20 -- Part 3: CHAPTER 1 Five Foundations of Economics
Efficiency and cost containment are the topics of the healthcare debate.
Choices with difficult trade- offs are required for increases in longevity and quality of life.
Consumers and producers face different incentives when making healthcare decisions because of the widespread use of insurance.
When seeking medical care, consumers pay premiums up front and smaller copays.
Insurance companies give the bulk of the revenue to producers.
The result is a system in which consumers demand more medical care because they are insured and many providers have an incentive to order additional tests or procedures that may not be absolutely necessary.
Incentives in healthcare delivery are affected by asymmetric information.
Insurance companies try to structure their plans in a way that encourages patients to seek care when it's needed and also to seek preventative care.
To achieve these goals, the companies can make many preventive care visits free and establish high copayments that will discourage unnecessary trips to the doctor.
Third- party payments that lower out- of- pocket expenses to consumers give rise to a serious moral hazard problem in which patients demand more medical care than is medically advisable.
The incentive structure needs to be fixed to solve a moral hazard problem.
Many insurance companies encourage preventive care because it lowers medical costs.
It explains why insurance companies impose payment limits.
Medical expenses have risen rapidly because ofelastic demand and third party payments.
The combination of third- party payments and inelastic demand for medical care increases the amount of medical care demanded and results in increased expenditures.
All prices are equal as we learned previously.
Licensing requirements limit the supply of key healthcare providers.
Licensing requirements give an explanation for increased medical expenditures.
Hospital charges are not subject to competitive pressures.
There is only one hospital in many small communities.
Providers can use market power to set prices.
The government is the single buyer of most medical care under a single- payer system.
The government uses its power to set compensation levels for providers below the market wage rate.
Private healthcare systems ration medical care through prices.
The supply of replacement organs is not enough to meet the demand.
The National Organ Transplant Act of 1984 makes it illegal to sell most organs in the United States.
Many deaths would be prevented if people were allowed to sell organs in legal markets.
There is a supply related reason for the high medi problem.
$300 erage can be extended by a medical specialist.
If the following medical ser has a different policy that requires 25% co vices have elastic or inelastic demand, tell us.
How an vive is considered in your answer.
If the sale of kidneys were legalized, what would happen to the price and the number of moral hazard?
A person wants a life insurance policy.
There is a hospital in an isolated community.
Next closest hospital is 2 hours away and the company requires a physical exam.
You decide to buy a ticket for a concert but don't know if it's legit because you don't know where the hospital is in a major metropolitan area.
He got his final payment from an insurance plan that cost $100 a month.
You hire a teenager to mow your insurance lawn for $50 a month and you have to pay a 15% coinsurance.
A consumer is traveling.
The teenager is trying to make a decision.
Determine the nomic implications for end- of- life care with an equation.
The market for the two plans has characteristics.
Human life is more safe.
We live in a world of trade- offs and the higher the speed, the safer it is.
An "infinite gain from safety features that help prevent value" means that the value is so high that accidents are survivable.
Drivers medical paths are worth pursuing.
The marginal cost of likely to take on hazardous conditions and care versus the amount of additional life that become involved in accidents must be considered when choosing a vehicle.
They change their behavior when driving a car that is important at the end of life.
The change in behavior is evidence of extraordinary medical efforts.
Because the demand for medical care is very elastic, an isolated hospital with a lot of resources that can be diverted from monopoly power will charge more and offer more services.
A similar returns.
It is assumed that nations should try to make their own goods and services.
We may be better off letting another nation produce the good and then trading for it later.
We can produce better if we specialize in production for another good.
An increase in international trade is beneficial to nations.
The level of trade among the world's nations has increased over the past few decades.
To show the extent of international trade, we begin this chapter with a look at global trade data.
International trade affects the economy.
We look at the reasons for trade barriers.
The United States gets imports from all over the world.
The world has increased both imports and exports over the past 75 years.
This activity shows that economies around the globe are becoming more interdependent.
The iPhone is a popular item.
Germany, Japan, Korea, and the United States make parts for the iPhone.
The phone is made in China, despite being designed by Apple in California.
It takes thousands of miles of global shipping to get this item to anyone.
There are many reasons for the modern trade explosion.
The total world exports of goods and services are four times the size of the world GDP.
The first thing we look at in this section is the growth in world trade.
"Globalization" is a term that has gained traction in the past few decades as people have seen a deeper interdependence between world economies.
We look at the trade data that shows general sentiment.
We look at the total world exports over time.
