Econ Dev

• Absolute advantage


  When an economy can produce a good at a lower cost than another economy
• Comparative advantage


  When an economy can produce a good at a lower opportunity cost than another economy
• Specialization and gains from trade

  1. Economies specialize in producing goods where they have comparative advantage

  2. Economies trade to consume beyond their production possibility frontier
• Balance of payments


  Tracks the flow of goods, services, and currency between a country and the rest of the world
• Foreign exchange


  The exchange rate between two currencies
• Fiscal policy


  Differs from monetary policy
• The more an economy produces any one good, the more costly it becomes to produce the next unit
• Rising cost of production leads to a search for less costly ways to produce and consume those goods
• If Nation ABC can produce a good at lower opportunity cost than can Nation XYZ, it is said that Nation ABC has comparative advantage
• Opportunity cost of goods


  • Mindanao: Timber = 1 soybean, Soybean = 1 timber
  • Luzon: Timber = 3 soybeans, Soybean = 1/3 timber
• Specialization and trade allow nations to consume beyond their production possibility frontier
• Free trade based on comparative advantage allows for a more efficient allocation of resources and greater prosperity for the trading partners than can be achieved without free trade
• If the world price of a good is above the domestic price


  The nation becomes an exporter of that good
• If the world price of a good is below the domestic price


  The nation becomes an importer of that good
• Current account


  Shows current import and export payments of both goods and services, and investment income
• Capital account


  Records purchases and sales of foreign assets
• Official reserves account


  Holds quantities of foreign currency to balance the current and capital accounts
• If current account balance + capital account balance > 0

  There is a balance of payments surplus
• Appreciating currency


  When the price of a currency is rising, it is said to be appreciating or "stronger"
• Depreciating currency


  When the price of a currency is falling, it is said to be depreciating or "weaker"
• Factors affecting exchange rates


  • Consumer tastes
  • Relative incomes
  • Relative inflation
  • Speculation
  • Relative interest rates
• Tariff


  An excise tax levied on imported goods
• Quota


  A maximum amount of a good that can be imported into a domestic market
• Tariffs and quotas share many of the same economic effects, including hurting consumers, protecting inefficient domestic producers, and creating deadweight loss</b>
• The Role of Government


  Different functions of the government and their roles in business; their influence to consumers and businesses; and the importance of competition in the economy as a whole
• Adam Smith: '"Every individual ... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own gain, and he is in this as in many other cases, led by an "invisible hand" to promote an end which was no part of his intention."'
• The invisible hand came to represent forces in the market at work
• This was the basis for theorizing that for the broader economy, government intervention is not wholesome
• Everyone promotes the overall good through the pursuit of individual welfare without intervention
• Conditions for the market and market forces to succeed


  • Full efficiency of market - no externalities
  • Externalities are handled
  • Public Goods are provided
  • Market Power is regulated
• Externalities


  Spill-over effects that occur as a result of the production process that affect those outside of the market
• Public Goods


  Services that do not benefit only those who pay for them
• Market Power


  When a few firms unduly exert monopolistic power in a market
• The government must play an active role in building a more just, equitable and progressive economic society
• Subsidiarity


  The government has a supporting role, the leading roles in development must be given to society itself
• Consumer Protection Laws


  • Laws in fraudulent advertising mislabeling or mishandling
  • Rules and regulations governing the conduct and promotion of sales of goods and services
  • Price Tags Law
  • Business Name Law
  • Bulk Sales Law
  • Broker's Law
  • Fire Extinguishers Law
  • Accreditation Decree (P.D. 1155)
  • Seven Basic Consumer Rights
• Seven Basic Consumer Rights


  • The Right to Safety
  • The Right to Choose
  • The Right to be Informed
  • The Right to be Heard
  • The Right to Consumer Education
  • The Right to Compensation against Damage
  • The Right to a Clean Environment
• Stabilization and Growth


  The government guides the overall pace of economic activity, attempting to maintain steady growth high levels of employment, and the price stability
• Roles of the Government


  • Correct problems of market failure
  • Alter the provision of certain goods and services based on normative judgements
  • Redistribute income through transfer payments
  • Provide a stable institutional framework
  • Promote effective and workable competition
  • Correct for externalities
  • Ensure for economic stability and growth
  • Provide for public goods
  • Adjust for undesired market results
• Economic Functions of Government


  • Maintain legal and social framework
  • Maintain Competition
  • Providing Public Goods and Services
  • Redistributing Income
  • Correcting for Externalities
  • Stabilizing the Economy