BLOCK 5.1
Gains from trade
Concepts
Absolute advantage
Comparative advantage
if production requires fewer resources
Opportunity cost is lower
Production possibility frontier (PPF)
Shows a country's maximum output mixes (cant produce more of one without producing less of the other)
Terms of trade
Index of EXP prices / Index of IMP prices x 100
Tarrif
Trade policy
Concepts
The optimal tarrif
tarrif that brings the maximum benefit to the country
Loss from trade
Inequality
Market power
Import/export
Between countries
High skilled/Low skilled jobs
Strategic trade policy
Trade policy with the aim to redistribute gains of trade in direction of the country
Infant industry tarrifs
Anti-dumping tarrifs
Dumping: price is below producers market price in HC or below its producers AC of production
To promote economic development through learning by doing
Technology
Within countries
Concepts
Equity
A distribution of income that society deems to be fair and justice (v subjective)
Gross income
OG income + GOV cash benefits
Disposable income
Gross income - direct taxes
Post-tax income
Disposable income - indirect taxes
e.g., income tax
e.g., VAT
Final income
Post-tax income + Benefits in kind
e.g., education and healthcare
Measures
Lorenz curve
Cumulative % share of HH income against cumulative % of HH
The closer to the line of equality, the lower the level of inequality
Gini coefficient
Measures the extent to which total income of HH/individuals deviates from a perfectly equal distribution
Goes from 0 to 1, the closer to 1 the more inequality
Poverty
Absolute
A level of HH income below that needed to consume basic life necessities
e.g., food, water, shelter, warmth
Relative
Income below that needed to participate fully in their society
rates always below 50%
Welfare policy
The iron triangle of welfare
goals
Improving employment incentives
Cost reduction
Raising living standards of the poor
these goals conflict (trade-offs)
participation tax rate
unemployment trap
unemployed
Effective marginal tax rate
Poverty trap
employed