Download Market Economy

Market Economy
Question 1: What is meant by a market economy?
Answer 1:
A market is a mechanism for exchange between buyers and sellers of goods and services.
In a market economy, the cost and availability of goods and services is determined by the
laws of supply and demand:
The law of supply specifies that producers will offer more of a product for sale as its
price rises, and less as its price drops.
The law of demand specifies that buyers will purchase more of a product as its price
drops, and less of a product as its price increases.
The laws of supply and demand tend to work against each other, so the result is a balance
in which buyers are always in search of the greatest values, while companies try to supply
buyers with the quantity and selection of goods that will earn then the greatest profits.
Question 2: What are the differences between perfect competition, an oligopoly, and a
monopoly?
Answer 2:
Two conditions are required for perfect competition to exist:
All competing companies in an industry must be small.
The number of competing companies must be large.
Under these conditions, no single firm will be large enough to dominate the market and
influence prices. Instead, prices will be determined by the laws of supply and demand.
An oligopoly exists when there are only a handful of competitors in an industry (the
automobile industry is one example of an oligopoly). Under these conditions, the prices of
competitive products tend to be similar. The competitors tend to follow suit as one company
raises or lowers prices.
A monopoly exists when a single company dominates an industry. The company controls the
only supply of a product or service and enjoys complete control over production and prices.
Laws such as the Sherman Antitrust Act (1890) and the Clayton Act (1914) were passed to
forbid monopolies and to regulate natural monopolies such as local power and telephone
companies.
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Market Economy
Question 3: What is gross domestic product (GDP)? Real GDP? GDP per capita?
Answer 3:
The gross domestic product (GDP) refers to the total value of goods and services produced
by a country within a given time period, usually one year. If the GDP increases from one
year to the next, the country is experiencing economic growth. GDP is the most common
method used to calculate national output.
Real GDP is the GDP after it has been adjusted to reflect changes in the value of the
country's currency, as well as price changes over the period in question.
GDP per capita is calculated by dividing the GDP by the total population of a country. The
result provides an indicator of the economic well-being of the average citizen of the country.
Question 4: How can balance of trade and the national debt affect economic growth?
Answer 4:
A negative balance of trade (or trade deficit) means that a country imports more than it
exports. More money has left than entered the country, so a trade deficit is the equivalent
of borrowed money. Money that flows out of the country to pay off the deficit cannot be
invested in productive enterprises and is therefore unavailable to fuel economic growth.
The national debt is the total amount of money a country owes all its creditors. Most
governments sell bonds to finance their national debts. They must offer a competitive rate
of return to be attractive because these bonds compete with similar bonds in the
marketplace. The more money a government must borrow to finance its debt, the less
money is available for productive investments that would help drive the economy.
Question 5: What does it mean when a country enjoys an absolute trade advantage in a
product?
Answer 5:
A country enjoys an absolute trade advantage when it can produce a product that is
cheaper or of better quality than any of its competitors. Examples of countries that enjoy
absolute trade advantages are Saudi Arabia (oil), Brazil (coffee), and Canada (timber).
Question 6: What are some ways countries erect barriers to international trade?
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Market Economy
Answer 6:
A country can erect overt barriers to trade, including tariffs and quotas. Both affect the
prices and quantities of foreign products than can be imported into a country. A country can
also provide subsidies to local manufacturers that enable them to compete against cheaper
foreign imports. For example, some European governments subsidize local farmers so they
can compete against U.S. grain imports.
Trade barriers can be covert as well. For example, a government may require that certain
products sold in a country be assembled there. For example, many foreign cars are
assembled in American factories from imported components made in countries like Japan. A
country may also enact laws and regulations that make it more expensive to do business.
For example, a famous mass-merchandiser had to purchase an existing retail chain in
Germany instead of opening its own chain because the German government stopped issuing
new licenses to sell food products.
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