Social Sciences Test 30/01/13

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What are the 4 basic functions of an economy?

The economy must determine:

1. The kinds of goods to be produced

2. The amount of each good to be produced

3. The resources that are to be allocated to a good's output

4. The ultimate devision of the goods among those who are to enjoy them

The economy must perform these functions in such a way as to confer the maximum benefits on the community. It must also provide a favourable environment for economic growth. 

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Why do goods in the form of capital not directly s

Because they aren't the final product, they just enable us to produce a uch greater quantity and variety of consumer goods than would otherwise be possible. These goods are usually of a more desirable kind, or quantity.

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How are unplanned/market economies run?

They rely upon private capital markets to raise money for building production facilities such as factories, and because any profits or losses from production accrue to the owners of those facilities. This is also why they are called private enterprise or capitalist economies.

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Compare the freedom of the individual in planned a


Individuals hace significant freedom to own and operate productive enterprises, to produce economic goods, and to develop specialized institutions such as banks and insurance companies to fulfill their needs. Eg. US citizens.


Individuals have far less freedom. When they graduate from uni, the government tells them were to work. Similarly, company heads are given a plan from the government stating what products they need to manufacture, and how much.

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How is a completely planned economy run?

These economies rely on a government controlled production and distribution system. All money for building the factories comes from the government, and any profits/losses from production accrue to the government.

If the economy incorporates political & ideological goals, it is called communist.

Eg. North Korea, and the Soviet Union a while back.

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How did the feudalist economy change to the mercan

Travelling traders, and workers, helped to spread cultures from one estate to another, setting up temporary markets to sell their wares/services. These temporary markets became permanent, and formed centers around which cities and towns grew. 

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How did the feudalist economy change to the mercan

Travelling traders, and workers, helped to spread cultures from one estate to another, setting up temporary markets to sell their wares/services. These temporary markets became permanent, and formed centers around which cities and towns grew. 

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Describe the mercantile economic system

The mercantile system deviated from the feudal system because it favoured manufacturing/processing above agriculture. A major aspect of this system was that people had to obtain permission to engage in economic activities from local authorities.

As time went on, and increasing trade fostered the development of the nation staet, traders soon had to answer to young governments.

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How did the mercantile economy change to the marke

In the 18th century the Industrial Revolution occured, which started the change from artisan production to machine production, which required workers to become specialised (and potentially isolated from their work - remember Karl Marx!). The Indust. Rev. placed an economic strain on the mercantilist system, because the latter was so limiting to individual enterprises. In  the mid-18th century Adam Smith published the Wealth of Nations which argued that the old system should be abandoned. 

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What was Adam Smith's argument for the market econ

Bakers will supply bread to people when they can make a profit, and this will satisfy people's hunger.

If the baker charges a high price, as long as there is competition, other bakers will enter and drive the price down to its cost of production.


If there is too little bread, prices will rise, and as it does, as long as individuals are free to become bakers, more people will be bakers, more bread will be made, and then prices will go down again. 

QED: Peoples needs met by the government not because people are nice or concerned about other's welfare, but because people are selfish and pursue profit. 

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Why is there no such thing as a free enterprise ec

Because freedom is always relative.

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In a market economy, what plays a dominant role in

Markets and prices. Ie. Any commodity that cannot be sold in the market at a profitable price will not be produced, whereas any commodity that can be sold at a profit is probably going to be produced by someone sooner or later.

When prices are not regulated, and markets are competitive, price changes keep adjusting production/consumption and consumption/production.

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What are the 3 advantages of international trade?

1. It enables a country to obtain products that can't be produced at home, or that can't be produced in adequate quantities and at acceptable costs. (Climate/lack of natural resources)

2. It enables a country to get a better product than can be produced at home. (Climate/lack of resources, or that over time people of a country have gotten very efficient at producing a certain good. Eg. Brits and wool.)

3. Makes products available at a lower price that would be possible if they were produced at home. This raises the standards of living by increasing consumer purchasing power. 

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What is the disadvantage of international trade?

Importing products made at a cheaper price hurts producers at home.

Eg. Importing potatoes helps US consumers but hurts Maine and Idaho potato producers. 

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Why is the idea that US producers are injured by i

If the US reduces imports, then exports are also reduced. This is because even though you might gain home markets for the products of some US workers, this is done at the expense of losing foreign markets for the products of other US workers. Ergo, US consumers pay high prices or receive inferior goods.

Conversely, if you increase imports, your exports will also increase in the long run! Any decline in the home market for US goods will be offset by an increase in the foreign market. If the US buys cheaper British textiles, and the Brits buy cheaper US refrigerators, then the consumers of both countries gain, and there is no loss in US employment. This is because the smaller demand for work in the textile industry is off-set by the demand for work in the fridge industry, and vice-versa in Britain.

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Why can't you sell goods to other countries withou

Eg. If UK & US sell products to one another.

UK importer wants to buy $1mill of US machinery. US firms want to be paid in $, not £. To buy US machinery, the UK importer needs to change £ to $, ie. find someone who has $ and will sell them in exchange for £. These people are a. US people that want £ to buy goods/services from UK, b. UK importers that have accepted checks/drafts in $ for UK goosd that they sold to Americans.

QED: The source of $ available to UK to buy US goods is the payments Americans have made, or plan to make for British goods.

If for any reason US imports of UK goods should decline, the UK would have to curtail their purchases because they wouldn't have enough $. 

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What are the 2 reasons to levy a tariff on an impo

1. Raise revenue 

2. Protect market of a domestic industry by keeping out foreign competitors.

These are INCOMPATIBLE! A tariff that keeps foreign products out entirely would raise no revenue at all. In reality though tariffs are rarely that high. 

