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Module 5 Glossary & Practice Exam Module 5 Glossary Term Absolute advantage Adam Smith Arguments to ban trade Arguments to ban trade: Consumer Confidence Arguments to ban trade: Domestic Businesses Arguments to ban trade: Domestic jobs Arguments to ban trade: National Security Arguments to ban trade: Price Balance of trade Barriers to Trade Command Economy Comparative advantage Consumer Price Index - CPI Deflation Economic Freedom of the World Index Efficiency Embargo Definition The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources. As a supporter of Smith’s theories you are most likely to feel the government should not drastically change its policies when faced with an economic crisis and that, eventually, the problems will resolve themselves through market forces (supply and demand). National Security, prices, domestic businesses, domestic jobs, and consumer confidence. Avoid drops in market demand because of quality, safety, or ethical concerns arising from foreign products. Avoid competition of low pay for foreign workers or recognition of a foreign brand. Avoid sweatshops, child labor, forced labor, and other undesirable working conditions that attract companies to employ foreign workers. Avoid dependence on imports for items critical to defense. Avoid oversupply of cheap foreign products forcing domestic producers to lower prices. A country’s exports value minus imports value. Quotas, Tariffs, Embargos, Regulation, & Impact. Economy revolves around government decisions. The government chooses the goods and services to produce, production quantities, and prices to charge. Leaders also determine training, education, employment opportunities, and wages. Most closely aligned to Karl Marx. When a country has a lower opportunity cost than another country to produce a particular good or service. Total price for a sample of consumer goods; changes in the CPI month to month indicate the rate of inflation. If the inflation rate is a negative number, that means overall prices are falling. Though you might think this is a positive for the consumer, falling prices means businesses are losing profits and they may reduce worker pay. Rather than growing, the economy is shrinking. Several attempts to measure economic freedom objectively, EFW index based on 42 components and has member research institutes contributing from around the world. Maximizing the use of resources in a society’s production. An embargo is the complete refusal to import a good or even all goods from a particular country. It can create a black market for Exchange Rates those goods and hurts the political relationship with the country that has been banned. It could also potentially hurt the economy of one or both countries. Extent to which citizens of a society have equal opportunities to share in the country’s overall wealth. Rate at which people may trade one currency for another. Fluctuations in rates Changes in housing or motor vehicle sales. Free Market Economy Economy revolves around individuals and business firms, who determine the goods and services to provide. Individuals and business firms seek to earn profits. In a true market economy, the government would not involve itself in the economy in any way. Most closely aligned with Adam Smith. Extents of personal choice, extent of ability to enter, compete, and exchange in markets, protection of personal property. The geographic features of a country can affect its ability to trade globally. Refers to the way that the individual nations of the world are becoming more connected to each other and in the process, interdependent. It makes it more likely that inflation in one country will affect another country. A monetary value based on production of goods and services within a country’s borders. Increasing overall output of the country’s economic goods over time and increasing standard of living. High human development countries have an HDI of 0.8 or above. These countries have an average life expectancy of 77 years and a GDP per capita of just over $23,000 U.S. Dollars. The United Nations divides countries into 3 groups based on their human development index: High human development, Medium human development, Low human development countries. The rate of inflation rises quickly and faster than a rise in income. Impact limits consumer access to goods that are considered to be of poor quality or do not meet social expectations. Difference in income between rich and poor. Equity Freedom Geographic Features in Trade Globalization Gross Domestic Product - GDP Growth High human development Human development index Hyperinflation Impact Income gap Inflation Jobless claims John Maynard Keynes General rise in prices over time. American economists view yearly inflation rates between two and four percent as acceptable. Number of weekly applications for unemployment benefits. As a supporter of Keynes’ theories you are most likely to support the government borrowing money and spending tax dollars on programs that will help put people to work and keep businesses Karl Marx Low human development countries Medium human development Mixed Economy National Goals Outsourcing Per Capita Poverty rate Quotas Regulation Representation statistics Security Specialization in operation. Likely, you would also support government policies that put some restrictions on banks and other businesses to prevent major swings in the economy. As a supporter of Marx’s theories you are most likely to feel it is the government’s job to make all the economic decisions to promote stability. You would likely think it unfair for the owners of a corporation to share the profits of their business without sharing them with everyone who works for the company. Low human development countries have HDIs lower than 0.5. Their average life expectancy is 49 years and their average GDP per capita is about $1,200 U.S. Dollars. 