AP Econ Week#18
Winter 2018
Economics 1/12/15
http://mrmilewski.com
• OBJECTIVE: Complete examination of economic
growth. APMacro-I.B
• Language objective: Write about economic growth.
• I. Administrative Stuff
• II. Journal#46
-notes on current issues in macro theory and policy
(Chapter#25)
• Homework: Finish reading Ch#25
Labor and Productivity
Real GDP = hours of work x labor productivity
• Size of
employed
labor force
Labor
Inputs
(hours of
work)
• Average
hours of
work
x
• Technological
advance
• Quantity of
capital
• Education and
training
• Allocative
efficiency
• Other
LO3
=
Real
GDP
Labor
Productivity
(average
output per
hour)
25-3
U.S. Economic Growth
Accounting for the Growth of U.S. Real
GDP, 1953-2007, Plus Projection from
2009-2020
1953 Q2
To 1973 Q4
Item
Increase in real GDP
1973 Q4
To 1995 Q4
1995 Q4
To 2001 Q1
2001 Q1
To 2007 Q3
Projected
2009 Q1
To 2020 Q4
3.6
2.8
3.8
2.6
2.5
Increase in quantity of labor
1.1
1.3
1.4
-0.1
0.2
Increase in labor productivity
2.5
1.5
2.4
2.7
2.3
(Average Percentage Changes)
Source: Derived from Economic Report of the President, 2008, p. 45;
and Economic Report of the President, 2010, p. 76
LO3
25-4
Accounting for Growth
• Factors affecting productivity growth
–Technological advance (40%)
–Quantity of capital (30%)
–Education and training (15%)
–Economies of scale and resource
allocation (15%)
LO3
25-5
Accounting for Growth
Average Test Scores of Eighth Grade
Students in Math and Science, 2007
Mathematics
LO3
Science
25-6
Productivity Growth
• Average rate of growth
–1.5% per year 1973-1995
–2.8% per year 1995-2009
• Affects real output, real income, and real
•
LO4
wages
Pay higher wages without lowering profit
25-7
Productivity Growth
• Microchip/information technology
• New firms and increasing returns
• Sources of increasing returns
–More specialized inputs
–Spreading of development costs
–Simultaneous consumption
–Network effects
–Learning by doing
• Global competition
LO4
25-8
Productivity Growth
LO5
25-9
Economic Growth
• Is economic growth desirable and
•
•
LO5
sustainable?
The antigrowth view
–Environmental and resource issues
In defense of economic growth
–Higher standard of living
–Human imagination can solve
environmental and resource issues
25-10
Economic Growth
• Growth is the path to greater material
•
•
•
LO5
abundance
Results in higher standards of living
Increases leisure time
Allows for the expansion and application
of human knowledge
25-11
Global Perspective
LO5
25-12
Economic Growth in China
• Growth averages past 25 years:
–9% annual growth output
–8% annual growth output per capita
• Labor more productive
• More international trade
• Transition to market economy
• Joined WTO 2001
• Financial system remains weak
• Income inequality across areas
LO5
25-13
Economics 1/13/15
http://mrmilewski.com
• OBJECTIVE: Examine the rise in international
trade during the 1990s. APMacro-I.B
• Language objective: Write about NAFTA & trade.
• I. Administrative Stuff
• II. Film: Commanding Heights Day#3
-questions about the new rules of the game
• Homework: Begin reading Chapter#36
Economics 1/14/15
http://mrmilewski.com
• OBJECTIVE: Begin examination of international
trade. APMacro-I.B
• Language objective: Discuss trade.
• I. Administrative Stuff
• II. International Trade discussion
-review Commanding Heights
-discuss international trade using the auto industry
(Chapter#37)
• Homework: Continue reading Chapter#37
Economics 1/15/15
http://mrmilewski.com
• OBJECTIVE: Begin examination of international
trade. APMacro-I.B
• Language objective: Write about trade.
• I. Administrative Stuff
• II. Journal#47
-notes on international trade
(Chapter#37)
• Homework: Finish reading Chapter#37 &
questions on learnsmart.
New Access Code
• W433-DX47-G6NJ-87EA-RH66
Some Key Trade Facts
• U.S. trade deficit in goods
–$517 billion in 2009
• U.S. trade surplus in services
–$138 billion in 2009
• Canada largest U.S. trade partner
• Trade deficit with China
–$220 billion in 2009
• Exports are 13% U.S. output
• Dependence on oil
LO1
37-18
Some Key Trade Facts
•
•
LO1
Principal U.S. exports include:
–Chemicals
–Agricultural products
–Consumer durables
–Semiconductors
–Aircraft
U.S. provides about 8.5% of world’s exports
37-19
Some Key Trade Facts
• Principal U.S. imports include:
–Petroleum
–Automobiles
–Metals
–Household appliances
–Computers
LO1
37-20
Some Key Trade Facts
LO1
37-21
Some Key Trade Facts
LO1
37-22
Economic Basis for Trade
• Nations have different resource
•
•
•
LO2
endowments
Labor-intensive goods
Land-intensive goods
Capital-intensive goods
37-23
Alpha & Beta
• Country A
• PPF –
-40 lbs of coffee
-8 lbs of cashew nuts
• Opportunity cost
-5 coffee for 1 cashew
• Country B
• PPF-6 lbs coffee
-6 lbs cashew nuts
• Opportunity cost
-1 coffee for 1 cashew
Before & After Trade
• Before Trade
• After Trade
• Alpha produced
-20 lbs coffee
-4 lbs cashews
• Beta produced
-5 lbs coffee
-1 lbs cashews
• Totals
-25 lbs coffee
-5 lbs cashews
• Alpha specializes in coffee
-40 lbs coffee
-0 lbs cashews
• Beta specializes in cashews
-0 lbs coffee
-6 lbs cashews
• Totals
-40 lbs coffee
-6 lbs cashews
The Gains of Trade
Ch#17 sec#1 p. 469
Figure 17.2a
Figure 17.2b
Comparative Advantage
• Assumptions
–Two nations
–Same size labor force
–Constant costs in each country
–Different costs between countries
–U.S. absolute advantage in both
• Opportunity cost ratio
–Slope of the curve
–Vegetables sacrificed per ton of beef
LO2
37-27
Comparative Advantage
(a) United States
45
40
40
35
35
30
30
Vegetables (Tons)
Vegetables (Tons)
45
25
20
15
12
10
A
20
15
5
4
5
10
15 18 20
Beef (Tons)
LO2
25
10
5
0
(b) Mexico
25
30
0
Z
5
8 10
15
20
Beef (Tons)
37-28
Comparative Advantage
• Self-sufficiency output mix
• Specialization and trade
• Produce the good with the lowest
domestic opportunity cost
• Opportunity cost of 1 ton of beef:
–1 pound of vegetables in U.S.
