Price Variation Affect on Price

¶ … Price Variation Affect on Price Line If, at moment 2, the price falls from PA0 to PA2, the income line will rotate upwards from PB0 to PB2 and the curve becomes flatter. The changes occur as the income line reflects a limited variable - the income an individual possess is assumed to have a limited purchase capacity of the a - B product set. Moreover, the price of one product is likely to change as the price of the other product changes as the market adapts to the demand-supply laws.

If we consider the income line inflexible, the price of one product should not necessarily influence the price of the other product, just the overall quantity that can be purchased. Thus, if the price of one good falls and all other parameters remain constant, the quantity of the same good increases. Conversely, if the price of one good increases and all other parameters remain constant, the quantity of the same good falls. FIG. 2 - PRODUCTION POSSIBILITY FRONTIER budget allows to.

A point inside the PPF implies that the production is less than optimal - underemployment of resources. A point on the PPF implies that the production of food and computers employs the optimal resource combination. A steeper curve implies that more food is produced at the expense of computers and a flatter curve implies that more computers are produced at the expense of food. A curve closer to the origin point of the axes reflects a smaller budget and one further away from the axes a larger one. 3.

The community indifference curve reflects the combination of goods (quantity) to which the consumer is indifferent. In other words, the points on each curve render the same utility for the consumer. The curves are concave and downward slopping. The negative slope suggests that the increase in consumption of one good (X) will increase overall satisfaction if it's not offset by a decrease in consumption of the other good (Y). Preferences are depicted upward on the right side of the quadrant - the more to the right, the higher the preference.

If the consumer is indifferent between the consumption of 2 goods, then the curves coincide. 4. FIG. 3 - INPUT TABLE World If the countries trade, the exchange price will be one tone of one unit of Y for 7/18 units of X. I's opportunity cost of producing one unit of X is 8/5 and II's opportunity cost of producing one unit of X is 5, meaning that I has a comparative advantage in producing X goods.

I's opportunity cost of producing one unit of Y is 5/8=0.625 and II's opportunity cost of producing one unit of Y is 7/18=0.389, meaning that II has a comparative advantage in producing Y goods. 5. FIG. 4 - OUTPUT PRODUCTION TABLE World exchange 4 of its 10 units of X, it will get ?10 units of Y in return rounded from 10.28=(4*18)/7). This implies that country II will consume the other 10 units of Y (rounded from 68/7) and 4 units of X, so that the world production is all consumed.

Country I will consumer more of Y products and country II will consumer more of X products after trade. 6. Given the output consumption table in fig. 5 we can notice that country I has an absolute in the consumption of X and Y (10.28>68/7).

If we were to use the consumption table to decide comparative advantages, we would have to notice that I's opportunity cost of consuming one extra unit of X is 12/7 ? 1.71, whereas II's opportunity cost of consuming an extra unit of X is 17/7 ? 2.42, so I has a comparative advantage in consuming X because it's opportunity cost is lower.

Also, II's opportunity cost of consuming an extra unit of Y is 7/17 ? 0.41 and I's opportunity cost of consuming an extra unit of Y is 7/12 ? 0.58, which implies that II has a comparative advantage in consuming Y over I. 7. The Heckscher-Ohlin theory was developed as an alternative to Ricardo's comparative advantage theory and its purpose was to connect the neoclassical price mechanism into the classical international trade theory. Basically, the theory suggests that international trade pattern will be determined by a country's factor endowments.

Thus, each country will specialize in the production of those good that make intensive use of factors that are locally abundant and export those goods and import good that make intensive use of factors that are locally scarce. The H-O model was received with much criticism because its prediction power turned to be low and because it assumed that factors are immobile between countries.

The Leontief paradox refers to the fact that the country with the highest capital endowment (USA) turned out to export goods that have a low capital to labor ratio than its imports. PART II - 8. FIG. 6 - CONSUMER and PRODUCER SURPLUS equals the benefit generated by producers selling at a higher price than they would be will to sell their products for.

After trade, the prices are likely to fall, which will reduce the producers' surplus and increase the consumers' surplus as they will be able to buy a higher quantity. The consumers' surplus exceeds the producers' loss, which implies that the overall trade effect is positive. In case the government imposes a tariff, the consumers will have a loss, producers will have a surplus, because the price level will rise with the tariff and the government will have a surplus, which comes from collecting the tariff. 9.

A tariff is tax imposed on imported goods, whereas a subsidy is a form of assistance from the government meant to stimulate production and consumption. FIG. 7 - TARIFFS reduces the producer's surplus from CDK to KFG and increases the consumer's surplus from ABL to FLJ. In this case the net surplus of the society is BGJ. If the government imposes a tariff, the price increases from F.

To C, the consumer's surplus will change to CEL, the producer's surplus increases to KCD, the government will receive a surplus equal to DHIE and DGH and IEJ will be deadweight losses. The tariff will limit imports and therefore consumption and encourage local production. Subsidies in international trade are used to promote one country's exports by helping national producers to be more price competitive outside the country.

