. Why is it sensible for Carl to specialize in birdhouses? Although Kate has an absolute advantage in making birdhouses, Carl has a comparative advantage in birdhouses because he has a lower opportunity cost. Remember that in order to make a bird-house, Kate has to give up three T-shirts. In order to make a birdhouse, Carl has to give up only one T-shirt. As you might remember from trading baseball cards or small toys when you were younger, trade usually involves bargaining. Each side tries to make the best deal it can. In a modern economy, we don't exchange goods directly—we use money. The main principle, however, remains the same: both sides agree on a price that benefits both. When Kate wants a birdhouse, she can either produce it herself or produce some shirts and trade some of them for a bird-house made by Carl. Suppose Kate and Carl agree to trade two T-shirts for one bird-house. In this case, Kate will be better off producing T-shirts and trading for a bird-house. That's because in the time she could have taken to produce her own birdhouse, Kate can produce three T-shirts. Once she pays Carl two T-shirts to get a birdhouse, she will still have one T-shirt left over. In other words, trade makes her better off by one T-shirt. (See Figure 17.4.) When Carl wants two more T-shirts, he can either make them himself, or make some birdhouses and trade some of them for shirts made by Kate. If Kate and Carl agree to trade one birdhouse for two T-shirts, Carl will be better off producing birdhouses and trading for shirts. In the time he could have taken to produce two T-shirts for himself, he can produce two birdhouses. Once he pays one birdhouse to Kate to get two T-shirts, he will still have one birdhouse left over. Trade makes him better off by one birdhouse. Kate and Carl both benefit from trade. Each person specializes in the production of the good for which he or she has a comparative advantage, and then trades for the other good. The same is true with nations—both sides benefit from trade. The United States is the world's leading exporter, followed by Germany and Japan. One reason for the success of the United States as an exporter is the wide range of its exports, from telecommunications equipment to soybeans. Another reason is that the United States has a commanding lead in manufacturing such products as computer software, medical equipment, and other advanced technology. The United States is also in a good position to benefit from increased trade in services. Goods make up the bulk of international trade, but services are also traded on the world market. These include education, information services, computer and data processing, financial services, and medical care. Exports of services have grown rapidly over the last decade. The United States is the world's top exporter of services, so it stands to gain significantly from this trend. To help you better understand the effects of international trade on employment, think back to the example of Kate and Carl. As you have read, Kate can make six T-shirts or two birdhouses by herself in an hour. Suppose she hires Ari to help her build bird-houses. She later realizes that she should specialize only in T-shirts since that is where her comparative advantage lies. She no longer needs Ari to help her. Unfortunately, Ari's only skill is making birdhouses. Ari now faces three possibilities: unemployment, retraining, or relocating to a part of the country where his skills are in demand. Ari may be able to find a training program and learn to make T-shirts or another product. He might even find himself better off than he was making birdhouses. If Ari relocates, he may or may not be better off. How well he does depends on housing prices, the quality of his new neighborhood, the impact on his family, and a variety of other factors. Government assistance is often available to help retrain laid-off workers for new jobs or to help them relocate to fit shifts in employment patterns. However, especially in the case of older workers or workers with families, retraining or relocation is not an easy (or sometimes not a possible) option. Some workers may become unemployed or be forced to take lower-paying jobs. The following example will help you calculate exchange rates. Suppose your family is planning a trip to Mexico this summer and wants to determine the cost of staying in a hotel. If a hotel room in Mexico costs 500 pesos per night and the exchange rate is 10.0 pesos per dollar, a hotel room will cost $50: 500 pesos 10.0 pesos per dollar = $ 50.00 fraction 500 , pesos , over 10.0 . pesos per dollar end fraction . equals dollars , 50.00 If your family decides to go to Mexico the following fall, however, the exchange rate will probably have changed. If by fall, the exchange rate is 11.0 pesos per dollar, the hotel room will cost only about $45 a night (assuming that the hotel still charges 500 pesos per night): 500 pesos 11.0 pesos per dollar = $ 45.45 fraction 500 , pesos , over 11.0 . pesos per dollar end fraction . equals dollars , 45.45 By fall, the exchange rate might, however, be only 9.0 pesos per dollar. In that case, your family would need to spend more money on your visit. The hotel room would now cost about $56 per night: 500 pesos 9.0 pesos per dollar = $ 55.55 You have probably heard newscasters talk about a "strong" or "weak" dollar or a currency like the Japanese yen "rising" or "falling." What do these terms mean, and are they good news or bad news for the United States economy? An increase in the value of a currency is called appreciation. When a currency appreciates, it becomes "stronger." If the exchange rate between the dollar and the yen increases from 100 yen per dollar to 120 yen per dollar, one dollar will purchase more yen. Since the dollar has increased in value, we say that the dollar has appreciated against the yen. This appreciation means that people in Japan will have to spend more yen to purchase a dollar's worth of goods from the United States. When a nation's currency appreciates, that nation's products become more expensive in other countries. For example, a strong dollar makes American goods and services more expensive for Japanese consumers. Japan will therefore probably import fewer products from the United States. That means that total United States exports to Japan will likely decline. On the other hand, a strong dollar means that foreign products will be less expensive