Specialization and Trade.pptxVIP

Specialization and TradeStandard of LivingOne’s standard of living refers to the goods and services one can consume (use, in other words). We assume that higher standards of living are associated with greater levels of utility, all else being equal (ceteris paribus).This raises the question of how we should raise our standard of living.The Importance of ProductionProduction is the center of economic activity.Production creates goods and services for people to enjoy. Production is also related to standards of living.Unless others give you free stuff, your ability to consume is related to your ability to produce.Scarcity and the Need for EfficiencySince our resources are scarce, we want to get the most goods out of our resources.This will result in the highest possible standard of living relative to the limits of our resources.This is accomplished by being efficient, or getting the most out of our resources. Two Types of EfficiencyProductive efficiency: getting the most goods and services out of our resourcesAllocative efficiency: getting the most utility out of our resourcesBoth of these are important. We want to get the maximum goods and services in order to increase standards of living, but we also want to maximize utility.Economic GrowthEconomic growth refers to an increase in the production of goods and services.Economists and policymakers seek to find ways to increase economic growth in order to increase standards of living.There are two basic ways we can grow the economy:Increase resourcesIncrease productivityIncreasing ResourcesResources used to produce other goods and services are referred to as factors of production. Although there are countless different types of resources, we divide them into a few different classes:Land: This includes not just land, but all natural resources. Labor: This includes all human effort.Capital (or Physical Capital): All produced goods used to make other things. Distinct from financial capital. Entrepreneurship: The work to orga