Introduction to Macroeconomics

Posted: August 26th, 2021

Introduction to Macroeconomics

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Introduction to Macroeconomics

Question 1

The major US imports are computers and hardware estimated at $386 billion. Whereas, the country’s major exports arecapital goods consisting of industrial supplies like civil aviation aircraft estimated at $531 billion (US Census Bureau, 2019). International trade has a way of lowering the prices of consumer products in the US. This happens due to the creation of welfare gains among the consumers coming from importing nations. Notably, the households lying adjacent to either urban areas or across the US national borders tend to record higher welfare gains (Mongelluzzo, 2000). Indeed, with the introduction of the trade barriers – tariffs – there is an anticipated economic loss. The excise tax levied on imported products increases the consumption of domestic goods, thus raising relative prices of local commodities in the US (McEachern, 2014).As consumers spend more on duty-imposed products, therefore, they have less to spend on other industrial goods. Tariffs triggeran increase in the prices of goods and services. Hence, leading to reduced production, thereby low supplies. Here, it implies that other industries would have to sustain the losses attributed to the opposite wealth gain. In the end, there would be an inefficient allocation of resources that would result in dwindling economic growth due to the relatively reduced net incomes arising from increased levels of unemployment.

Question 2

Determining the type of goodsthat a nation should produce and export depends on the following scenarios. First, countries need to trade in products that they would record a higher mutual gain, leading to comparative advantage (McEachern, 2014). Therefore, nations need to specialize in producing goods and services whose domestic opportunity costs are considerably lower than those of other countries. Thus, they need to exchange for products that would impact higher local opportunity costs in comparison with other countries.

Second, the differences in factor endowments would determine the particular goods that a country would long to produce and export. Ideally, nations have amounts of land, labor, and capital that differ in proportionality (Arnaud, Donaldson, &Komunjer, 2010). With Saudi Arabia having lots of barrels of oil to export, it does not have sufficient timber.Thus, this Arabic country will have to seek for lumber. Also, Japan produces an adequate number ofhigh-quality technological goods; however, it lacks sufficient natural resources. Notably, it would have to trade with Indonesia for the exchange of such inputs.Consequentially, the need to record more gains from specialization is a significant factor in determining the kind of products many countries would want to produce and export (Arnaud, Donaldson, &Komunjer, 2010). Therefore, there would be economicgains due to product specialization that occasions countries to experience a long-termdecrease in the average cost as the level of output goes up.

Question 3

World Trade Organization (WTO) is the only international organization in-charge of setting rules that govern the trading relationship existing among nations, globally. With the negotiation and signing of bilateral and multilateral agreements, there is a need for ratification that essentially happens in WTO parliaments (WHO, 2018). Thus, this agreement is enforced to help ratify and facilitate harmonized approach to trading.

As a way of reinforcing multilateral trade, the WTO offers a forum platform for bargain agreements that are entirely directed towards reducing international trade barriers. The move ensures a level playing field for the activities of allnations, leading to economic growth and development. Moreover, the WTO offers a legally institutional framework necessary for monitoring and executing of these trade agreements. In case of arising inter-territorial conflicts, this organization takes the initiative of analyzing the root-cause, therefore bring about a settlement(WHO, 2018). With its founding and the directorial principle of opening borders, facilitating non-discriminatory relationships between the developed and developing nations, and committing to the transparency of tradeactivities, the WHO has effectively fostered bilateral associations. For example, the opening of national markets to international trade vis-à-vis limited trade barriers like tariffs has led to the increased economic development of many countries.

Question 4

The argument that companies hurt by cheap imports ascribe to the idea of restricting trade as a way of saving US jobs is misguided and ungrounded for various reasons. First, restricting trade would imply that other nations would likewise occasion some restrictions on their imports as a retaliatory technique (McEachern, 2014). Second, this kind of limitation on imports like protectionism of the infant industry would, in turn,cutdown on the number of jobs in the export industries. Further, the economy would record reduced trading wealth gains that would have been made in case of saving the jobs (Baldwin, 2014). Protectionism would compel the domestic consumers of a particular good to procure at relatively higher prices as a means of benefitingthe domestic producers of the same product(Kehoe, 2016).Therefore, nations that would initiate such protectionism would record losses on the economic gains.Such a situation occurs following diminishing levels of comparative advantage andeconomies of scale.

On the other hand, there is a rationality thinking that could support the validity of protectionism in these countries. Protectionism would be impactful on the developing countries if this kind of trade restriction would not negatively affect the jobs of the export industries.This can be achieved by instituting protectionism and incentive subsidies to a few but not all industries (Baldwin, 2014). For example, it would be prudent enough to apply protectionism on companies manufacturing computers in import countries since it would not lead to retaliatory restrictions from other nations(Baldwin, 2014). Hence, companies in the export countries would still experience normal economic gains across the international trade border.

Question 5

According to McEachern (2014), fixed production technology is a kind of technology that has a set number of units of production. Regardless of the increase or decrease in the level of technology, the number of units of production remains constant. The variable production technology, however, there is variation in the number of production units due to a shift in technology. The government should set a goal of lowering the marginal cost of pollution to zero in industries with fixed technology. The step is meantto effectively influence the marginal social cost(Yuen, 2008). It would achieve an optimal social quantity as there would bea fixed number of production units due to the exclusion of the externalities costs.

Figure 1. A graph of pollution against production units under fixed technology

On the other hand, the government should not set a goal of lowering the marginal cost of pollution to zero in industries with variable technology since it would not attain an optimal socialquantity(Muller, 2007). Instead, there would be a more significant marginal social benefit in comparison with the marginal social costs.

Figure 2. A graph of pollution against production units under variable technology

Lorenz curve is a graph that illustrates the distribution of income, and therefore effective in analyzing the spread of inequality of wealth across a particular population.

Figure 3. A graph of a less evenly spread of income in 2010 than in 1980 across the US households

            From Exhibit 2, however, the Lorenz curve perfectly shows the total percentage of the income that a proportionate percentage of households would receive when arranged in ascending order. According to McEachern (2014), point a in 1980 signifies that 80% and below of the households received a lower total percentage of income at 56% as compared to point b in 2010. Therefore, the distribution of income is not even across the households based on the non-linear curve in red.

References

Arnaud, C., Donaldson, D.,&Komunjer, I. (2010). What goods do countries trade? A quantitative exploration of Ricardo’s ideas.NBER Working Paper Series. https://doi.org/ 10.3386/w16262

Baldwin, R. (2014). WTO: Governance of 21st-century trade. The Review of International Organizations, 261-283. https://doi.org/10.1007/s11558-014-9186-4

Kehoe, J. (2016). The great free-trade kiss-off: Protectionism – US jobs. The Australian Financial Review, 18.

McEachern, A.W. (2014). Macroeconomics: A contemporary introduction(10^th ed.). South-Western Publishing Co.

Mongelluzzo, B. (2000). High-tech emerging as major US exports.Journal of Commerce Incorporation, 6(1), 123-324.

Muller, N.Z. (2007). The price of pollution: An integrated economic analysis of air pollution in the United States. Yale University: ProQuest Dissertations Publishing.

US Census Bureau. (2019). Top trading partners – February 2020. Foreign Trade. Retrieved 6 April 2020 from, https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html

WHO. (2018). World Trade Organization urges all countries to eliminate protectionist barriers and cut tariffs. Retrieved 6 April 2020 from, http://www.wto.org/

Yuen, A.C. (2008). Optimal emission reduction in a cap-and-trade regime estimation of a finite horizon dynamic game of the imperfect competition. University of Pennsylvania: ProQuest Dissertations Publishing.