Bu204 Macroeconomics Unit 2 Assignment

Renea Frymoyer BU204 01 September 29, 2012 ? Questions: 1. A representative of the American clothing industry recently made the following statement: â€Å"Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more productive and as a result earn higher wages. In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. † Answer the following: a. Which parts of this quote are positive statements? Which parts are normative statements?Positive statements are â€Å"claims that attempt to describe the world as it is† (Mankiw, 2011, p. 31). Normative statements are â€Å"claims that attempt to prescribe how the world should be† (Mankiw, 2011, p. 31). Positive statements * Workers in Asia often work in sweatshop conditions earning only pennies an hour. * American workers are more productive and as a result earn higher wages. Normative statem ents * In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. b.Would such a policy make some Americans better off without making any other Americans worse off? Explain who, and why. â€Å"In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing. † Sweatshops once existed in the United States. With the accumulation of capital, technology was developed and implemented; workers became more educated, productive and their income increased; and working conditions improved (Hendrickson, 2006). This is the process of economic development.The explosion of sweatshops abroad has led to the decline of the apparel industry in the United States (Hendrickson, 2006). Economists are known to have conflicting views due to differences in values and perceptions (Mankiw, 2011, p. 34-35). Economist Josh Hendrickson believes it is in the best interest of Americans to import garments at lower cost because it allows the United States to focus capital and educated and skilled labor on ventures and enterprises that increase the standard of living and overall wealth of our country (2006).The United States has an absolute advantage in producing apparel and the opportunity cost is higher. Conversely, third-world countries with sweatshops have a comparative advantage and the opportunity cost is lower (Mankiw, 2011, p. 54-56). In regards to the preservation of dignity, sweatshops offer jobs where none existed before. Voluntary sweatshop workers are generally paid well in comparison to many in their country. The concern really should be for those who have jobs that pay less with worse working conditions and for those who have no job (Hendrickson, 2006). The standard of living in the locality of sweatshops increases.United States workers are incited to become educated and work hard to obtain high paying jobs. The majority do not feel in competition with third-world sweatshop workers. c. Would low-wage Asian workers benefit from or be hurt by such a policy, and why? Without a doubt, low-wage Asian workers would not benefit from such a policy. First, due to the difference in economic development and the standard of living, we cannot compare wages in the United States with (sweatshop) wages in third-world countries. Asian sweatshops generally offer their workers higher wages and acceptable working conditions.Because the work is manual, hours are long and productivity is low. Realizing that many have jobs with lower wages and worse working conditions or no jobs at all (Hendrickson, 2006), voluntary sweatshop workers are glad to have their jobs and enjoy a higher standard of living. 2. Referring to the same situation in question 1, but instead of legislation banning the imports, assume that the government enacts a special tax on imported clothing that is so high that the selling price of the impo rts would be equal to the selling price of the same clothing made in America.This kind of tax is called a tariff and is enacted to protect domestic producers of the same items that can be imported at much lower costs. Answer the following: a. What would shoppers see when they shopped in Wal-Mart and the other â€Å"big box† stores that sell so many imported items? If the government enacted a special tax on imported clothing making the selling price equal to the selling price of clothing made in the United States, shoppers would see imported items with much higher prices in discount stores.If the prices of clothing made in sweatshops and in the United States were comparative, shoppers would consider the trade-offs and opt to buy clothing made in the United States for higher quality, loyalty to United States workers, and the health of our economy (Mankiw, 2011, p. 4). Wal-Mart and â€Å"big-box† stores that sell so many imported clothing items would see a decrease in sal es. Shoppers would choose to buy clothing at stores that sell clothing made in the United States. These stores would see an increase in sales. b.Would this tax policy have a better effect, worse effect, or no different effect on American workers than the legislation banning the imports discussed in question 1? What kind of effect would the tax have on the Asian workers? Trade between two countries can make each country better off (Mankiw, 2011, p. 10). Third-world countries with sweatshops have a comparative advantage in producing clothing at a lower opportunity