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Absolute vs. Comparative Advantage Assuming the US could produce 200 cars a day if every available resource was used to produce cars, and Japan could produce only 150 cars a day under the the same conditions, then the US has a absolute advantage in producing cars. However, if the US could shift all its resources to making 300 computers instead, and Japan could produce 200 computers, then Japan would have a comparative advantage in producing cars. This is because while Japan gives up 4/3 (200/150) computers per car it produce, the US loses 3/2 (300/200) computers for every car it makes. Since Japan can make cars at a lower [oppertunity] cost than the US, it would make sense for each to specialize and trade. This makes sense despite the fact that the US has absolute advantages in both sectors.
Equilibrium (Price and Quantity) If the market is at any point except the interception of the supply and demand curve, market forces will move quantity and price toward that point. For example, if supply is lower than demand, prices will increase as consumers bid higher prices for those goods. The increase in price will drive supply up as firms try to take advantage of the higher prices. This would move the market toward equilibrium.
GDP vs. GNP Gross Domestic Product has overtaken GNP in most countries as the most popular indicator of economic growth and health because it measures total output of a country. This can more useful for assertaining information because it does not discount firms owed by foreigners like GNP.
Hicksian Compensation
Loans Market The loans market of an economy determines domestic savings. Supply of loans is total domestic savings, national output minus private and government consumption.
S = Y - C - G
Demand for loans is a downward function of the real interest rate.
I = I(r)
Although domestic investment depends only on domestic savings and does not change, the real interest rate will vary depending on the amount of investment demanded.
National Income Accounting Y = C + I + G + NX
National output is the sum of consumer spending, investment, government spending and net export. A more in depth version is
Y(K,L) = C (Y-T) + I(r) + T + NX(epsilon)
Here output is a functin of capital and labor. Investment is a function of the real interest rate. And, net export is a function of epsilon, the real exchange rate. Because capital, labor and taxes are all exogeneous, any change in one of the variables or one of the function (ie. labor force is increased, or consumption is increased for all levels of disposable income) mean that investment or net export (which are based on endogeneous variables) must change to balance out the equation.
Walt Whitman Rostow (1916-- ) Economist, born in New York City. Studied at Yale and Oxford universities. He is best known for his theory that economies pass through five stages of growth. 1. Traditional: a pre industrical revolution economy 2. Preconditions: the successful completion of steps that must be taken in order for industrial revolution to occur 3. Takeoff: an explosive growth in the economy due to the success of key sectors in the economy 4. Drive to Maturity: stimuated by the key sectors in takeoff, other sectors also grow, balancing out of the entire economy 5. Age of High Mass Consumption: a steady and permanent growth in the economy which blesses consumers with high output.
Slutsky Compensation Because Social Security and other welfare programs relies on Hicksian compensation rather than slutsky compensation, arguments for inflation having less impact than normally thought usually calls upon this theory.

Unlike Hicksian compensation, Slutcky compensation deals with initial utility instead of initial allocation. Because of the slope of utility functions, a compensation based on intial allocation (such as Social Security) can actually over-compensate as consumers change their consumption bundle to obtain maxium utility.

Because prices do not neccessarily changed by the same proportions, consumers will buy more of a good whose price grew less (and less of a good whose prices grew more). After receiving their new budge, they will be able to consumate at a higher utility curve by changing their consumption bundle. ie. there are points on the new budget (B2') which lies above the utility curve (U), this means that the consumers can buy less of x and more of y and gain greater utility (In order to better show the effects of this, in my grpah I have deflated the price of one good. However, this need not happen. A uneven inflation in the prices of both good would have a similar effects, merely less dramatic.)

Supply and Demand The most basic and possibly the most important concept in economics. This concept stipulates that equilibrium price and quantity for a market must lie at the interception of the downward sloping demand curve and the upward sloping supply surve. If this isn't the case, then market forces will shift prices and quantity toward equilibrium.
Trade Trade is usually regarded as good for everyone. This is because of gains by both parties. Even if a country have absolute advantages in producing all goods being traded, it can still gain because of comparative advantage.

Let's assume that there are only two products, cars and computers. The US can produce either 400 cars or 600 computers if it specialized or a combination of the two if doesn't. Japan can produce either 300 cars, 200 computers, or a combination of the two. Without trade, each country would devote half of its resource to each producing each product. The US would be able to produce 200 cars and 300 computers, and Japan could produce 150 cars and 100 computers. This would create a 'world' output of 350 cars and 400 computers. (Note that the US have absolute advantage in producing both goods.)But, if Japan used its comparative advantage in producing cars (for every car it makes, Japan gives up 2/3 of a computer, while the US would give up 3/2 computers for ever car it makes) and specialized, it can produce 300 cars. The US could then devoted 1/4 of its resource to producing 100 cars and the rest to producing 450 computers, increasing the 'world' output to 400 cars and 450 computers. If the US and Japan traded cars for computers, then both countries are better off with more of both good.