INDIVIDUAL ASSIGNMENT DIRECTIONS:
Chapter 2 shows and discusses the gains from trade that can result when individuals, firms, or countries specialize in producing goods for which they have the comparative advantage, and trade those goods with others.
Gains from specialization and exchange can be seen in many situations. For example, most people that we pay to do things for us (e.g. grow our food, cut our hair, tutor us, etc.) perform the task for a lower opportunity cost than we would bear if we were to do it ourselves. This is where the gain from trade that benefits both parties comes from, and is why it is rational for you to pay for the service.
To show that you understand how comparative advantage works in the modern economy, please discuss a good or service you recently purchased and address the following prompts:
- What is the item or service, and how much did you pay for it?
- What is a reasonable estimate of how long it would take you to make the item or perform the service at the same quality level of the one your purchased, if you had been unable to buy it? You need to come up with a number of hours or days or years, or whatever time measurement you want, for how long it would take you. Don’t try to avoid this. If you can’t figure it out, pick another good or service.
- Who worked to get the money to pay for the item, and how long did they have to work to get the money? If your money came from the government, see the how the government gets money page.
- Based on your answers to 2 and 3 above, was it rational to buy the good? Explain. Make sure you compare the time it would take you to make the good or perform the service (mentioned in part 2) and the amount of time that had to be worked to get the money (mentioned in part 3). It is only rational to buy something if you give up less resources working to earn money to pay, than you would have if you made the good or perform the service yourself. If it turned out to be irrational, why did you buy it?
If you want to see an example, check out the “great work” linked above. But do not copy the example or even the wording. There are many ways to express these ideas if you understand the material. Please find your own words or face the consequences of academic dishonesty.
In chapter 3 we learn that the supply and demand for a good or service can shift in response to changes in certain variables, and about how supply and demand interact to determine the market equilibrium price.
- Please identify a price change you have observed in the last few years. Do not choose gasoline or smart/cell phones, please pick something else.
- Use the supply and demand model to explain the price change you identified in A) above. You should be talking about what happened with supply and demand curves, so please be sure you talk about both of these. You don’t need to search the internet for information about this, because I don’t care if you are correct. I just want to see if you can use the model to explain price changes, so if your explanation would create the change you observed, that is all I’m looking for.
- Summarize your explanation with one sentence that mentions what you think has happened to both supply and demand, and how this interaction has resulted in the price change you observed. If both curves are moving, you will need to comment on the relative size of each shift to justify the price change you observed.
Please do not try to explain price changes in gasoline or cell phones. Please pick something else.
Helpful tip: be sure you discuss both supply AND demand, as they both play a role in determining the price.
In our everyday lives as consumers we purchase many goods and services, and we derive consumers’ surplus for most of them. With that in mind, please:
Identify 3 goods or services you have purchased in the last year, and estimate the amount of consumer surplus you enjoy from those purchases. For each good, please state specifically:
- The highest amount you would have been willing to pay.
- The price you actually paid.
- The amount of consumers’ surplus you received from each item.
You should have 3 short paragraphs, one for each good. Do not use a chart, please use words.
Helpful tips: Be sure to state exactly the highest price you would have been willing to pay, the price you actually paid, and what your consumer’s surplus is. There are many different phrases you can use to communicate the highest price you were willing to pay, but note that the following are incorrect:
- The price you were willing to pay. Just because you were willing to pay $20 for a good, doesn’t mean this is the highest you were willing to pay.
- The price you expected to pay. Again, this is not necessarily the highest price you were willing to pay.
We are about one third of the way through the course. How is it going for you? Are your grades where you want them to be? If not, what can you do to remedy the situation? If you want a different result, it is imperative that you change your strategy.
This chapter focuses on externalities in the context of producing goods and services, but like many concepts in our course, these ideas are very applicable to our daily lives. In this discussion, please:
- Identify and describe a situation where you have experienced either a positive or negative externality.
- State clearly what the external cost or benefit is.
- Estimate the dollar value of the externality. You may not be sure how to do this, so consider asking yourself the following: If it’s a positive externality, what is the highest price you would be willing to pay for the external benefit you received? If it’s a negative externality, what is the lowest price you would be willing to accept as compensation for the external cost you are bearing?
- How many people in total are affected by this externality? Recommend either a tax or subsidy amount that the externality creator should pay or receive (to “internalize the externality”) based on the number of people affected. You may assume that everyone affected has the same valuation for the externality as you do.