The data shows that world trade in goods grew from over a trillion dollars to over fifteen trillion dollars.
Over 40 years, that's a tenfold increase.
Since 2003 world goods trade has doubled.
World trade is not just in market value.
As a percentage of world output, it has grown.
Not only are nations trading more, but they are also trading more of their GDP.
This has more than doubled over the last 40 years, from less than 1% in 1970 to more than 25% in 2013).
The second poorest nation in the Western Hemisphere is trying to escape poverty through international trade.
Its real exports grew from $1.2 trillion to $4.2 trillion.
The country has established "free zones" where companies can produce goods for export and avoid standard corporate tax rates.
A lot of Nicaraguan companies pay a lot of taxes.
These do not apply to output that a company exports to other nations.
Some U.S. companies have taken advantage of production in these free zones.
International trade helps nations prosper.
While the free zones are increasing exports, the effect on domestic consumers may not be as positive.
There is very little incentive to produce goods for blue jeans in Nicaragua because of the Levi- Strauss company producing many of its breaks.
The United States is the largest economy in the world.
Residents of Michigan buy oranges from Florida, while Floridians buy cars from Michigan.
Even with the ability to produce and trade so much within the U.S. borders, the nation's participation in international trade has risen dramatically in recent years.
U.S. exports grew from less than 5% to over 15% of GDP.
Imported goods and services increased from 4% to over 16%.
Even though real GDP grew by over 3% each year, these changes occurred.
U.S. imports have been higher than U.S. exports.
A nation has a positive balance if it exports more than it imports.
The United States had a negative trade of over $2 trillion in goods and services in the year.
Financial, travel, and education services are popular U.S. service exports.
Think about the students in your classes who are not U.S. citizens in order to put a face on service exports.
The United States exported $21 billion worth of education services.
Inter national trade is affected by the business cycle.
One type of U.S. service export is imports.
During downturns, the trade deficit tends to shrink.
The way imports and exports are calculated is reflected in this fluctuation.
There is a strong relationship between trade and economic activity.
The United States imported goods and services from more than 200 countries.
The majority of goods imports came from 10 nations.
The United Kingdom has $54 in goods imports from 10 nations.
The U.S. has a $67 deficit with Japan.
Cars, electronics, and medical instruments are some of the goods the United States imports from Japan.
Financial and travel services are some of the services we export to Japan.
The table shows the trade between the United States and Japan.
The popular U.S. import from Japan is Sony PlayStations.
There is a trade deficit.
The trade balance is negative.
This is a trade deficit.
The trade balance is positive.
There is a trade deficit.
The trade balance is negative.
Canada and Mexico were our chief trading partners in the past.
Motor vehicles, oil, natural gas, and many other goods and services can be found in Canada.
Coffee, computers, household appliances, and gold can be found in Mexico.
We are trading more in volume with other countries because of the decrease in transportation costs.
China's total imports are now $467 billion, up from $105 billion a decade ago.
Chinese imports include electronics, toys, and clothing.
Canada and Mexico buy the most U.S. exports.
We export cars, car parts, and meat to Mexico.
Major U.S. exports are financial and travel services.
In this section, we explain how comparative advantage and specialization make it possible to achieve gains from trade between nations.
We assume that the United States and Mexico only produce two items, clothes and food.
Gains arise when a nation trades its output with a trading partner.
In other words, if a nation wants to trade with another nation that has a lower opportunity cost, they should produce the goods that are the best for them.
Trade leads to lower costs.
The United States and Mexico produce both food and clothing.
It makes sense that the United States will produce food because it is abundant in capital and skilled labor, but not so much in unskilled labor.
Mexico, which is seen as abundant in unskilled labor, will specialize in clothing.
Mexico can produce at any point along its PPF.
Mexico chooses to operate along its production possibilities curve of 450 million articles of clothing and 150 million tons of food.
Mexico would have to do without both clothing and food if the extreme were to happen.
Mexico will prefer to operate somewhere between the two extremes.
Mexico has 450 million articles of clothing and 150 million tons of food.
The United States can produce 400 million articles of clothing and 800 million tons of food if it doesn't make any clothing.
The United States would prefer to operate somewhere between 300 million articles of clothing and 200 million tons of food.
The opportunity cost that each country faces when making these two goods must be looked at first to see if gains from trade are able to make both countries better off.
Producing 150 million tons of food in Mexico means giving up 450 million articles of clothing.
Each ton of food incurs an opportunity cost of three articles of clothing, yielding a ratio of 150:450, or 1:3, or 1 ton of food per three articles of clothing.
