Shirley Tang
Borge
AP Macroeconomics
4 September 2018
Summer Assignment
Chapter 1:
Adam Smith wrote “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” Wheelan uses the example of taking the bus for $1.50 versus taking a taxi for $7 when you’re running late for a client that will pull a $50,000 account. Many would take a taxi because the return would be worth it. My example is going to school for 20 years and getting a PhD versus getting a high school diploma. Many would go to school for 20 years because you would make more money in the future when you have a PhD.
The word “utility” describes how much usefulness is gained by the consumer from any product and it can also be a measurement as to how much someone values the product, which can be shown on page 9 when Wheelan explains that the chicken crossed the road to maximize his utility. A “rational choice” in terms of economics is a principle that an individual follows when they are taking a logical approach to their decision-making. For example, Wheelan explain that people that smoke tend to weigh the benefits of smoking against future health risks and other costs before deciding to smoke.
Chapter 2:
As supply goes down, price goes up. Since it’s limited, more people want it and are willing to pay a lot for rhino horns. Because the black rhino species is endangered, it is harder to get rhino horns. Since the supply is limited, the black market price for them rises, which leads to poachers to hunt own the remaining animals ( this also applies to the elephants).
The value of a license to fish for lobster reduces the problem of overfishing since it causes fishermen to preserve more fish/lobster in the water. They preserve the fish and lobsters because it they kill all the lobsters and fishes now, their license wouldn’t be worth anything in the future, since there isn’t anything to fish for.
Chapter 3:
An externality means that the private costs of someone’s behavior and actions are different from social costs. For example, families traveling with small children on planes should be at the back of the plane just so other passengers don’t have to deal with the negative effects of being in the same row (Wheelan 57). I think that building train stations throughout the city provides shelters for the homeless during the cold and rainy weather conditions which is a positive externality for both the homeless and the government. By taxing a behavior, it will limit the behavior and result in more revenue to pay for the negative incentives since it would make the externalities less attractive.
According to Wheelan, the good government allows markets to happen by setting rules that make it easier to conduct a small business. By doing this, they succeed in developing and maintaining the organization that is needed to carry the economy. It protected property rights and the laws lower the costs allowing for a good market to happen.
Chapter 4:
At the end of the chapter, Wheelan likens the government’s role in the economy to be a surgeon’s scalpel. Pro-government supporters would use examples from the text such as a physician outlining the medical issues related to treating an advanced cancer with chemotherapy to illustrate Wheelan’s point because the physician, like the economy, is in the hands of someone that will be using their tools for good and will be trying to make the patient/economy grow and heal. Anti-government supporters would use examples from the text such as how raising the minimum wage would help those workers whose wages are raised and hurt the workers who end up losing their jobs to illustrate Wheelan’s point because when the economy is in the wrong hands, even with the best intentions, it still hurts the workers.
Chapter 5:
In theoretical economics, all parties are rational and have perfect information. Imperfect information in markets leads to inefficiencies because without knowing the perfect information and being outside the world of Econ 101, it is highly possible for errors in decisions. For example, when insurance companies don’t know what their client is at risk for and they insure them for life, but the client dies a year later, then the insurance company would be at a huge loss of money. Wheelan uses the example of two candidates interviewing for a small law firm. Both candidates have similar background and qualification, but the law firm might lean towards hiring the man because they think that the woman would end up starting a family and the firm would have to pay for her maternity leave, but that’s just an example of imperfect information because the man could want to be a stay-at-home dad and the woman could have decided that she didn’t want any children.
Chapter 6:
Human capital is the sum total of skills embodied within an individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, even the ability to throw a baseball fast. According to Wheelan, this is more important to economic growth than things like machines because while the economy grows, it favors more skilled workers, which is why human capital is more important since it is what you are left with after all of your properties and assets are stripped away.
The chapter begins and ends with references to Bill Gates. Wheelan uses the example of Bill Gates to prove that human capital increases productivity that wealth for one does not necessarily mean poverty for another by showing that even if Bill Gates was stripped of all his assets, he wouldn’t have a hard time getting back to the place that he was before since his human capital is still big. Bill Gates is richer than most wealthy Americans because his human capital is huge. Bill Gates’ wealth does not mean poverty to another as there is no relation between one’s wealth and another’s poverty, rather it is based on one’s human capital. If one’s human capital is higher, this would result in a potentially wealthier future.