–2 pounds of vegetables in Mexico
LO2
37-29
Comparative Advantage
LO2
37-30
Comparative Advantage
• Terms of trade
–U.S. 1V = 1B
–U.S. will sell 1B for more than 1V
–Mexico 2V = 1B
–Mexico will pay less than 2V for 1B
–Settle between the two
–Depends on supply/demand factors
–Assume 1B = 1.5V
LO2
37-31
Economics 1/16/15
http://mrmilewski.com
• OBJECTIVE: Continue examination of
international trade. APMacro-I.B
• Language objective: Write about trade.
• I. Administrative Stuff
• II. Journal#48
-notes on international trade
(Chapter#37)
• Homework: Finish Chapter#37 & finish
questions on learnsmart.
Comparative Advantage
• Gains from trade
–Trading possibilities line
–Slope equals terms of trade
–Improved options
• Complete specialization
• More of both goods
• More efficient resource allocation
LO2
37-33
Gains from Trade
(a) United States
45
(b) Mexico
45
V’
40
40
35
30
30
V
Vegetables (Tons)
Vegetables (Tons)
35
Trading
Possibilities Line
25
20
A’
15
12
25
20
Trading
Possibilities Line
v
15
A
10
10
Z’
5
0
5
4
B
5
10
15 18 20
Beef (Tons)
LO2
25
30
Z
W
0
5
b
8 10
b’
15
20
Beef (Tons)
37-34
Comparative Advantage
• Trade with increasing costs
–Concave production curve
–Resources not perfectly
•
LO2
substitutable
–Incomplete specialization
Case for free trade
–Promote efficiency
–Promote competition
37-35
Supply and Demand Analysis
• World price
• Domestic price with no trade
• World price > domestic price
–Export surplus
–Export supply curve
• World price < domestic price
–Import shortage
–Import supply curve
LO3
37-36
Supply and Demand Analysis
Surplus = 100
(b) U.S. Export Supply
and Import Demand
Sd
1.50
1.50
Surplus = 50
1.25
c
1.25
1.00
1.00
.75
Shortage = 50
.50
0
50
75
100
125
Quantity of Aluminum
(Millions of Pounds)
b
U.S.
Export
Supply
a
U.S.
Import
Demand
.75
x
.50
y
Dd
Shortage = 100
LO3
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
(a) U.S. Domestic
Aluminum Market
150
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-37
Supply and Demand Analysis
(b) Canada’s Export Supply
and Import Demand
1.50
1.50
Surplus = 100
Sd
1.25
1.25
Surplus = 50
s
1.00
1.00
.75
.50
Shortage = 50
Dd
0
50
75
100
125
Quantity of Aluminum
(Millions of Pounds)
LO3
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
(a) Canada’s Domestic
Aluminum Market
150
.75
r
Canadian
Export
Supply
q
Canadian
Import
Demand
.50
t
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-38
International Equilibrium
Price (Per Pound; U.S. Dollars
• Import demand = Export supply
LO3
U.S.
Export
Supply
Canadian
Export
Supply
1.00
.88
.75
e
Equilibrium
U.S.
Import
Demand
Canadian
Import Demand
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-39
Trade Barriers and Export Subsidies
• Tariffs
–Revenue tariff
–Protective tariff
• Import quota
• Nontariff barrier (NTB)
• Voluntary export restriction (VER)
• Export subsidy
LO4
37-40
Economic Impact of Tariffs
• Direct effects
–Decline in consumption
–Increase in domestic production
–Decline in imports
–Tariff revenue
• Indirect effects
LO4
37-41
Economic Impact of Quotas
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Quotas do not provide for any
government revenue but instead
transfer it to foreign producers
LO4
37-42
Economic Effects of Tariff/Quota
Sd
Price
Sd + Q
Pd
Pt
Pw
Dd
0
LO4
a
b
q c d
Quantity
37-43
The Case for Protection
• Military self-sufficiency
• Diversification for stability
• Infant industry
• Protection against dumping
• Increased domestic employment
• Cheap foreign labor
LO5
37-44
Multilateral Trade Agreements
• General Agreement on Tariffs and Trade
•
•
•
LO5
(GATT)
World Trade Organization (WTO)
European Union (EU)
North American Free Trade Agreement
(NAFTA)
37-45
GATT
• Three principles:
–Equal, nondiscriminatory trade
between member nations
–Reduction in tariffs
–Elimination of import quotas
LO5
37-46
WTO
• Established by Uruguay Round of GATT
• 153 member nations in 2010
• Oversees trade agreements and rules on
•
LO5
disputes
Critics argue that it may allow nations to
circumvent environmental and workerprotection laws
37-47