Economics Chapter 2

 How does it increase?  Dependence on others?  Or Complete Self Sufficiency?  Reality is whether you live on your own or with your parents, you still rely on others to help provide you with a higher standard of living.  This is accomplished through TRADE! Standard of Living

 Bartering  The Merchant Class and Hardship  Growing Empires and Wealth abroad  Main constant, trade always occurs between individuals A Brief History of Trade

 17 th and 18 th Century Principle in Europe.  The idea that a Country’s exports are greater than the value of its imports  Ex: The more gold amassed the wealthier the country  What ensued?  Countries competed to import cheap natural resources and then convert them into more expensive manufactured goods for export. Mercantilism

 This ideal lead European countries to the Americas to try and colonize them and take advantage of their resources.  FLAW: If a country is always trying to export more than it imports and everyone else is playing the same game, someone has to LOSE.  Here come the laws and taxes!  In an attempt to maintain an export advantage Country’s used taxes as a form of control……But Mercantilism Part 2

 Taxes ended up distorting the flow of goods  The people of the country were not better off.  In the end it created a Win/lose condition that harmed more than it helped.  But why should we believe this, let’s try it for ourselves Mercantilism the Trilogy

 Rules: BIRKA

 Adam Smith – A Wealth of Nations  Exposed the special interests of mercantilism  His idea:  IF a country specialized in what it produced best and freely traded those products, then society would be better off.  Viewed Wealth as being the sum total of all that the people of a nation produced.  Wealth increases even if you import some goods according to this theory FREE TRADE

 Absolute Advantage (Implies Efficiency)  Exists when you can produce more of a good or service that someone else.  Or if you can produce that good or service faster!  Comparative Advantage  Exists if you can produce a good at a lower opportunity cost that someone else.  If you sacrifice less of one good or service to produce another good or service, then you have this advantage. Who has the ADVANTAGE?

 100 Typical American High School Students  100 Young People in Bangladesh.  The argument:  When Americans specialize in T-Shirts, they give up the potential for more doctors, nurses, teachers, engineers, mechanics, fire fighters, police officers, business managers, machinists, and social workers than does Bangladesh.  The Catch, America can produce T-Shirts more efficiently, but it makes sense to trade pharmaceuticals, refined chemicals, capital equipment, and know-how for T-Shirts CA Example

 Milk at the Grocery Store  Win-Win  Both parties of trade increase the collective value of all they own.  Wealth is nothing more than the collective value of all you own. Thank You-Thank You