CHAPTER 8, 9, AND 10:
We have begun our exploration of the macroeconomic statistics that describe total output (and the business cycle), unemployment, and inflation in our economy. In recent times we have seen significant variation in output and employment due to the “great recession” of 2008/9 and the recovery that has followed. In this assignment we will use interactive maps on the internet to visualize these variations, and see if we can identify any relationships between changes in output and changes in employment.
- We are going to start by looking at growth rates of GDP. This link goes to the International Monetary Fund’s data mapping website
- (Links to an external site.)
There is a bar at the top of the page that says “Datasets”. Click on Datasets, then select “World Economic Outlook” on the upper left part of the screen. On the World Economic Outlook page, scroll down and select “Gross Domestic Product”, then select “Real GDP Growth” on the page that pops up. You will now be taken to a page that will give you the data on GDP growth rates for different countries and groups of countries.
On the GDP growth rates page, you will see 4 panels. On the upper right panel, scroll down and select United States (by double clicking on it) so that you will be able to see our GDP growth rates. You should see United States added to the lower right panel. To make the graphs more readable, I suggest deleting anything else besides the United States in this panel.
Now in the lower left panel, drag the sliding selector thingy to the left, and notice that the number next to United States in the right lower panel is changing. This number is the value for the real GDP growth rate for the year currently selected. Please write down the annual rates of real GDP growth for the United States for the years 2007, 2008, 2009, 2010, and 2011.
Next we will now look at changes in the unemployment rate over this same time period. We can make this change by going back to the “World Economic Outlook” data set, and selecting the “People” subject, then “Unemployment Rate”. You will then be taken back to the “data mapper page” you were on when we looked at real GDP growth rates, but now we have data on the unemployment rate. Please use the same approach described above, and write down the unemployment rates for the United States for the years 2007, 2008, 2009, 2010, and 2011.
- Please tell me the numbers that you collected. I don’t care if you do this in a table or not.
- Compare the data on GDP growth rates and unemployment you have gathered for the years in question. What phase of the business cycle were we in during 2009? Note that “trough” is not a phase of the business cycle –it is a moment in time.
- Unemployment is something economists call a “lagging indicator”, which means that it lags behind changes in productivity (firms wait to hire and fire people until they are sure they need to). Do you notice a relationship between the GDP growth rates and the unemployment rate (hint: you should)? What is the relationship?
- Do you think there is a causal (meaning changes in one variable cause changes in the other variable) relationship between GDP growth and unemployment rates? If so, please explain exactly how the mechanism of causality works… i.e. Why does a change in one variable cause the change in the other? Think hard here, for yourself, and absolutely DO NOT search the internet for help. Think deeply about the real activities that each variable is measuring and summarizing, and how these activities are related to each other.
CHAPTER 9 CONTINUE:
In this chapter on international trade we explained the benefits of trade using the concepts of producer and consumer surplus. We know that trade barriers such as quotas and tariffs cause prices to rise, which reduces consumer surplus, but we also discussed that trade barriers save or create jobs for American workers. In a writing of no more than two pages, please:
- identify an imported product that you purchased recently, and estimate the amount of consumer surplus you received from your purchase.
- state how much, if any, of your consumer surplus you would be willing to give up if it meant another job could be saved for an American worker.
- determine, if you knew that the job saved for the American worker came at the expense of a job for someone in a third-world country, if that would change the amount of consumer surplus (in dollars) you would be willing to give up.
- determine, if you knew the surplus you gave up went directly to increase the wage of a worker in a third-world country, if that would change the amount of surplus you would give up.
- state whether or not you would change the purchase, and the associated consumer surplus you received, in any way to redistribute the gains you personally received from international trade. If you would have been willing to give up some of the surplus you received if it went directly to the worker in the third world country, would you consider making a donation to a charitable organization benefiting workers that country (this is a way for you to give some of your surplus to the workers)? Why or why not?
We have described economic growth as a function of increased worker productivity, and have argued that worker productivity has risen due to increased levels of capital and technology. We have argued that the more capital a country has, the more it will be able to produce. This is true on a macro level, but also on a micro level –that is, our individual productivity also increases when we acquire machines that help us be productive.
- What machine(s) do you use in your daily life that help(s) you be more productive? Please be specific.
