Microeconomics
One feature of the U.S. and other nominally free market capitalist economies are constant calls for government to interfere in the operation of the market.
These proposed intrusions take many forms–taxes, regulations, restrictions on trade, quotas, and banning production, trade and consumption of selected goods.
Choose all that are correct
a. In the case of international trade, restrictions on imports, e.g. tariffs and trade bans, are an example where eliminating those restrictions would create a large
benefit to the general population and a small loss to firms that would face competition from overseas firms.
b. In the case of international trade, removing restrictions on imports, e.g. tariffs and trade bans, would make owners and workers at firms competing with imports
worse off.
c. In the case of international trade, removing restrictions on imports, e.g. tariffs and trade bans, would make consumers better off by lowering prices..
d. None of the answers are correct.
e. In the case of international trade, removing restrictions on imports, e.g. tarriffs and trade bans, the gain to consumers far outweighs the loss to selected
domestic workers and producers leaving the general population better off overall.
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The Economic Case For Free Trade.
Choose all that are correct
a. Consumers voices are seldom heard in political debates concerning tariffs or other restrictions on imports.
b. The debate about restricting imports frequently resolves around protecting jobs.
c. The mistake frequently made in the debate about restricting imports is that the debate concentrates on the jobs lost in industries that compete with foreign imports
and ignores the jobs that would be created in import restrictions were removed.
d. Rather than concentrating on the number of jobs created or lost, it is correct to concentrate on the total income jobs pay. If this is done, the decrease in income
from jobs lost removing restrictions on foreign trade is smaller than the increase in income from jobs created by removing restrictions.
e. None of the answers are correct.
f. Consumers voices are seldon heard in political debates about imposing or removing import restrictions because their welfare is not affected by the imposition or
removal of import restrictions.
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The Fallacy of Trade Surpluses and Deficits.
Choose all that are correct
a. In the press, a trade deficit, where the value of goods imported is greater than goods exported, is falsely portrayed as a bad thing. This reflects a lack of
understanding of economic theory by journalists.
b. In reality, a trade deficit is a good thing.
c. When the U.S. runs a trade deficit with China, that means the value of goods exported to China is less than the value of goods imported from China.
d. When the U.S. runs a trade deficit with China, China is accepting debt, e.g. paper currency or government bonds, for the difference between exports and imports.
e. When China accepts debt, e.g. paper currency or government bonds, for goods and services this makes the U.S. better off because people in the U.S. consume and enjoy
the Chinese goods today but don’t have to pay for them until later.
f. If the foreign exchanges markets are unregulated, foreign exchange rates will be determined by the market and this will tend to eliminate trade surpluses and
deficits.
g. None of the above.
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The Argument Against Unfair Competition. It is comonly argued that foreign governments who subsidize production of goods produced in their country that are
subsequently sold in the United States are engaged in “Unfair Competition” that hurts the United States.
Choose all that are correct
a. None of the answers are correct.
b. Free trade would be fine if all countries practiced free trade but so long as other countries choose policies that subsidize theri domestic industries, the United
States makes itself worse off by practicing free trade.
c. The gain to U.S. consumers from foreign subsidies is larger than the loss to domestic workers and firms.
d. Countries that impose restrictions on trade hurt us but they also hurt themselves. If we respond to those restrction by imposing our own restrictions we just
increase the harm to ourselves.
e. When a foreign government takes money from it’s citizens, subsidizes the production of good which are sold to consumers in the United States the result is identical
to that foreign government taking money from it’s citizens and giving cash to people in the U.S.
f. The unfair competition argument is wrong. Foreign countries subsidizing production of goods that are sold below cost in the U.S. make Americans better not worse
off.
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Central Economic Planning.
Intellectuals everywhere take for granted that free enterprise capitalism and a free market are devices for exploiting the masses, while central economic planning is
the wave of the future that will set their countries on the road to rapid economic progress.
Choose all that are correct
a. The facts support the hypothesis that centrally planned economies are the best way for poor countries to create rapid economic progess.
b. Historically, whenever there have been large elements of individual freedom creating improvement in the material condition of ordinary citizens and there has been
hope for further progess, economic activity has been guided by intellectuals serving as goverment beauracrats organizing economic activity through regulation and
central control.
c. The contrast between East and West Germany is an example which supports the superiority of a centrally controlled economy in producing material prosperity.
d. The contrast between Indians residing outside India and Indians living in India supports the superiority of a centrally controlled economy in producing material
prosperity.
e. None of the above.
