ECON202

After looking over chapters one through three in Real World Macro, pick an article that you find interesting. 1. Article name 2. What interested you about the reading 3. Why it caught your attention

1.Microeconomics and Macroeconomics

Although you have made thousands of economic choices, you probably seldom think about your own economic behavior. For example, why are you reading this book right now rather than doing something else? Microeconomics is the study of your economic behavior and the economic behavior of others who make choices about such matters as how much to study and how much to party, how much to borrow and how much to save, what to buy and what to sell. Microeconomics examines individual economic choices and how markets coordinate the choices of various decision makers. Microeconomics explains how price and quantity are determined in individual markets—the market for breakfast cereal, sports equipment, or used cars, for instance.

You have probably given little thought to what influences your own economic choices. You have likely given even less thought to how your choices link up with those made by millions of others in the U.S. economy to determine economy-wide measures such as total production, employment, and economic growth. Macroeconomics studies the performance of the economy as a whole. Whereas microeconomics studies the individual pieces of the economic puzzle, as reflected in particular markets, macroeconomics puts all the pieces together to focus on the big picture. Macroeconomics sees the forest, not the trees; the beach, not the grains of sand; and the Rose Bowl parade float, not the individual flowers that shape and color that float.

To Review: The art of economic analysis focuses on how people use their scarce resources in an attempt to satisfy their unlimited wants. Rational self-interest guides individual choice. Choice requires time and information and involves a comparison of the expected marginal benefit and the expected marginal cost of alternative actions. Microeconomics looks at the individual pieces of the economic puzzle; macroeconomics fits the pieces together to form the big picture.

2.Normative Versus Positive

Economists usually try to explain how the economy works. Sometimes they concern themselves not with how the economy does work but how it should work. Compare these two statements: “The U.S. unemployment rate is 5.6 percent,” and “The U.S. unemployment rate should be lower.” The first, called a positive economic statement , is an assertion about economic reality that can be supported or rejected by reference to the facts. Positive economics, like physics or biology, attempts to understand the world around us as it is. The second, called a normative economic statement , reflects an opinion. Moreover, an opinion is merely that—it cannot be shown to be true or false by reference to the facts. Positive statements concern what is; normative statements concern what, in someone’s opinion, should be. Positive statements need not necessarily be true, but they must be subject to verification or refutation by reference to the facts. Theories are expressed as positive statements such as “If the price of Pepsi increases, then the quantity demanded decreases.”

Most of the disagreement among economists involves normative debates—such as the appropriate role of government—rather than statements of positive analysis. To be sure, many theoretical issues remain unresolved, but economists generally agree on most fundamental theoretical principles—that is, about positive economic analysis. For example while all economists agree on the positive idea that people buy less as prices rise, they may not agree on normative questions such as, “is the distribution of income in the United States too unequal?”

Normative statements, or value judgments, have a place in a policy debate such as the proper role of government, provided that statements of opinion are distinguished from statements of fact. In such policy debates, you are entitled to your own opinion, but you are not entitled to your own facts.

3. Absolute Advantage Versus Comparative Advantage

The gains from specialization and exchange so far are obvious. A more interesting case arises if you are faster at both tasks. Suppose the example changes only in one respect: Your roommate takes 12 minutes to iron a shirt compared with your 10 minutes. You now have an absolute advantage in both tasks, meaning each task takes you less time than it does your roommate. More generally, having an absolute advantage means making something using fewer resources than other producers require.

Does your absolute advantage in both activities mean specialization is no longer a good idea? Recall that the law of comparative advantage states that the individual with the lower opportunity cost of producing a particular good should specialize in that good. You still take 30 minutes to type a paper and 10 minutes to iron a shirt, so your opportunity cost of typing the paper remains at three ironed shirts. Your roommate takes an hour to type a paper and 12 minutes to iron a shirt, so your roommate could iron five shirts in the time it takes to type a paper. Because your opportunity cost of typing is lower than your roommate’s, you still have a comparative advantage in typing. Consequently, your roommate must have a comparative advantage in ironing (again, try working this out to your satisfaction). Therefore, you should do all the typing and your roommate, all the ironing. Although you have an absolute advantage in both tasks, your comparative advantage calls for specializing in the task for which you have the lower opportunity cost—in this case, typing.

If neither of you specialized, you could type one paper and iron three shirts. Your roommate could still type just the one paper. Your combined output would be two papers and three shirts. If you each specialized according to comparative advantage, in an hour you could type both papers and your roommate could iron five shirts. Thus, specialization increases total output by two ironed shirts. Even though you are better at both tasks than your roommate, you are comparatively better at typing. Put another way, your roommate, although worse at both tasks, is not quite as bad at ironing as at typing.

Don’t think that this is just common sense. Common sense would lead you to do your own ironing and typing because you are better at both. Absolute advantage focuses on who uses the fewest resources, but comparative advantage focuses on what else those resources could produce—that is, on the opportunity cost of those resources. Comparative advantage is the better guide to who should do what.

The law of comparative advantage applies not only to individuals but also to firms, regions of a country, and entire nations. Individuals, firms, regions, or countries with the lowest opportunity cost of producing a particular good should specialize in producing that good. Because of such factors as climate, workforce skills, natural resources, and capital stock, certain parts of the country and certain parts of the world have a comparative advantage in producing particular goods. From Washington State apples to Florida oranges, from software in India to hardware in Taiwan—resources are allocated most efficiently across the country and around the world when production and trade conform to the law of comparative advantage.

4. International Trade

In the previous chapter, you learned about comparative advantage and the gains from specialization. These gains explain why householders stopped doing everything for themselves and began to specialize. International trade arises for the same reasons. International trade occurs because the opportunity cost of producing specific goods differs across countries. Americans import raw materials like crude oil, bauxite (aluminum ore), and coffee beans and finished goods like cameras, computers, and cut diamonds. U.S. producers export sophisticated products like computer software, aircraft, and movies, as well as agricultural products like wheat, corn, and cotton. Farm exports are why America has long been called the “breadbasket of the world.”

Trade between the United States and the rest of the world has increased in recent decades. In 1970, U.S. exports of goods and services amounted to only 6 percent of the gross domestic product. That has increased to about 13 percent today. The top 10 destinations for U.S. exports in order of importance are Canada, Mexico, China, Japan, the United Kingdom, Germany, the Netherlands, South Korea, France, and Brazil.

The merchandise trade balance equals the value of exported goods minus the value of imported goods. Goods in this case are distinguished from services, which show up in another trade account. For the last quarter century, the United States has imported more goods than it has exported, resulting in a merchandise trade deficit. Just as a household must pay for its spending, so too must a nation. The merchandise trade deficit must be offset by a surplus in one or more of the other balance-of-payments accounts. A nation’s balance of payments is the record of all economic transactions between its residents and residents of the rest of the world.