- Without this/these machine(s), what would you be unable to produce or do? Would you have to give up some leisure activities?
- Can you think of any machines that you could buy (thereby accumulating more capital), that would help you produce more? Would you be likely to experience diminishing returns? Why or why not?
Although most of the concepts developed in chapter eleven pertain to businesses, many of the different notions of cost can be applied to your life. In a writing of no more than one page, please identify a fixed, variable, marginal, and implicit cost that you have paid in the last few years.
Whenever the economy goes into recession (as occurred most recently in 2008), consumption in the United States decreases.
- If the economy went into a recession, but you were not directly affected, do you think you might change your consumption patterns/choices? Do you remember if you or your family changed your spending habits at all during or after the 2008 recession? That recession was over a decade ago, so you might want to ask someone (a family member, friend, or whomever) about their recollections and decisions if you don’t remember what happened. Feel free to discuss any of these.
- Following the recession of 2008, the rate of savings in the United States doubled. Why do you think this is? How do you think the increase in savings affected overall consumption? Since, on average, 70% economic activity in the United States is based on consumers (just like you) purchasing goods and services for consumption, how do you think the increase in savings affected aggregate expenditure? Please respond to these questions using your understanding of the aggregate expenditure model.
Many difficult or important jobs in our society pay surprisingly low wages. For example, babysitters, social workers, nursing home workers, seasonal lifeguards, and paramedics, all typically make around $15 per hour or less, but provide services that can save lives.
This phenomenon can be explained via the supply and demand model we developed back in chapter 3, or from related material we learned here in chapter 12 if we view the worker as a business owner selling their labor services.
We know that if barriers to entry into an industry are low, then businesses cannot expect to earn long-run profits. This implies that jobs that require little or no training (read: low barriers to entry) should not expect to get paid much.
For this chapter’s learning portfolio assignment, please:
- Identify a job that you think earns surprisingly little given the task(s) performed
- Discuss the training necessary to get the job
- Discuss what you think the job “should” earn, and try to justify it
- What do you think would happen if the government mandated the wage you suggested above? Please apply the lessons from the material on price floors from chapter 4 in your response
Many businesses operate in the “monopolistically competitive” environment. As we learned in chapter 13, economic profits are possible in this setting, but only to the extent that a firm can continue to differentiate itself from competing firms or produce goods at a lower cost than competitors. For example, Starbucks recently announced that it plans to offer beer and wine for sale after 4 in the afternoon in some markets. Certainly this differentiates it from other coffee shops.
For this chapter’s learning portfolio assignment, please:
- Identify a business operating in the monopolistic competition setting.
- List the assumptions of monopolistic competition and explain how the business fits in with these assumptions
- Suggest a way that this business could differentiate itself from its competition
Keeping your money in a bank seems like a good idea. However, from time to time, depositors lose confidence in banks. In chapter 14 we learned that when many people lose confidence in a bank at the same time it is called a “bank run”, and when this happens to many banks at the same time it is called a “bank panic.” Runs and panics typically occur following the realization that banks may have made bad loans, and may be unable to provide depositors with access to their funds. So it’s clear that there is some risk in keeping your money at a bank.
- If your bank was experiencing a run, would you join in, or would you be confident that the FDIC would be there to insure your account?
- Since the European Union does not have a unified banking system (and possibly other reasons) there is no deposit insurance at most European banks. If you had a bank account in Europe, would you be more, less, or equally as likely to participate in a bank run?
- If it was a panic instead of a run, would you feel safe? Why or why not?
Choose your own monetary policy adventure!
- Imagine that either the economy is in an expansion or a recession. In the next few prompts you will talk about responding to this situation, so choose wisely. This choice is yours to make, so please now state what is going on with the economy you are pretending to observe.
- Would you use expansionary or contractionary policy to help the economy?
- Why would you use the policy you mentioned in 2 above (i.e. what are you trying to affect or prevent)?
- What changes could you make to reserve requirements, the discount rate, and in open market operations that could help you pursue the policy that is appropriate for the situation the economy is in?
- How will the changes mentioned in 4 actually help the economy? In other words, how will the changes you want to make translate into real people making different decisions that will ultimately help the overall economy? You probably want to mention how the market for money is affected, how the interest rate might change, how people respond to changes in the interest rate, and how this behavioral change in many people can change the overall economy.
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