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    International trade and the market system

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    1. Why do many economists believe that the market system is the most efficient economic system for allocating resources?
    2. What are the four main categories of resources? Explain each of them.
    3. (a) Explain what happens in the simple circular flow diagram? (b) What effect do price controls have on the market system?

    4. (a) Explain what can we learn from a country's production possibilities curve? (b) How can a nation's production possibilities curve shift inward? (c) Why the production possibilities cure is bowed-out in shape?

    5. Will a nation tend to export or import goods for which it has comparative advantage? Explain.

    6. Consider a professor who is writing a book. The professor can both write the chapters and gather the data faster than anyone else in the university. Still he pays a student to collect the data at the library. Is this sensible? Explain.

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    Solution Preview

    1. Only an unfettered market can efficiently allocate each good and service in a complex economy. It is not possible to centrally plan how much of each good should be produced, but through the pricing mechanism a free market can automatically reajust its allocation of resources to the goods most needed at that time. This occurs because an increase in demand causes prices to rise, which signal sellers to increase production.

    2. The four main categories of resources are labor, capital, natural resources, and entrepreneurship. Entrepreneurship is the development of new and better ways of producing goods and the invention of new goods. Capital includes those things ...

    Solution Summary

    Explanation of market system. Illustration of comparative advantage. Shifting of a nation's PPF.