Microeconomics vs. Macroeconomics, International Trade, and Key Economic Concepts

1. What are the differences between micro and macroeconomics?

Microeconomics is concerned with:

• Supply and demand in individual markets
• Individual consumer behavior. E.g., Consumer choice theory

Macroeconomics is concerned with:

• Monetary/fiscal policy, e.g., what effect do interest rates have on the whole economy?
• International trade and globalization

2. Briefly explain how countries gain from international trade.

The comparative advantage provided by differing opportunity costs of various goods in two countries allows both to benefit from mutual trade. This occurs if they specialize in producing (and exporting) those goods that have relatively low opportunity costs compared to another country.

E.g., Canada exports minerals to Spain, and Spain exports wine to Canada.

3. What are 'Trade Restrictions,' and do countries benefit from these restrictions?

Reasons for restricting trade that have some validity in a global context include:

• The infant industry argument
• The problem of dumping and other unfair trade practices
• The danger of the establishment of a foreign-based monopoly
• The need to spread the risks of fluctuating export prices
• The problems that free trade may adversely affect consumer tastes and may not take account of externalities.

4. What is the WTO, and how does it affect international trade?

Most countries worldwide are members of the WTO and, in theory, are in favor of moving towards free trade.

The WTO can impose sanctions on countries not abiding by WTO rules.

5. What are the government's 'Four Macroeconomic Objectives?'

The government has four key macroeconomic objectives it seeks to effect. They are high and stable employment, price stability (low inflation), sustainable economic growth, and avoiding balance of payments and exchange rate problems.

6. What is the 'Circular Flow of Income?'

The circular flow of income model depicts the flows of money income and expenditure around the economy.

7. What is the 'Business Cycle,' and what are its four phases?

The business cycle tracks growth in actual and potential output.

Economic growth and the business cycle:

• Fluctuations in actual growth
• The phases of the business cycle:
  • The upturn
  • The expansion
  • The peaking out
  • The slowdown or recession

8. Define 'Money' in its 'narrow sense' and also in its 'broader sense.'

Money in its narrow sense includes just cash in circulation. Money is normally defined more broadly to include all bank deposits, not just those in cash. M4 is the name given in the UK to this broader measure of the money supply.

9. Define inflation.

Inflation is the annual percentage increase in prices.

10. Define unemployment.

The two most common measures of unemployment are claimant unemployment (those claiming unemployment-related benefits) and ILO/OECD standardized unemployment (those available for work and actively seeking work or waiting to take up an appointment).