1️⃣ Big Ideas, Trade, Comparative Advantages
, C1: The Big Idea
1. Incentives matter:
Most acts are out of self-interest mainly, or at least have incentives.
2. Good institutions align self-interest with social interest
Through well-functioning markets, individuals pursuing their own interest also
promote the social interest ⇒”Invisible Hand”
3. Trade-offs are everywhere
● Opportunity costs: the value of the opportunities lost ⇒ Benefit trading
opportunities ⇒ The better you get at doing sth, the higher become the
opportunity costs of all other things you can do
● If one decision is made, the advantages of other decisions will expire
4. Thinking on the margin
A little bit more or a little bit less? What is favourable? ⇒ Marginal cost, revenue, tax
rates
5. Trade makes people better off
Increase production through specialization (division of labour) → Benefit from
economies of scale and scope.
Comparative advantages can be utilized (Division of knowledge)
6. The importance of wealth and economic growth
We care about and this wealth comes with economic growth (we value hospitals and
clean environments to live in highly) ⇒ GDP
7. Institutions matter
Supporting good incentives: property rights, political stability,...
8. Economic booms and busts can’t be avoided but can be moderated
The deviation from the average economic growth line can be moderated by the
governments and the central banks as they have the power to influence the economic
movements by changing interest rates and government spending within a country.
→This cycle cannot be stopped, however.
9. Inflation is caused by increases in the supply of money
More money, if prices don’t rise, demand will be too high.
10. Central banking is a hard job
Predicting the economic movements and anticipating the right way at the right time
is a very difficult and impactful job.
C2: The power of trade and comparative advantages
● 3 benefits of trade:
○ Makes people better off when preferences differ
○ Increases productivity through specialization and the division of knowledge
○ Increases productivity through comparative advantage
● Trade and preferences
Create values by moving goods from people who value them less to people who
value them more
,● Specialization, productivity and the division of knowledge
The real power of trade is in specialization. ⇒ Without trade, specialization is
impossible (Specialize in the production of one good and trade for all other desired
goods)
→ Increase division of knowledge (extent the power of human mind) →
Specialization → Increase productivity & total output
→ Size of the market matters, greater potential trading partners, the more specialize
⇒ Unite humanity
● Comparative advantage
⇒ Take advantage of differences: Ability to produce some good with lower
opportunity cost than another producer
→ The greater the advantage a country has in producing A, the greater the cost to it
of producing B ⇒ Worldwide division of labor
○ Absolute advantage: ability to produce more output from the same input than
another producer
⇒ Everyone has a comparative advantage. Not everyone has an absolute
advantage.
● Production possibilities frontier shows all the possible product combinations that a
country can produce given its productivity and supply of inputs.
● Wages: Differences in wages reflect differences in productivity
→ Wages will rise in high-labor-demand industries (Mexico - Shirts) >< (Mexico -
Computers)
● Globalization:
Producing something overseas is cheaper and thus brings more value than it loses
(With voluntary trade, no one loses)
→ Workers will move from low-wage industries to high-wage until wages equalize
⇒ The better you good at doing something, the higher become the opportunity
costs of all other things you can do
Adam Smith
● Division of labor → Specialization (dexterity, innovation machinery, low
switching costs) → Productivity growth → Wealth
● Natural propensity to trade: barter, exchange
● Limitations: technical, extent of market (small areas → individuals perform
multiple task), work alienation
, 2️⃣ Supply, Demand, Equilibrium
, C1: The Big Idea
1. Incentives matter:
Most acts are out of self-interest mainly, or at least have incentives.
2. Good institutions align self-interest with social interest
Through well-functioning markets, individuals pursuing their own interest also
promote the social interest ⇒”Invisible Hand”
3. Trade-offs are everywhere
● Opportunity costs: the value of the opportunities lost ⇒ Benefit trading
opportunities ⇒ The better you get at doing sth, the higher become the
opportunity costs of all other things you can do
● If one decision is made, the advantages of other decisions will expire
4. Thinking on the margin
A little bit more or a little bit less? What is favourable? ⇒ Marginal cost, revenue, tax
rates
5. Trade makes people better off
Increase production through specialization (division of labour) → Benefit from
economies of scale and scope.
Comparative advantages can be utilized (Division of knowledge)
6. The importance of wealth and economic growth
We care about and this wealth comes with economic growth (we value hospitals and
clean environments to live in highly) ⇒ GDP
7. Institutions matter
Supporting good incentives: property rights, political stability,...
8. Economic booms and busts can’t be avoided but can be moderated
The deviation from the average economic growth line can be moderated by the
governments and the central banks as they have the power to influence the economic
movements by changing interest rates and government spending within a country.
→This cycle cannot be stopped, however.
9. Inflation is caused by increases in the supply of money
More money, if prices don’t rise, demand will be too high.
10. Central banking is a hard job
Predicting the economic movements and anticipating the right way at the right time
is a very difficult and impactful job.
C2: The power of trade and comparative advantages
● 3 benefits of trade:
○ Makes people better off when preferences differ
○ Increases productivity through specialization and the division of knowledge
○ Increases productivity through comparative advantage
● Trade and preferences
Create values by moving goods from people who value them less to people who
value them more
,● Specialization, productivity and the division of knowledge
The real power of trade is in specialization. ⇒ Without trade, specialization is
impossible (Specialize in the production of one good and trade for all other desired
goods)
→ Increase division of knowledge (extent the power of human mind) →
Specialization → Increase productivity & total output
→ Size of the market matters, greater potential trading partners, the more specialize
⇒ Unite humanity
● Comparative advantage
⇒ Take advantage of differences: Ability to produce some good with lower
opportunity cost than another producer
→ The greater the advantage a country has in producing A, the greater the cost to it
of producing B ⇒ Worldwide division of labor
○ Absolute advantage: ability to produce more output from the same input than
another producer
⇒ Everyone has a comparative advantage. Not everyone has an absolute
advantage.
● Production possibilities frontier shows all the possible product combinations that a
country can produce given its productivity and supply of inputs.
● Wages: Differences in wages reflect differences in productivity
→ Wages will rise in high-labor-demand industries (Mexico - Shirts) >< (Mexico -
Computers)
● Globalization:
Producing something overseas is cheaper and thus brings more value than it loses
(With voluntary trade, no one loses)
→ Workers will move from low-wage industries to high-wage until wages equalize
⇒ The better you good at doing something, the higher become the opportunity
costs of all other things you can do
Adam Smith
● Division of labor → Specialization (dexterity, innovation machinery, low
switching costs) → Productivity growth → Wealth
● Natural propensity to trade: barter, exchange
● Limitations: technical, extent of market (small areas → individuals perform
multiple task), work alienation
, 2️⃣ Supply, Demand, Equilibrium