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Controls and Freedom.
Choose all that are correct
a. When government taxes income, it reduces economic freedom.
b. When government outlaws birth control, it reduces economic freedom.
c. In the past 50 years, the U.S. has moved away from a purely free market economy and moved toward a centrally controlled economy.
d. Government taxes and controls more than 40% of the economy. That means it takes away 40% of people’s income and spends it on what government chooses rather than on
what individuals choose.
e. In the past 50 years, the expanding role of government is evidence of the movement toward a centrally controlled economy.
f. None of the answers are correct.
g. When government taxes corporate profits, it reduces economic freedom.
h. When the government outlaws the sale, distribution, and consumption of marijuana, it reduces economic freedom.
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Human Freedom
Consider the following Wall Street Journal article and Friedman’s discussion of Human Freedom in Chapter 2 of Free to Choose.
Which of the following statements is true.
http://online.wsj.com/article/SB10001424127887323873904578571472700348086.html
The Middle-Class Revolution
All over the world, argues Francis Fukuyama, today’s political turmoil has a common theme: the failure of governments to meet the rising expectations of the newly
prosperous and educated.
By FRANCIS FUKUYAMA
[image]
ReutersBRAZIL JUNE 22, 2013 | Demonstrators protest corruption and poor public services.
Over the past decade, Turkey and Brazil have been widely celebrated as star economic performers—emerging markets with increasing influence on the international stage.
Yet, over the past three months, both countries have been paralyzed by massive demonstrations expressing deep discontent with their governments’ performance. What is
going on here, and will more countries experience similar upheavals?
The theme that connects recent events in Turkey and Brazil to each other, as well as to the 2011 Arab Spring and continuing protests in China, is the rise of a new
global middle class. Everywhere it has emerged, a modern middle class causes political ferment, but only rarely has it been able, on its own, to bring about lasting
political change. Nothing we have seen lately in the streets of Istanbul or Rio de Janeiro suggests that these cases will be an exception.
In Turkey and Brazil, as in Tunisia and Egypt before them, political protest has been led not by the poor but by young people with higher-than-average levels of
education and income. They are technology-savvy and use social media like Facebook and Twitter to broadcast information and organize demonstrations. Even when they
live in countries that hold regular democratic elections, they feel alienated from the ruling political elite.
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European Pressphoto AgencyTURKEY JUNE 22, 2013 | A protester holds a flag in Taksim Square in Istanbul.A
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European Pressphoto AgencyTUNISIA FEB. 25, 2011 | Tunisians rally to demand the resignation of the interim government.
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European Pressphoto AgencyEGYPT JUNE 28, 2013 | Egyptians opposing President Morsi hold placards reading ‘Leave.’
In the case of Turkey, they object to Prime Minister Recep Tayyip ErdoÄŸan’s development-at-all-cost policies and authoritarian manner. In Brazil, they object to an
entrenched and highly corrupt political elite that has showcased glamour projects like the World Cup and Rio Olympics while failing to provide basic services like
health and education to the general public. For them, it is not enough that Brazil’s president, Dilma Rousseff, was herself a left-wing activist jailed by the military
regime during the 1970s and leader of the progressive Brazilian Workers Party. In their eyes, that party itself has been sucked into the maw of the corrupt “system,”
as revealed by a recent vote-buying scandal, and is now part of the problem of ineffective and unresponsive government.
The business world has been buzzing about the rising “global middle class” for at least a decade. A 2008 report defined this group as those with incomes between $6,000
and $30,000 a year and predicted that it would grow by some two billion people by 2030. A 2012 report by the European Union Institute for Security Studies, using a
broader definition of middle class, predicted that the number of people in that category would grow from 1.8 billion in 2009 to 3.2 billion in 2020 and 4.9 billion in
2030 (out of a projected global population of 8.3 billion). The bulk of this growth will occur in Asia, particularly China and India. But every region of the world
will participate in the trend, including Africa, which the African Development Bank estimates already has a middle class of more than 300 million people.
Corporations are salivating at the prospect of this emerging middle class because it represents a vast pool of new consumers. Economists and business analysts tend to
define middle-class status simply in monetary terms, labeling people as middle class if they fall within the middle of the income distribution for their countries, or
else surpass some absolute level of consumption that raises a family above the subsistence level of the poor.