cost (Mankiw, 2011, p. 54-56). Sweatshops play a vital role in economic development by bringing investment, technology, and the opportunity for workers to build skills and improve their standard of living.By importing clothing, the United States is allowed to focus capital and educated and skilled workers on more lucrative ventures and enterprises aimed at advancing economic development and our standard of living (Hendrickso n, 2006). Trade allows countries to specialize in the activities they do best and to benefit from a multiplicity of goods and services at lower cost (Mankiw, 2011, p. 10). The tax would negate the economic development of third-world countries with sweatshops. Further, when Americans purchase imported goods and services, we are in effect, providing aid to poorer countries. . Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. Maximum annual output options Quantity of potatoes Quantity of fish (pounds) (pounds) A 1,000 0B 800 300 C 600 500 D 400 600 E 200 650 F 0 675 a. Examine the Maximum annual output options table above and the resultin g Production Possibility Frontier Graph below and answer parts b – f. Production Possibility Frontier Graph b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. The economy of Atlantis can produce any combination of fish and potatoes on or inside the frontier. Given the economy’s resources, points outside the frontier are not feasible (Mankiw, 2001, p. 26).Because point b is outside of the frontier, Atlantis does not have the resources to produce 500 pounds of fish and 800 pounds of potatoes. c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? If the annual output of potatoes is increased to 800 pounds, only 300 pounds of fish can be produced. Because the production possibilities frontier is bowed outward, the opportunity cost of potatoes is highest when the economy is many pounds of potatoes and fewer pounds of fish. It is steeper at point 800/300.When producing fewer pounds of potatoes and man y pounds of fish, the frontier is flatter and the opportunity cost of pounds of fish is lower. It is flatter at point 600/500 (Mankiw, 2001, p. 26-27). Answer: the opportunity cost is higher. d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? If the annual output of potatoes is increased to 400 pounds, 600 pounds of fish can be produced. Because the production possibilities frontier is bowed outward, the opportunity cost of potatoes is highest when the economy is many pounds of potatoes and fewer pounds of fish.It is steeper at point 400/600. When producing fewer pounds of potatoes and many pounds of fish, the frontier is flatter and the opportunity cost of pounds of fish is lower. It is flatter at point 200/650 (Mankiw, 2001, p. 26-27). Answer: the opportunity cost is lower. e. Can you explain why the answers to parts c and d are not the same? When Atlantis is using the majority of its resources to produce pounds of fish, the resourc es best suited for producing pounds of potatoes are being used to produce pounds of fish.Because these workers likely are not good at producing pounds of fish, the economy will not have to forfeit producing many pounds of fish to increase producing more pounds of potatoes. The opportunity cost of pounds of potatoes is low and the frontier is flatter (Mankiw, 2001, p. 27-28). When Atlantis is using the majority of its resources to produce pounds of potatoes, the resources best suited for producing pounds of potatoes are already producing pounds of potatoes. Producing more pounds of potatoes means transferring some of the most skilled fishermen from producing pounds of fish to produce pounds of potatoes.Producing more pounds of potatoes will mean a significant loss in producing pounds of fish. The opportunity cost of producing pounds of potatoes is high and the frontier is steeper (Mankiw, 2001, p. 28). f. What does this imply about the slope of the production possibility frontier? Th e production possibilities frontier shows the trade-offs of producing fish and potatoes at a point in time. Due to a variety of circumstances, trade-offs can change. For example, the development and use of new fishing nets increases the pounds of fish that can be produced.Atlantis can now produce more pounds of fish compared to pounds of potatoes using the same resources. If Atlantis does not produce and pounds of fish, it can still produce 1,000 pounds of potatoes. One end point of the frontier stays the same (pounds of potatoes) but the rest of the production possibilities frontier shifts outward allowing economic growth (pounds of fish) (Mankiw, 2001, p. 28). The slope of the production possibilities frontier denotes the scale of the trade-off (Beggs, 2012). Beggs, Jodi. 2012). The production possibilities frontier. About. com Economics. Retrieved September 29, 2012, from http://economics. about. com/od/production-possibilities/ss/The-Production-Possibilities-Frontier_4. htm Hend rickson, Josh. (May 18, 2006). The economics of sweatshops. The Everyday Economist. Retrieved September 29, 2012, from http://everydayecon. wordpress. com/2006/05/18/the-economics-of-sweatshops/ Mankiw, N. Gregory. Principles of Macroeconomics. United States: Cengage Learning, 2011. Print.