Transcript Test Review
Test Review Chapters 4 & 5 Income can go to: • Taxes • Savings • consumption vertically integrated • that produces a single product but owns plants in many different stages of the production process • E.g. US Steel three legal forms of business: • proprietorships • partnerships • corporations Limited liability: • creditors have no legal claim on the personal assets of a corporate stockholder principal-agent problem • goals of the corporate managers may not match the goals of the corporate owners "free-rider“ problem • Certain goods will not be produced because there is no way of excluding nonpaying individuals from the associated benefits • E.g. missile shield, fireworks show • Example of “market failure” redistributional function of govt. • the transfer of income and of wealth from some individuals to others by means such as taxation, monetary policies, welfare Negative externalities • when firms "use" resources without being compelled to pay for their full costs • Solution? • Effect? public good • benefits that are available to all, regardless of payment stabilization function of government • Efforts to deal with the problems of substantial unemployment and rapid inflation Government's economic role • complicated by political context progressive income tax • percentage of income paid as taxes increases as income increases Trade deficit • Imports exceed exports • US has trade deficit over past several decades Trade has improved due to: • dramatic improvements in communications technology • general declines in tariffs • improvements in transportation technology basic rationale for international trade • comparative advantage a good should be produced in that nation where • its domestic opportunity cost is least The terms of trade • the ratio at which nations will exchange two goods benefits of international trade include • more efficient use of world resources and higher living standards • Nation’s PPC beyond its own domestic potential Depreciation of a currency will • increase the prices of U.S. imports, but decrease the prices of U.S. exports U.S. imports from country X • create demand for country X’s currency Protective tariffs • excise taxes or duties placed on imported products Import quotas • maximum limits on the quantity or total value of specific products imported to a nation Export subsidies • government payments to domestic producers World Trade Organization (WTO) • hears and rules on trade disputes between nations • Criticisms? NAFTA • North American Free Trade Agreement • increased trade among Canada, Mexico, and the United States