Chapter 7:
Financial markets serve 4 purposes. These four purposes include: raising capital, storing, protecting, and making profitable use of excess capital, insuring against risk, and speculation. Financial markets raise capital by giving out loans, for example: lend money for people to pay for college or the downpayment of their houses. Storing, protecting, and making profitable use of excess capital by having stocks and bonds for the general people to buy into a company and earn money. By having life, auto, and health insurance, financial markets are insuring against risk. Speculation serves its purpose in the financial markets when a product is made and those who dedicate themselves to bet on the wellbeing and stocks of the products decide to bet on how the products are doing in the market
Wheelan suggest that people use their money wisely and invests in something that will benefit them in the long run. This relates to the concepts of rational choice, perfect/imperfect information, and utility because he suggests that people make a rational/logical choice with the information given to decide whether or not they should invest in something based on their utility in the long run and if it would be positive or negative.
Chapter 8:
The chapter opens with a discussion of economics and politics. Wheelan argues that things that make sense economically are not always politically possible because what makes sense economically might not cause a politician to win the number of votes that he/she needs to win the election. Sometimes, what is politically possible and doesn’t make sense economically can cause a politician to win the election. The disconnect between economics and politics connect to incentives, rational choice, and utility for both politicians and voters by because politicians and voters need to make a rational choice based on what would give them the most utility.
According to Wheelan, it is so much more likely that people will protect against free trade and groups like NAFTA or the WTO than in favor of them because the return isn’t enough to convince people to protest for them, so it’s easier for people to just go against free trade and groups like NAFTA or the WTO, which also are more political and involve more restrictions.
Chapter 9:
The beginning of this section deals largely with the concept of GDP. Wheelan’s arguments for GDP as a metric for growth and progress include that GDP is a pretty good metric for growth and progress since it considers inflation, which means it’s a better system than any other systems. Wheelan’s arguments against GDP as a metric for growth and progress include how GDP per capita is determined by the GDP per population since that would mean that because it’s a high GDP, the country’s economy could be doing very bad.
Fiscal policies use the government’s capacity to tax and spend as a lever for prying the economy from reverse into forward. Monetary policies have the potential to affect the economy quickly. The government can help deal with recessions through fiscal and monetary policies by lowering or raising short term interest rates leading to more spending and by giving people more money which causes them to be less afraid to spend their money.
Chapter 10:
Low interest rates and inflation are related because as interest rates go down, inflation goes up since more people borrow money meaning that the consumers have more money to spend. Because people have more money to spend, the economy would grow.
In William McChesney Martin’s comment about the Federal Reserve’s job, he meant that the government has to remove the Federal Reserve’s job because if the government hadn’t removed it, things would get out of hand and it would be harder for them to cool things down. The government has to create recession to lower the consumer’s want of something in order to remove the inflation.
The actions of the Fed in response to the financial crisis were so important because lending will go down and when marks begin to freeze and/or evaporate, the Fed creates new programs that maintain the credit flow by filling the gap.
Chapter 11:
Changes in currency valuations made George Soros $1 billion in a day because he made a huge bet on the future value of the British pound relative to other currencies. He didn’t believe that the British government would really keep their currency from falling below the designated value in the ERM and on September 16 of 1992, Britain withdrew from the ERM, which led Soros to make a billion dollars in a day since the British pound lost over 10% of what its originally worth.
The value of Icelandic krona went down internationally and it impacted the economy of Iceland by a lot. Iceland’s banks major banks were defunct and as the Icelandic krona value went down, the cost of consumer loans went up (foreign currencies). The Iceland stock market dropped 90% while their GDP dropped 10% and unemployment rates hit a 40-year high.
According to Wheelan, US debt to China is bad for both countries. This is because the US currency would lose value due to inflation which would lead to China not getting paid back from what the US owe them. Also, the US can also say that they don’t want to pay China back, but since US currency can devalue, then whatever the US pays back might just be worth half of what we actually paid.
Chapter 12:
Wheelan argues that the benefits of international trade are obvious, and rooted in the most basic economics. These benefits include making consumers richer by lowering the cost of goods for them. This helps the poor countries. They are rooted in the economic concepts of comparative advantage.
Globalization and economic disruption are connected because globalization stops a country from developing and evolving, which is what economic disruption is based on, causing the GDP to stay at a standstill.
Chapter 13:
The story of Nashon Zimba illustrates the disconnect between labor and human capital when it comes to productivity because Nashon Zimba was a very hard working man that had a huge labor, but yet a very low human capital, so he didn’t succeed much in life. This is because although he works very hard and works a lot, it didn’t affect his human capital since human capital was the sum of the skills that he has as an individual.
Wheelan mentions many criterias/policies as helping nations develops such as: government institutions that are effective (shown when taxes are collected), law systems that are backed up by the police, property rights (shown by owning a house, car, etc.), and how in the United States, there aren’t any extra regulations (shown by not overworking specific groups of people and having different jobs and positions). Many jobs are so that the nation can maximize their utility and productivity from the citizens of the nation.