Test Review

Chapters 4 & 5

Income can go to:

• Taxes• Savings• consumption

vertically integrated

• that produces a single product but owns plants in many different stages of the production process

• E.g. US Steel

three legal forms of business:

• proprietorships • partnerships• corporations

Limited liability:

• creditors have no legal claim on the personal assets of a corporate stockholder

principal-agent problem

• goals of the corporate managers may not match the goals of the corporate owners

"free-rider“ problem

• Certain goods will not be produced because there is no way of excluding nonpaying individuals from the associated benefits

• E.g. missile shield, fireworks show• Example of “market failure”

redistributional function of govt.

• the transfer of income and of wealth from some individuals to others by means such as taxation, monetary policies, welfare

Negative externalities

• when firms "use" resources without being compelled to pay for their full costs

• Solution?• Effect?

public good

• benefits that are available to all, regardless of payment

stabilization function of government

• Efforts to deal with the problems of substantial unemployment and rapid inflation

Government's economic role

• complicated by political context

progressive income tax• percentage of income paid as taxes increases

as income increases

Trade deficit

• Imports exceed exports• US has trade deficit over past several decades

Trade has improved due to:

• dramatic improvements in communications technology

• general declines in tariffs• improvements in transportation technology

basic rationale for international trade

• comparative advantage

a good should be produced in that nation where

• its domestic opportunity cost is least

The terms of trade

• the ratio at which nations will exchange two goods

benefits of international trade include

• more efficient use of world resources and higher living standards

• Nation’s PPC beyond its own domestic potential

Depreciation of a currency will

• increase the prices of U.S. imports, but decrease the prices of U.S. exports

U.S. imports from country X

• create demand for country X’s currency

Protective tariffs

• excise taxes or duties placed on imported products

Import quotas

• maximum limits on the quantity or total value of specific products imported to a nation

Export subsidies

• government payments to domestic producers

World Trade Organization (WTO)

• hears and rules on trade disputes between nations

• Criticisms?

NAFTA

• North American Free Trade Agreement • increased trade among Canada, Mexico, and

the United States