International Trade
What does the term comparative advantage mean?
Producing a good at a lower opportunity cost than another country.
What is a negative externality?
A cost imposed on others not involved in the activity (e.g., pollution).
What are the two characteristics of a public good?
Non-excludable and non-rival.
What are the demand side and supply side?
The interaction of this side (employers) and this side (workers) determines wages and employment levels.
What determines the equilibrium wage in a competitive labor market?
Intersection of labor supply and labor demand.
When a country begins importing a good, who benefits, who loses, and why?
Consumers gain from lower prices and more choice, while domestic producers lose due to foreign competition.
What is a positive externality?
A benefit received by others not involved in the activity (e.g., education).
What is the free-rider problem?
People benefit from a good without paying for it.
What is derived demand for labor?
This concept describes how the demand for workers depends on the demand for the goods and services they produce.
What is a compensating wage differential?
Higher pay for jobs with unpleasant or risky working conditions.
When a country opens to trade and begins exporting a good, who benefits, who loses, and why?
Domestic producers gain because they can sell at higher world prices and expand production, while domestic consumers lose as prices for that good rise, making it more expensive at home.
How can a government correct a negative externality?
By imposing a tax equal to the external cost (Corrective tax).
What is the tragedy of the commons, and how can it be prevented?
The tragedy of the commons occurs when individuals overuse a shared resource (like fisheries or forests) because no one owns it.
It can be prevented by regulation, property rights, or usage fees that limit overexploitation.
When the demand for a firm’s output increases, how does this affect the demand for labor, and what are the resulting changes in equilibrium wages and employment in the labor market?
Higher product demand → firms produce more → need more workers → labor demand increases → wages and employment both rise.
What do we call a situation in the labor market where a small difference in talent or performance leads to very large differences in wages, often seen in top athletes, entertainers, or executives?
A winner-takes-all wage.
These wages arise because the highest-performing individuals capture most of the rewards, while slightly less skilled competitors earn much less, even if their productivity is similar.
Name one possible disadvantage of trade restrictions.
Higher prices for consumers and less efficient allocation of resources.
What does it mean to internalize an externality?
To adjust incentives so that people take external costs or benefits into account.
Clean air is a common resource. Explain why pollution occurs in this case and describe one economic policy that could reduce the problem.
Because clean air is non-excludable but rival in use, firms and individuals have no incentive to limit pollution — this creates a negative externality and overuse of the resource.
A tax (carbon tax) or tradable pollution permits can internalize the external cost and encourage pollution reduction.
If labor and capital are complements, how does a decrease in the price of capital affect the labor market?
Rightward shift in labor demand: Lower capital costs → firms use more capital → since capital and labor are complements → firms hire more workers → labor demand increases.
What is turnover reduction through wages?
Employers may pay above the equilibrium wage (efficiency wage) to prevent employees from leaving, a strategy known as this.
A government imposes a tariff on imported steel to protect domestic producers. Explain who gains, who loses, and what the overall effect of this tariff is on the economy. Why does the government impose tariffs?
Gainers: Domestic producers and the government (tariff revenue). Losers: Consumers (higher prices) and foreign exporters. Overall effect: Total welfare falls due to deadweight loss, though governments may impose tariffs to protect jobs or industries.
According to the Coase Theorem, how can private parties solve externality problems without government intervention? What condition must hold for this solution to be efficient?
The Coase Theorem states that if property rights are clearly defined and transaction costs are low, private parties can negotiate to reach an efficient outcome on their own.
Why can parking spaces in a busy downtown area be viewed as a common resource, and how can policy improve their use?
Because parking spaces are rival and often non-excludable when free, drivers overuse them, causing congestion. A pricing system (such as paid or dynamic parking fees) can allocate spaces efficiently and reduce time wasted searching for parking.
If immigration increases the number of skilled workers and a new technology complements labor, how will wages and employment change?
If a binding minimum wage is set above the equilibrium wage in a competitive labor market, what will happen to employment and the quantity of labor supplied?
A decrease in employment and an increase in the quantity of labor supplied (labor surplus/unemployment).