But middle-class status is better defined by education, occupation and the ownership of assets, which are far more consequential in predicting political behavior. Any
number of cross-national studies, including recent Pew surveys and data from the World Values Survey at the University of Michigan, show that higher education levels
correlate with people’s assigning a higher value to democracy, individual freedom and tolerance for alternative lifestyles. Middle-class people want not just security
for their families but choices and opportunities for themselves. Those who have completed high school or have some years of university education are far more likely to
be aware of events in other parts of the world and to be connected to people of a similar social class abroad through technology.
Families who have durable assets like a house or apartment have a much greater stake in politics, since these are things that the government could take away from
them. Since the middle classes tend to be the ones who pay taxes, they have a direct interest in making government accountable. Most importantly, newly arrived members
of the middle class are more likely to be spurred to action by what the late political scientist Samuel Huntington called “the gap”: that is, the failure of society to
meet their rapidly rising expectations for economic and social advancement. While the poor struggle to survive from day to day, disappointed middle-class people are
much more likely to engage in political activism to get their way.
This dynamic was evident in the Arab Spring, where regime-changing uprisings were led by tens of thousands of relatively well-educated young people. Both Tunisia and
Egypt had produced large numbers of college graduates over the past generation. But the authoritarian governments of Zine El Abidine Ben Ali and Hosni Mubarak were
classic crony-capitalist regimes, in which economic opportunities depended heavily on political connections. Neither country, in any event, had grown fast enough
economically to provide jobs for ever-larger cohorts of young people. The result was political revolution.
None of this is a new phenomenon. The French, Bolshevik and Chinese Revolutions were all led by discontented middle-class individuals, even if their ultimate course
was later affected by peasants, workers and the poor. The 1848 “Springtime of Peoples” saw virtually the whole European continent erupt in revolution, a direct product
of the European middle classes’ growth over the previous decades.
While protests, uprisings and occasionally revolutions are typically led by newly arrived members of the middle class, the latter rarely succeed on their own in
bringing about long-term political change. This is because the middle class seldom represents more than a minority of the society in developing countries and is itself
internally divided. Unless they can form a coalition with other parts of society, their movements seldom produce enduring political change.
Thus the young protesters in Tunis or in Cairo’s Tahrir Square, having brought about the fall of their respective dictators, failed to follow up by organizing
political parties that were capable of contesting nationwide elections. Students in particular are clueless about how to reach out to peasants and the working class to
create a broad political coalition. By contrast, the Islamist parties—Ennahda in Tunisia and the Muslim Brotherhood in Egypt—had a social base in the rural population.
Through years of political persecution, they had become adept at organizing their less-educated followers. The result was their triumph in the first elections held
after the fall of the authoritarian regimes.
A similar fate potentially awaits the protesters in Turkey. Prime Minister ErdoÄŸan remains popular outside of the country’s urban areas and has not hesitated to
mobilize members of his own Justice and Development Party (AKP) to confront his opponents. Turkey’s middle class, moreover, is itself divided. That country’s
remarkable economic growth over the past decade has been fueled in large measure by a new, pious and highly entrepreneurial middle class that has strongly supported
ErdoÄŸan’s AKP.
This social group works hard and saves its money. It exhibits many of the same virtues that the sociologist Max Weber associated with Puritan Christianity in early
modern Europe, which he claimed was the basis for capitalist development there. The urban protesters in Turkey, by contrast, remain more secular and connected to the
modernist values of their peers in Europe and America. Not only does this group face tough repression from a prime minister with authoritarian instincts, it faces the
same difficulties in forging linkages with other social classes that have bedeviled similar movements in Russia, Ukraine and elsewhere.
The situation in Brazil is rather different. The protesters there will not face tough repression from President Rousseff’s administration. Rather, the challenge will
be avoiding co-optation over the long term by the system’s entrenched and corrupt incumbents. Middle-class status does not mean that an individual will automatically
support democracy or clean government. Indeed, a large part of Brazil’s older middle class was employed by the state sector, where it was dependent on patronage
politics and state control of the economy. Middle classes there, and in Asian countries like Thailand and China, have thrown their support behind authoritarian
governments when it seemed like that was the best means of securing their economic futures.
