Intermediate Microeconomics Outline

EC 340 Chapters 1-9

Chapter 1

• Trade barriers refer to: the limits placed on the amount of goods and services a country can export.

• Ex 1: Trade tariffs; taxes placed on exports
• Ex 2: Transportation costs
• Ex 3: Wars, etc.

• Barriers to trade change over time as tariffs and laws change
• Have trade barriers reduced or grown over the past few decades: reduced significantly over the past few decades.

Chapter 2

• The Ricardian Model focuses on: technology differences between countries
• Comparative advantage: When the opportunity cost of producing 1 bushel of wheat is smaller than the opportunity cost of producing 1 yard of cloth. If I wanted to know the opportunity cost of producing a bushel of wheat, I would take MCCloth/MCWheat.
• Absolute advantage: U.S. ability to produce a good more efficiently than china. U.S/China ratio is higher.
• Both countries export the good for which they have the: comparative advantage in.

Chapter 3

• The Heckscher-Ohlin model (HO) shows: differences in a countries resources. Country produces goods for which resource they have more of. If a country is said to be capital abundant, they will specialize in producing capital intensive goods.
• Capital intensive vs. labor intensive goods: A good is  labor intensive if more labor is required per unit of capital. L/K ratio is high. A good is capital intensive if more capital is required per unit of labor. K/L ratio is high.
• Capital abundant vs. labor abundant counties: Capital abundant has more capital resources than labor resources. Labor abundant has more labor resources than capital resources.
• The Stolper-Samuelson Theorm: Free trade benefits the abundant factor and harms the scarce factor.

• Establishes a reason for some groups in a society to: not be in favor of free trade. Thus it provides insights into why governments may: establish barriers to trade.

• Ex. If the U.S. is abundant in skilled workers and scarce in unskilled workers, then increasing wage rates will harm the unskilled workers and benefit the skilled workers.

• The country overall will: benefit from free trade

Chapter 4

• Intra-industry trade: Firms will trade differentiated products, variations of the same product.

• Mainly due to: Economies of scale, producing more of a good will allocate the costs over more units. Decrease per unit output.

• Definition of and what it causes firms to do. Causes firms to specialize in the product they are best at producing so they can generate most profit on that product.

• Model of outsourcing

• Slicing the value chain: Since the U.S. is more abundant skilled workers, they will perform skilled labor activities at home and outsource the unskilled labor intensive activities. Assembly→ component production → marketing/sales → R/D.

• Will slice between component production and marketing/sales

• Why do companies outsource?  The cost savings from the low wage rates in countries with unskilled workers
• Lowering trade costs will make outsourcing easier, and companies can outsource more. The work done in foreign will become more skill intensive than the activities formerly done in foreign, but still less skill intensive than the work done at home.  

• This will increase the demand for: skilled workers at home and ultimately increase the: wage rate