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International Trade and Money summary
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INTERNATIONAL TRADE AND MONEYCHAPTER 5 (PARKIN): EFFICIENCY AND EQUITY
Resources are scare, so they must be allocated somehow. And trading in markets is just one of several alternatve
methods. Resources might be allocated by:
Market price
when a market price allocates a scare resource, the people who are willing and able to pay that price get the
resource. This is not always good, because poor people can’t always efort to pay, such as school fees and
healthcare.
Command
a command system allocates resources by the order of someone in authority. It is used extensively inside frms,
public organisatons and government departments. Example: if you have a job, most likely someone tells you
what to do.
Majority rule
Allocates resources in the way that a majority of voters choose. Societes use this to elect representatve
governments that make some of the biggest decisions. Works well when the decision being made afect large
numbers of people.
Contest
Allocates resources to a winner. Sportng events use this method. Can get people a lot of motvaton.
First-come, frst-served
Allocates resources to those who are frst in the queue. Many restaurants won’t accept reservatons, they use
frst-come, frst-served.
Lottery
Allocate resources to those who pick the winning number, draw the lucky cards or pick the winning tcket in a
gamble. Used to allocate licensed taxi permits, places in the London marathon etc.
Personal characteristcs
When resources are allocated on the basis of personal characteristcs, people with the ‘right’ characteristcs get
the resources. Example: you will choose a marriage partner on the basis of personal characteristcs.
Force
Plays a crucial role, for both good and ill. War: use of military force by one naton against another. Good: transferring
wealth from the rich to the poor.
Value is what we get and price is what we pay. The value of one more unit of a good or service is its marginal beneftt We
measure marginal beneft by the maximum price that is willingly paid for another unit of good/services. A demand curve is
a marginal beneft curvet
The relatonship between the price of a good and the quantty demanded by one person is individual demandt And the
relatonship between the price of a good and the quantty demanded by all buyers is called market sharet The market
demand cure is the sum of the individual demand curves and is also the marginal social beneft curvet
A consumer surplus is the excess of the beneft received from a good over the amount paid for it. Marginal beneft minus
its price, summed over the quantty bought.
Consumers distnguish between value and price, so producers distnguish between cost and pricet Cost is what a producer
gives up and price is what a producer receives. Marginal cost is the cost of producing one more unit of a good or service.
Marginal cost is the minimum price that producers must receive to induce them to ofer to sell another unit of the good. A
supply curve is a marginal cost curvet
The market supply curve (sum of the individuals) is the society’s marginal cost curve, or the marginal social costt
,A producer surplus is the excess of the amount received from the sale of a good or service over the cost of producing it.
The price received for a good minus its minimum supply-price (marginal cost) summer over the quantty sold.
Equilibrium in a compettve market occurs when the quantty demanded = the quantty supplied at the intersecton of the
demand curve and the supply curve. At this point, marginal social beneft on the demand curve = marginal social cost on
the supply curvet allocatve efficiency.
Market don’t always achieve an efficient outcome. Market failure is a situaton in which a market delivers an inefficient
outcome. Occurs because of overproducton and underproductont
Underproductonn consumers are willing to pay more than it actually is. Deadweight loss, is the decrease in total
surplus that results from an inefficient level of producton.
Overproductonn consumers are willing to pay less than it actually cost. There is a waste of products. Here is a
deadweight loss as well, and one that is borne by the entre society is a social losst
OBSTACLES THAT BRINGS MARKET FAILURE ARE:
Price and quantty regulatons
price regulatons such as minimum wage, can block the price adjustments that balance the quantty demanded
and supplied.
Quantty regulatons can limit the amount that a farm is permited to produce. Leads to underproducton.
Taxes and subsidies
taxes increase the prices paid by byers and lover the price received by sellers. Taxes decrease the quantty
produced and lead to underproducton.
Subsidies decrease the prices paid by buyers and increase the prices received by sellers. So it increases the
quantty produced and lead to overproducton.
Externalites
A cost of a beneft that afects someone other than the seller of buyer. Electricity company creates an external
cost by damage something. The company doesn’t consider the cost when it decides how much power to
produce. Result is overproducton.
When an apartment owner provide a smoke detector but she doesn’t consider her neighbour’s marginal beneft,
results is underproducton.
Public goods and common resources
public good is a good that is consumed by everyone even if they don’t pay for it. Example: natonal defence and
law enforcement. Market would under produce a good because of the free-rider problem.
A common resource is owned by no one but used by everyone. Atlantc cod is an example. This leads to
overproducton.
Monopoly
self-interest is to maximise its proft. No compettors so it can set the price to achieve its goal. It produces too
litle and charges too high, leads to underproducton.
High transactons costs
Opportunity costs of making trades in a market. Example: playing tennis on your local free court, you don’t pay a
market price for use of the court. When transactons costs are too high, the market might under produce.
Majority rule can be used when the market is inefficient.
IDEAS ABOUT FAIRNESS:
It’s not fair if the result isn’t fairn it is unfair that a bank president earns millions while bank tellers earn only
thousands. Utlitarianism is when equality brings efficiency. Greatest happiness for the greatest number.
The more we try to increase equity by income, the more we reduce efficiency. Recognising the cost of making
income transfers leads to what is called the big trade-oft
It’s not fair if the rules aren’t fairn symmetry principle is the requirement that people in similar situatons be treaded
similarly.
,CHAPTER 7: GLOBAL MARKETS IN ACTION
Imports are the good and services that we buy from other countries. Exports are the goods and services we sell to other
countries.
The
fundamental force that generates trade between natons is comparatve advantagen as the ability of a naton to perform
an actvity or produce a good or service at a lower opportunity cost than other natons .
, Internatonal trade lowers the price of an imported good and raises the price of an exported goodt Importers
beneft from lower prices while exporters beneft from higher prices.
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