30 out of the 34 low development countries are in sub-Saharan Africa. Medium human development countries have a Human Development Index of 0.5 and 0.8. Their average life expectancy is 67 years and their average GDP per capita is about $4,000 U.S. Dollars. The majority of the world’s countries are mixed economies— somewhere between command and free market. These countries’ leaders seek to combine individual initiative and progress with the protection of government intervention. Most closely aligned to John Maynard Keynes. Countries organize their economies in different ways but most seek the goals of efficiency, security, freedom, growth, and equity. Purchasing the labor of another company to cut costs, typically referring to foreign companies. Per person. Percentage of families earning less than the official poverty level. A quota sets a maximum amount of a product for import. With less product available, quantity supplied decreases and price increases. A regulation is a safety and quality standard. It may result in the ban of specific ingredients proven to be hazardous. If a product includes these ingredients, it is not allowed to enter the country. A regulation also serves as a standard for environmental or ethical impact. Statistics showing similar representation proportions among various age, gender, or ethnic groups, like in higher education or career fields. Extent to which citizens of a society are able to provide their own material well-being even in time of crisis. Focusing on specific products for production in higher quantities. Allows a country to produce higher quality products and potentially enter into trade agreements with other countries. Those countries, in turn, specialize in their own goods and Tariff Traditional Economy Types of Economies Unemployment rate services. Each country specializes in certain products and trade to obtain other products. A tariff is a tax on imported goods. It is added onto the selling price when it enters the country and increases the price of import goods, thus decreasing the quantity demanded. In addition, it provides more tax revenue to the government. Economy revolves around individual and family unit activity, usually agriculture or a trade like shoemaking. Local leaders are most significant in the village or town life. Another name for this is a subsistence economy. The types covered in the lesson are Command, Traditional, Free Market, and Mixed. Percentage of workers over age 16 unable to find work. MODULE 5 PRACTICE EXAM QUESTIONS 1. Karl Marx would most likely agree with a plan for a. reducing taxes on the largest corporations b. government bailouts for failing corporations c. eliminating barriers to trade with other countries d. decreased government involvement in wages 2. Who is most closely associated with this quote? “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.” a. b. c. d. Adam Smith John Maynard Keynes Karl Marx Milton Friedman 3. Income taxes based on the ability to pay would be most closely associated with what economist? a. Adam Smith b. David Ricardo c. John Maynard Keynes d. Karl Marx 4. What factor below is not an indicator of a developed country? a. High per capita income b. Low unemployment c. Elevated GDP d. Large income gap 5. Which of the following does not describes a developing nation? a. A command economy with a low Human Development Index b. A high gross domestic product and a low per capita income c. A low gross domestic product and a high standard of living d. A market economy with a high GDP e. A traditional economy with a low standard of living 6. New Zealand has a GDP of $122.2 billion and a per capita GDP of $27,668. Life expectancy is 80.9 years. Which of these additional factors would most support the conclusion that New Zealand has a developed rather than an emerging economy? a. New Zealand exports more than it imports. b. New Zealand has a free-market economy. c. New Zealand has a low population density. d. New Zealand's unemployment rate is 9.6 percent. 7. The United States is a mixed economy with free-market leanings. Cuba has an absolute command economy. Both want to increase gold exports. What could Country A do that that Country B would most likely not? a. Artificially lower the price of gold b. Legislate higher production quotas c. Lower taxes on gold mining d. Impose stricter divisions of labor 8. Which of the following economic goals focuses on equal opportunities for women? a. Equity b. Freedom c. Growth d. Security 9. The government institutes a new job-training program to prepare citizens for higher-paying, technologically advanced jobs in computer coding. If successful, this action benefits the goal of security by a. decreasing unemployment b. helping minimize the education gap c. raising government spending d. reducing the income gap Use the chart to answer the following two questions. Hours to Produce One Unit Worker