The subsidies are more efficient for an export oriented national strategy, whereas tariffs are more efficient when government chose to focus on the internal production and consumption. 10. The effective tax rate is the amount paid by an individual when all payments or all other government offsets are included, which is divided by the tax base (total income). For instance, when some individuals will have higher government offsets, their effective tax rate will be lower, despite the fact that their official tax rate will be equal to other people.

The effective rate of protection measures the effective rate of protection of one country and can be calculated as: where VAd=Value Added in the domestic market VAint=Value Added in the international market. The purpose of this protection is to detect the level of value added tax that can be levied in any stage of the production without reducing the competitiveness of national output.

If the total tariff value on imports is higher than that on exports, then the protection is negative and national products are discriminated compared to imported ones. 11. FIG. 8 - PAYOFF MATRIX If the government subsidizes the U.S. chip production with 11, then U.S. will be able to produce regardless of Japan's production decision. The gain will be 1 if Japan produces and 111 if Japan doesn't. Without a subsidy, the production decision will be made depending on the entrant. Thus, if U.S.

is the first to produce, Japan won't produce and vice-versa. The payoff matrix criticism has to do with the fact that is difficult to predict future profits and because production output may be different and if the competition has a better technology it may produce anyway, which will make the subsidy less efficient. 12. The Smoot-Hawley Act translated into the raising of tariffs on U.S. imported goods, which reached record levels.

Some say that the initial purpose was to deal with U.S.'s overcapaciy in the 20s, which was not closely followed by the country's purchasing power. Overall, the act had a negative impact on the country's economy because many countries retaliated and raised similar tariffs on U.S. exported goods, which damaged the country's trade balance and it is said to have contributed to the Great Depression. 13.

Dumping - in international trade is equivalent to a producer from one country exporting products to another country at a price that is either below production costs or the price used to sell the same products on the domestic market. Fair value - refers to the potential market value of a service, good, asset, etc. taking under consideration factors, such as: production costs, distribution costs, cost of substitution, perceived utility, scarcity, etc.

In 2004, FASB (Financial Accounting Standards Board) issued a draft meant to provide guidelines of how entities should estimate fair value prices for reporting purposes. Escape clause - is a part in any contract that specifies the conditions in which one or more parties involved in the contract may avoid performing its duties as specified in the contract. 14. The import substitution is a policy through which countries decide to substitute some of the imported products with others manufactured locally.

The advantage of this policy is the import limitation, which in some instances may turn out to be positive for the trade balance and national value-added creation. The disadvantage is that national products lose export competitiveness because they are protected by the state. The export promotion is a policy through which countries decide to develop measures meant to increase the exports of national products. The advantage of this policy is that exports represent the ideal way to generate growth.

One of the criticisms brought to this policy has to do with the depreciation of exchange rates, which is one tool used for export promotion. This method may increase the inflation of one country. 15. Balance of payments contains the payments flow between one country and its trade partners. The current account contains the flow of incomes, goods and services plus the financial aid received from governments outside the country.

The GDP has 4 components: private consumption -, business investment capital (I), government expenditure (G) and the gross difference between exports and imports. 16. The capital account reflects the net result of private and public investments which are made both inside and outside the country. Short-term flows include bank deposits and treasury bills, which are also known as "hot money." Long-term flows include foreign direct investment (overseas investment) and portfolio investment (stocks and shares).

The purchase of securities falls into the inflow category and represents an accumulation of cash, whereas the sales of securities fall into the outflow category. 17. It is said that a positive balance of payments is a desirable situation. A positive balance is given by capital, current and financial accounts having positive results. Conversely, a negative balance reflects that the sum of these three accounts is a deficit.

A positive balance means no debt and no debt related costs, whereas a negative one means the opposite and from this point-of-view a positive balance is desirable. However, a negative balance is not necessarily a negative aspect. It is important to know what exactly generated the sign of the balance. Thus, higher imports than exports may have a positive impact on an economy that is looking to upgrade its technological level by importing products meant to do just that.

A negative capital account suggests that domestic investors purchase more assets abroad, which may return a higher value in the future and in the long run have a positive impact on the country's finances. 18. Price arbitrage reflects a situation in which an entity takes advantage of price difference for the same category of good/service in different countries. Suppose that in NY 3$=2€=1£ and in London 4$=2€=1£. If we were to convert 3$ into 1£ in NY and buy 4$ in London, the 1$ difference is considered arbitrage.

Hedging is an investment undertaken to limit risk. Suppose the oil price is 5$/barril and is expected to rise. A company which has high oil-related costs may chose to buy in two months from now, 10 barills of oil for 6$/oil. If the oil price in 2 months is 7$/barill, the company saved costs worth of $10 = (7-6)*10. Speculations refer to the situation when an investor is taking advantage of the.