Test Review Chapters 4 & 5

Income can go to: Taxes Savings consumption

vertically integrated that produces a single product but owns plants in many different stages of the production process E.g. US Steel

three legal forms of business: proprietorships partnerships corporations

Limited liability: creditors have no legal claim on the personal assets of a corporate stockholder

principal-agent problem goals of the corporate managers may not match the goals of the corporate owners

"free-rider“ problem Certain goods will not be produced because there is no way of excluding nonpaying individuals from the associated benefits E.g. missile shield, fireworks show Example of “market failure”

redistributional function of govt. the transfer of income and of wealth from some individuals to others by means such as taxation, monetary policies, welfare

Negative externalities when firms "use" resources without being compelled to pay for their full costs Solution? Effect?

public good benefits that are available to all, regardless of payment

stabilization function of government Efforts to deal with the problems of substantial unemployment and rapid inflation

Government's economic role complicated by political context

progressive income tax percentage of income paid as taxes increases as income increases

Trade deficit Imports exceed exports US has trade deficit over past several decades

Trade has improved due to: dramatic improvements in communications technology general declines in tariffs improvements in transportation technology

basic rationale for international trade comparative advantage

a good should be produced in that nation where its domestic opportunity cost is least

The terms of trade the ratio at which nations will exchange two goods

benefits of international trade include more efficient use of world resources and higher living standards Nation’s PPC beyond its own domestic potential

Depreciation of a currency will increase the prices of U.S. imports, but decrease the prices of U.S. exports

U.S. imports from country X create demand for country X’s currency

Protective tariffs excise taxes or duties placed on imported products

Import quotas maximum limits on the quantity or total value of specific products imported to a nation

Export subsidies government payments to domestic producers

World Trade Organization (WTO) hears and rules on trade disputes between nations Criticisms?

NAFTA North American Free Trade Agreement increased trade among Canada, Mexico, and the United States