hours to Worker hours to Additional worker hours to produce coffee produce sugar produce coffee instead of sugar Developed 36 40 ? Country A Developing 36 43 ? Country B 10. Given the data in the chart above, which of the following statement is true? a. Developing Country B has an absolute advantage in producing sugar b. Developing Country B has an absolute advantage in producing coffee c. Developed Country A has an absolute advantage in producing sugar d. Developed Country A has an absolute advantage in producing coffee 11. Which of the follow is true of the trade relationship between Developed Country A and Developing Country B? a. Developed Country A has a comparative advantage to Developing Country B in producing coffee b. Developed Country A has an absolute advantage in producing sugar and coffee c. Developing Country B has a comparative advantage to Developed Country A in producing coffee d. Developing Country B has an absolute advantage in producing sugar and coffee Worker hours to produce one unit of natural gas Worker hours to produce one unit of oil Columbia 4 9 Chile 2 10 Honduras 3 7 United States 1 6 12. According to the chart above, which country has an absolute advantage in natural gas? a. Chile b. Columbia c. Honduras d. United States 13. According to the chart above, which country has the comparative advantage in oil production? a. Chile b. Columbia c. Honduras d. United States 14. Two countries produce wheat and dairy products efficiently. Neither has an absolute advantage. However, India exports wheat to Russia, and India imports cotton from Russia. Which of the following can be deduced? a. The opportunity cost of producing wheat is lower for India. b. The opportunity cost of producing cotton is higher for Russia. c. Russia has a natural resource advantage in wheat. d. India has a natural resource advantage in cotton. 15. The United States enjoys certain economic advantages. Which is not one of those economic advantages? a. Expansive territory b. Fertile farmland c. Highly educated population d. Inexpensive labor force 16. What kind of trade barrier would be used by a country if it raises taxes on imported machinery items? a. Embargo b. License c. Quota d. Tariff 17. Canada, Mexico and the United States belong to NAFTA. How can this affect the United States? a. Cost of trade increases b. Exports decrease c. Imports decrease d. Trade increases 18. Because the United States has an embargo on North Korea, a. the United States regularly increases the taxes on North Korea imports b. North Korea exports the majority of North Korea products to American companies c. virtually no North Korea products are legally available in the United States d. North Korea must sell products directly to state governments in the United States 19. How would a strong Saudi riyal ($) impact the trade of oil produced in Saudi Arabia? a. Saudi Arabia oil exports decrease b. Saudi Arabia oil exports increase c. Saudi Arabia oil imports decrease d. Saudi Arabia oil imports stagnate 20. High inflation in one country does not a. create a significant rise in the price of goods b. haves a negative impact on that countries currency exchange rate c. reduce the demand for the countries goods in global trade d. result in an individuals income increasing ANSWERS 1. B - government bailouts for failing corporations; This is in line with a command economy of government control 2. A – Adam Smith; Free Market 3. C - John Maynard Keynes; Mixed Market 4. D – Large income gap 5. D - A market economy with a high GDP 6. B - New Zealand has a free-market economy. 7. C - Lower taxes on gold mining; Cuba being command would not lesson government control 8. A – Equity; women are a representative statistic (gender) that is on the 5.03 economic indicator chart 9. A - decreasing unemployment 10. C - Developed Country A has an absolute advantage in producing sugar; Lowest cost of the worker which is 40 (less than the 43). You are only looking at one product with all countries. 11. A - Developed Country A has a comparative advantage to Developing Country B in producing coffee; If you figure the additional worker hours to produce coffee instead of cotton you would see Country A takes 4 hours and Country B takes 9 hours. 4 hours in comparison of the two products shows comparative advantage. 12. D- United States; The US has the lowest number of worker units based only on natural gas with 1 unit per worker hour 13. C – Honduras; Even though the chart does not give you a column for “Number of additional worker hours to produce one unit of oil instead of one unit of natural gas” you need to figure this out. Once you do you would see that Honduras has the lowest cost at 4 units. 14. A - The opportunity cost of producing wheat is lower for India. 15. D - Inexpensive labor force; all other factors are benefits of the US economy 16. D - Tarriff - a tax on imported goods (5.05 Trade Barriers) 17. D - Trade increases 18. C - Virtually no North Korea products are legally available in the United States 19. A - Saudi Arabia oil exports decrease – as the countries money value increases (strong) then it is harder for countries to purchase because their money may be worth less and it would take more money in exchange for the same amount of oil 20. D - result in an individuals income increasing; this may actually make an income lower with higher inflation your salary/money is not worth as much