Producing 200 million tons of food in the US means giving up 100 million articles of clothing.
The ratio is 200: 100 or 2:1.
The table shows the initial production choices for both nations.
If the opportunity cost of the production of the two goods is different between the two countries, trade has the potential to benefit both.
Finding a trading ratio between 1:3 and 2:1 is the key to making trade mutually beneficial.
Mexico would be able to buy food from the United States at a lower cost than it would cost to produce it in Mexico.
The United States would be able to get clothing from Mexico at a lower cost than it would cost to produce it domestically.
The effects of a 1:1 trade agreement on frontier possibilities for each country is shown in Figure 19.6 The two countries can specialize in the same good if they trade.
The United States and Mexico will both produce food.
400 million units of clothing are traded for 400 million tons of food.
Mexico is shown in panel a. Mexico produces 900 million units of clothing.
It exports 400 million units of clothing to the United States and imports 400 million tons of food from the United States in return.
Mexico has 500 million lion units of clothing and 400 million tons of food.
Mexico's production without trade was 450 million units of clothing and 150 tons of food.
Mexico can consume 50 million more units of clothing and 250 million more tons of food thanks to specialization and trade.
The United States is in panel b.
The United States produces 800 million tons of food.
It imports 400 million units of clothing from Mexico in return for exporting 400 million tons of food.
The United States ends up with 400 million units of clothing and 400 million tons of food.
300 million units of clothing and 200 tons of food were produced in the U.S. without trade.
The United States has been made better off by being able to consume 100 million more units of clothing and 200 million more tons of food.
The benefits that Mexico and the United States enjoy are even more significant.
50 million units of clothing and 250 million tons of food can be traded between Mexico and the United States after Mexico specializes in clothing and trades with the United States.
In this section, we look at how international trade encourages both economies of scale and increased competition, as well as how these factors can help an economy to grow.
In the past decade, U.S. trade with mainland China has exploded, with goods imports reaching $467 billion a year and exports up to $124 billion.
We consider a production frontier for food and textiles in both China and the United States.
The amount of textile production that is forgone for a single unit of food output is the opportunity cost of food production in China.
The opportunity cost of 1 unit of food is 2 textile units because a Chinese worker can produce 2 textile units in a day.
A worker in the United States can make 3 textile units and 9 food units in a day.
1/3 textile unit is the opportunity cost of 1 unit of food.
The amount of food production that is forgone for a single textile is the opportunity cost of textile production in China.
The opportunity cost of 1 textile unit is 1/2 unit of food because a Chinese worker can produce 1 unit of food in a day.
A worker in the United States can produce 9 units of food in a day.
3 units of food is the opportunity cost of 1 textile unit.
The United States has a lower opportunity cost of food production compared to other countries.
China has a lower opportunity cost of textile production, so it has a comparative advantage in textile production.
Once a smaller nation has free access to larger markets, it can effectively specialize in what it does best and generate low per-unit costs through exports.
In the real world, access to new markets allows countries to take advantage of economies of scale and therefore lower per- unit costs as production expands.
Increased production gives companies the chance to save money on distribution and marketing.
Consider how a small textile company in Mexico fares.
The company can expand into the United States with international trade.
Added sales were created by this move.
The textile firm can become more efficient with a larger volume of sales.
The firm can purchase fabrics in bulk, expand its distribution network, and use volume advertising.
Increased competition is a benefit from trade.
Domestic firms are forced to become more innovative and compete in terms of both price and quality because of increased competition from foreign suppliers.
Consumers can purchase a broader array of products that better match their needs because of competition.
Many domestic cars are produced in the United States, but foreign cars are cheaper and offer more variety to U.S. consumers.
Although international trade can be beneficial, countries often restrict trade.
To create opportunities for freer trade, nations often reach trade agreements that specify the conditions of free trade.
The North American Free Trade Agreement, signed in 1992, eliminated nearly all trade restrictions between Canada, Mexico, and the United States.
The United States has trade agreements with 20 countries.
Even though trade agreements often include protections for agriculture, they still increase trade between nations.
As a result of the North American Free Trade Agreement, real U.S. imports and exports have doubled.
In 1993, the United States exported $183 billion worth of goods to Canada, but this amount had risen to $312 billion by the end of the year.
Mexico's exports grew from $80 billion to $240 billion over the same period.
Canada's imports grew from $180 billion to $348 billion, and Mexico's grew from $76 billion to $294 billion.
The reduction in trade barriers has allowed all three nations to move toward the production of goods and services in which they have a comparative advantage.