for consumers in the United States. A strong dollar is therefore likely to lead consumers in the United States to purchase imported goods. A decrease in the value of a currency is called depreciation. You might also hear depreciation referred to as "weakening." If the dollar exchange rate fell to 80 yen per dollar, you would get fewer yen for each dollar. In other words, the dollar has depreciated against the yen. When a nation's currency depreciates, its products become cheaper to other nations. A depreciated, or weak, dollar means that foreign consumers will be able to better afford products made in the United States. As you can see from Figure 17.9, exports are likely to increase as a result of a weakened dollar. At the same time, other nations' products become more expensive for consumers in the United States, so imports are likely to decrease. When a company in the United States sells computers in Japan, that company is paid in yen. It must, however, pay its United States workers in dollars. The company must therefore exchange its yen for dollars in order to pay its workers. This exchange takes place on the foreign exchange market. Because each nation uses a different currency, international trade would not be possible without this market. The foreign exchange market consists of about 2,000 banks and other financial institutions that facilitate the buying and selling of foreign currencies. These banks are located in various financial centers around the world, including New York, London, Paris, Singapore, Tokyo, and many other cities. Wherever they are located, the banks that make up the foreign exchange market maintain close links to one another through telephones and computers. This technology allows for the instantaneous transmission of market information and rapid financial transactions. Although fixed exchange-rate systems make it easier to trade, they require countries to maintain similar economic policies, including similar inflation and interest rates. By the late 1960s, changes were continually occurring in the international trading system, and worldwide trade was growing rapidly. At the same time, the war in Vietnam was causing inflation in the United States. These factors made it increasingly difficult for many countries to rely on a fixed exchange-rate system. In 1971, the West German and Dutch governments abandoned the fixed exchange-rate system. By 1973, many countries, including the United States, had adopted a system based on flexible, or floating, exchange rates. In contrast to the fixed rate system, the flexible exchange-rate system allows the exchange rate to be determined by supply and demand. With a flexible exchange-rate system, exchange rates need not fall into any prespecified range. Today, the countries of the world use a mixture of fixed and flexible exchange rates. Most major currencies, however—including the U.S. dollar and the Japanese yen—use the flexible exchange-rate system. This system accounts for the day-to-day changes in currency values that you read about earlier in this section. When the flexible exchange-rate system was first adopted, some economists worried that changes in the exchange rate might interrupt the flow of international trade. In fact, the flexible exchange-rate system has worked reasonably well since the breakdown of the Bretton Woods fixed-rate system. World trade has grown at a rapid rate, and more nations trade today than ever before. Although the United States sells many goods abroad (supercomputers, movies, and CDs, for example), in general it buys more goods from abroad than it sells (cars, clothing, and VCRs, for example). The result is that the United States is running a large trade deficit, and has been for several decades. The United States trade deficit has existed since the early 1970s. At that time, the Organization of Petroleum Exporting Countries (OPEC) dramatically raised the price of oil. The United States had to increase the money spent on foreign oil, thus increasing the money spent on imports. The total cost of imports to the United States then exceeded the income from exports, and a trade deficit developed. (See the United States Trading Partners map on page 545 of the Databank for the names of the countries that belong to OPEC.) As you can see from Figure 17.11, the United States suffered record trade deficits in 1986 and 1987. In the early 1990s, the trade deficit began to fall. By the late 1990s, however, the deficit had skyrocketed to record levels, largely as a result of increasing oil prices and an economic boom that fueled consumer buying. The United States trade deficit totaled over $617 billion in 2004, with the largest amounts owed to China, Japan, Canada, Mexico, Germany, and oil exporting countries, such as Venezuela. Imported petroleum accounted for about 20 percent of the deficit. When a country can produce something more efficiently?Comparative advantage is when a country can produce one thing more efficiently than it can produce another thing. The idea is straightforward enough: if Germany is better at making beer than it is at making pizzas it has a comparative advantage in brewing.
Which of the following is the ability to produce something more efficiently than any other country can?absolute advantage, economic concept that is used to refer to a party's superior production capability. Specifically, it refers to the ability to produce a certain good or service at lower cost (i.e., more efficiently) than another party.
What kind of advantage does a country have if it can make a product more efficiently?Absolute advantage refers to the ability of a country to produce a good more efficiently than other countries. In other words, a country that has an absolute advantage can produce a good with lower marginal cost (fewer materials, cheaper materials, in less time, with fewer workers, with cheaper workers, etc.).
What kind of advantage does a country have if it can make a product more efficiently quizlet?Absolute advantage means a country has a monopoly on a certain product or can produce the product more efficiently than any other country.
What happens if country A has an absolute advantage in producing everything?Even when one country has an absolute advantage in all products, trade can still benefit both sides. This is because gains from trade come from specializing in one's comparative advantage.
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