Ch. 14 - Ch. 17
11/11/13
Concerns with large and growing budget deficits
Investment reduced
Less flexibility to use fiscal policy
Less flexibility to use spending in an emergency
Less federal spending on programs
Risk of financial crisis
What should the long term budget deficit be?
Zero
Less than 3%
Less than 5%
Less than 10%
We should have a surplus
Why: the growth in the deficit will be smaller than the growth in GDP so deficits will be smaller
Core trade reasons
Natural resources
Specialization and increased technical efficiency (i.e., lower costs)
Economies of scale
Increased competition - holding down prices and enhancing quality
Absolute advantage
People and businesses in one country can produce goods and services with fewer resources than people and businesses in another country
Comparative advantage
People and businesses in one country can produce goods and services with a lower opportunity cost than people and businesses in another country
The U.S.
can produce with one worker 2 tons of bananas or 10,000 bushels of wheat. Brazil can produce with one worker, 5 tons of bananas or 1,000 bushels of wheat.
The U.S. should produce wheat and Brazil should produce bananas.
With 100 workers, Canada produces 200 automobiles or 5,000 computers, and the U.S. produces 100 automobiles or 500 computers.
The U.S. should produce automobiles and Canada should produce computers
Why: There must be specialization to maximize productivity. Canada should produce computers because there is a larger opportunity cost per worker than in the U.S.
How many computers would the U.S. want in exchange for 100 automobiles?
Any number less than 500
500 computers
Any number greater than 500
One cannot tell
Why: They would be receiving more computers than they would be able to produce with the same amount of labor, so they are better off.