1. Incentives Matter
- Most acts are out of self-interest
- Incentives: rewards and penalties that motivate behavior
- People respond to incentives in predictable ways.
- Examples of incentive: fame, love, sex, reputation, money
2. Good Institutions Align Self-Interest with the Social Interest
- When self-interests align with the broader public interest, we get good outcomes, when they are at
odds, we gets bad outcomes.
3. Trade-offs are Everywhere
- If one decision is made, the advantages of other decisions will expire.
- Pharmaceutical example: either keeping the drug off the market for testing or putting an unsafe
drug on the market.
- Scarce: a resource is scarce when there isn’t enough to satisfy all of our wants.
- The great economic problem: how to arrange our scarce resources to satisfy as many of our wants
as possible.
- Opportunity cost: the opportunity cost of a choice is the value of the opportunities lost.
4. Thinking on the Margin
- A little bit more or a little bit less? What is favourable?
- We all make decisions that involve marginal thinking.
- Thinking in terms of marginal benefits and marginal costs.
5. The Power of Trade
- More than just exchange
- The power to increase production through specialisation (division of labour).
- Allows us to take advantage of the economies of scale.
- Comparative advantages can be utilized.
6. The Importance of Wealth and Economic Growth
- Wealth generally comes from economic growth.
- Wealthier nations come with better health, education and rights.
7. Institutions matter
- Institutions work based on incentives.
- They create enormous amounts of wealth in the form of innovations which creates wealth for them
(money) but it also creates wealth as our lives (our lives are improved by these developments).
8. Economic Booms and Busts Cannot be Avoided but can be Moderated
- No economy grows at a constant pace.
- Booms and busts are part of the normal response of an economy to changing economic conditions.
- The deviation from the average economic growth line can be moderated by the governments and
the central banks as they have the power to influence the economic movements by changing
interest rates (monetary) and government spending within a country (fiscal). They are not always
that powerful.
9. Inflation is Causes by Increases in the Supply of Money
, - Inflation: a sustained increase in the general price level of gods and services.
- Decreases the purchasing power of money.
- If there is more money available the prices for a good or service will rise.
10. Central Banking is a Hard Job
- Predicting the economic movements and anticipating the right way at the right time is a very
difficult and impactful job.
- Often the effects of a decision made are only seen months later.
, CHAPTER TWO – THE POWER OF TRADE AND COMPARTIVE ADVANTAGE
3 Benefits of Trade:
- Trade makes people better off when preferences differ
- Trade increases productivity through specialization and the division of knowledge
- Trade increases productivity through comparative advantage
1. Trade and Preferences
A product can have more value to one person than to another. Trade allows us to create value to both
parties. Trade makes people with different preferences better off.
Example: I have an old skateboard and bought a new one, the old one is worth almost nothing to me, but it
is to someone that wants to skate but has no skateboard. By trading the skateboard for money, value is
created on both sides.
2. Specialization, Productivity and the Division of Knowledge
The real power of trade is in specialization. Without trade, specialization can’t be afforded. Specialization
results in higher productivity and a better-quality product. The human brain is limited to a certain degree
so it only makes sense to divide knowledge over many so it stays accessible and is used to the fullest
through specialization.
3. Comparative Advantage
Trading takes advantage of differences. Certain environments are suited to produce certain goods so it
wouldn’t make sense to spend time on producing something that someone else can produce better,
cheaper and faster. Instead, you produce the thing that you’re relatively best at.
Absolute advantage: the ability to produce the same good using fewer inputs than another product. –
more output from the same input.
Production possibilities frontier: shows all the combinations of goods that a country can produce given its
productivity and supply of inputs. – the slope of the curve gives us the opportunity cost.
Comparative advantage: a country has the comparative advantage in producing goods for which it has the
lower opportunity cost.
To increase its wealth, a country should produce the goods it can make at low cost and buy the goods that
it can make only at high cost.
All countries have some comparative advantage.
High-productivity = high wages
Trade and Globalization
Workers in sectors with falling wages will move to sectors with higher wages.
Due to the fact that countries have a comparative advantage in producing products overseas, this may be
at detriment to your local businesses as they can no longer compete with these businesses overseas.
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