Brazil’s recent economic growth has produced a different and more entrepreneurial middle class rooted in the private sector. But this group could follow its economic
self-interest in either of two directions. On the one hand, the entrepreneurial minority could serve as the basis of a middle-class coalition that seeks to reform the
Brazilian political system as a whole, pushing to hold corrupt politicians accountable and to change the rules that make client-based politics possible. This is what
happened in the U.S. during the Progressive Era, when a broad middle-class mobilization succeeded in rallying support for civil-service reform and an end to the 19th-
century patronage system. Alternatively, members of the urban middle class could dissipate their energies in distractions like identity politics or get bought off
individually by a system that offers great rewards to people who learn to play the insiders’ game.
image
REUTERS Brazil’s recent economic growth has produced an entrepreneurial middle class. Above,aprotest in Rio de Janeiro on June 20.
There is no guarantee that Brazil will follow the reformist path in the wake of the protests. Much will depend on leadership. President Rousseff has a tremendous
opportunity to use the uprisings as an occasion to launch a much more ambitious systemic reform. Up to now she has been very cautious in how far she was willing to
push against the old system, constrained by the limitations of her own party and political coalition. But just as the 1881 assassination of President James A. Garfield
by a disappointed office-seeker became the occasion for wide-ranging clean-government reforms in the U.S., so too could Brazil use the occasion of the protests to
shift onto a very different course today.
The global economic growth that has taken place since the 1970s—with a quadrupling of global economic output—has reshuffled the social deck around the world. The
middle classes in the so-called “emerging market” countries are larger, richer, better educated and more technologically connected than ever before.
This has huge implications for China, whose middle-class population now numbers in the hundreds of millions and constitutes perhaps a third of the total. These are the
people who communicate by Sina Weibo—the Chinese Twitter—and have grown accustomed to exposing and complaining about the arrogance and duplicity of the government and
Party elite. They want a freer society, though it is not clear they necessarily want one-person, one-vote democracy in the near term.
This group will come under particular stress in the coming decade as China struggles to move from middle- to high-income status. Economic growth rates have already
started to slow over the past two years and will inevitably revert to a more modest level as the country’s economy matures. The industrial job machine that the regime
has created since 1978 will no longer serve the aspirations of this population. It is already the case that China produces some six million to seven million new
college graduates each year, whose job prospects are dimmer than those of their working-class parents. If ever there was a threatening gap between rapidly rising
expectations and a disappointing reality, it will emerge in China over the next few years, with vast implications for the country’s stability.
There, as in other parts of the developing world, the rise of a new middle class underlies the phenomenon described by Moises Naím of the Carnegie Endowment as the
“end of power.” The middle classes have been on the front lines of opposition to abuses of power, whether by authoritarian or democratic regimes. The challenge for
them is to turn their protest movements into durable political change, expressed in the form of new institutions and policies. In Latin America, Chile has been a star
performer with regard to economic growth and the effectiveness of its democratic political system. Nonetheless, recent years have seen an explosion of protests by
high-school students who have pointed to the failings of the country’s public education system.
The new middle class is not just a challenge for authoritarian regimes or new democracies. No established democracy should believe it can rest on its laurels, simply
because it holds elections and has leaders who do well in opinion polls. The technologically empowered middle class will be highly demanding of their politicians
across the board.
The U.S. and Europe are experiencing sluggish growth and persistently high unemployment, which for young people in countries like Spain reaches 50%. In the rich
world, the older generation also has failed the young by bequeathing them crushing debts. No politician in the U.S. or Europe should look down complacently on the
events unfolding in the streets of Istanbul and São Paulo. It would be a grave mistake to think, “It can’t happen here.”
—Mr. Fukuyama is a senior fellow at Stanford University’s Freeman Spogli Institute for International Studies and the author of “The Origins of Political Order: From
Prehuman Times to the French Revolution.”
Choose all that are correct
a. Free markets produce economic growth and prosperity for the average person.
b. Prosperity means the rise of a middle class in previously poor countries.
c. When a middle class arises in a poor country, for the first time large numbers of people have disposable income with which they can elect what to spend that income
on. When they were poor, all their income was spent on items neccessary to keep them alive such as food, clothing and shelter.
d. The disposable income of the middle class promotes freedom by providing a pool of resources to resist dictators.
e. Middle class people and business owners prefer free markets and democratic political systems because they own property which can be confiscated by dictators. Under
a democracy they can vote for leaders who will protect their property from confiscation by government.
f. The article supports Milton Friedman’s thesis that economic freedom produces human freedom.
g. None of the answers are correct.
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