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What is the main argument against tariffs?

By restricting international trade, they rob us of its benefits. Free admission of imports is the most effective way of expanding the foreign markets of home industries. (more imports, more exports).

Also note the danger of one country introducing tariffs, and other countries following. This is what happened in the Great Depression!!

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What are the 4 arguments in favour of tariffs?

1. The home-market 

2. High-wages

3. Infant-industry

4. Self-sufficiency 

All of these arguments seem plausible but are complete bullocks.

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What is the home market argument?

A tariff that keeps out foreign goods increases the market for US goods and ergo increases home profits and employment.

This is only true in the short-term.

Because if you lower your imports, you lower your exports, you end up decreasing home profits and employment. This happens faster because when one country raises the tariffs on their goods, other countries retaliate.

QED: US consumers pay higher prices or receive inferior products.

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What is the high-wages argument?

That tariffs maintain the US wage level and the US standard of living by protecting our workers from having to compete with cheap foreign labor.

QED: This is bullocks because if a tariff makes possible higher wages, it does so only by enabling producers to sell their products at a higher price. This reduces the purchasing power and the standard of living of all otheres who must buy the product. If this kind of price raising were applied to a great many products, the general reduction in standards of living might be serious.

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What is the infant-industry argument?

The people that support this are against permanent tariff protection to an industry that can't survive without it. Ie. a small industry in the US can't help to produce at as low a cost as an old, established industry abroad. If you give it protection from the foreign market, it can establish itself and grow, perhaps eventually becoming more efficient than its foreign competitors. If so, it can provide consumers with goods at reduced prices, and it won't need tariff protection.

QED: This is bullocks because this argument has been advanced several times, and been put in practice with several industries, but there is no clear case wherein any firm has benefitted from this, and then continued without such protection.

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What is the self-sufficiency argument?

Tariffs make a country more self-sufficient and therefore less depedent on foreign countries for essential commodities in time of war.

QED: Bullocks because WW2 showed us how important it was to have dependable supplies of vital raw materials, and to keep those products out of the country with tariffs would not always result in building up home production. 

When there is a REAL danger of a shortage of strategic materials in a time of war, the best things to do is to stockpile. 

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What are the 2 reasons to impose an import quota?

1. To keep out foreign goods for the benefit of domestic producers

2. To limit payments to foreign countries in order to conserve limited supplies of foreign currency.

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What are arguments for/against import quotas? (1 e


For people that want to restrict imports, quotas are better than tariffs. 

a. Doesn't require special legislation, but can instead be imposed or changed by administrative decrees.

b. A quota can be fixed to admit a definite amount of a commodity, whereas with tariffs, there is no way of knowing just how much of it will ente.r


Quotas restrict trade, but unlike tariffs, they bring no revenue to the government of the importing country.

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What are the 6 problems that developing countries

1. The political consensus problem

2. The corruption problem

3. The economic problem

4. The debt problem

5. The population problem

6. The brain drain problem

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What is the result of the political consensus prob

There is no political consensus, ergo:

1. Decisions halted (taxes, public health, laws)

2. Real political power is moved elsewhere as people have no faith in the government. (military, drug cartels in Columbia.)

3. No government transparency because they don't want the population to panic about how badly they are doing.

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What is the result of the corruption problem? (4)

Corruption is when officials waive their responsibilities in favour of their personal wants.

1. Public officials no longer serving their constituency

2. International credibility goes down the toilet (eg no foreign aid is given because everyone knows that the money gets skimmed into the pocket of gov. officials)

3. Inhibits the economy (no corporations want to invest in countries where they have to bribe people on top of all other costs)

4. It becomes an inherent part of society, and very hard to solve!

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What is the result of the debt problem? (2)

Private investment, and loans that are pumped into the economy as foreign aid must be serviced, which means that the interest must be paid. AKA. structural debt.

1. 3rd world country X gets dependent upon 1st world country Y. (when X borrows from Y, and X eventually pays Y back, the money immediately leaves the former's economy, and it needs more aid!)

2. Creates a lack of gov't investment.

A feature of Y is that it invests in educating its workforce, which allows them to take raw materials and complete the value-added process.

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What is the result of the brain drain problem? (3)

1. All of the educated people from X move to Y.

2. Education quality in X decreases because nobody gets educated there.

3. If you don't have an educated workforce to better your economy, then you're stuck where you were before.

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What is the result of the population problem? (1)

1. As long as population continues to grow at current rates, X and similar countries are going to have almost insurmountable difficulties in increasing their per capita output (the total output divided by the country's population.)

This means that it's near-impossible to break free of this vicious cycle.

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What is the result of the economic problem, and ho

1. To get economic growth, countries need to save and invest. But when the income is below starvation level, how do you save and invest?

2. When capital is poured into X's economy in the form of foreign aid, sometimes the lack of understanding/pride of the politicians causes the money to be put into places where it isn't needed, with the creation of big, impressive projects, like an airport. 

To solve the economic problem, you need to educate the people about how a successful industry operates, and the population have to be wlling to develop the patterns of behaviour, intitiative, and attitudes for rapid economic growth. On top of this, X also needs to raise the level of investment to a certain minimum proportion of the national income. 

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What are the basics of Friedman economics? (5)

1. Free markets

2. Moneterism (controlling money supply to stabilize economy), negative income tax.

3. Government intervention is never the solution!

4. Invisible hand -> feedback mechanism.

5. Keep money supply stable

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What are the basics of Keynesian economics? (5)

1. Regulated markets

2. Multiplier effect

3. Government should always do what's best for the market!

4. Government spending and private investment

5. Keep the demand stable

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