STUDENT ID: BKH1712008F

1. QUESTION:
a) Why Physiocrats were popular in France? Please show the circulation of wealth
among the three classes of people in Physiocracy system.
Answer: The Physiocrats were a group of Economist who believed that the wealth of nation
was derived solely from agriculture. Their theories originated in France and were most
popular during the second half of the 18th century.
The Physiocrats saw the true wealth of nation as determined by the surplus of agriculture
production over and above that needed to support agriculture.
France was an overwhelmingly agriculture country. During this regimes land tax was the
principle source of government revenue thereby imposing huge burden on the agriculturist.
Physiocracy provided a theoretical backing to the back to the nature movement. Physiocracy
was a French intellectual movement which lasted from 1750-1780.

The Physiocrats were popular in France because of:

1. Physiocracy was the revolt of the French people against Mercantilism. The Physiocrats
provided the theoretical basis to attack Mercantilism.
2. Physiocrats supported free trade. On the belief that France farmers would benefit from
higher prices if they were allowed to export their crops.
3. The tax system of France was corrupt, inefficient and unjust. The nobles and the
clergymen, who owned nearly two thirds of the lands, were exempted from direct taxation.
4. The general economic conditions of France were also unfavorable. Britain had already
realized that it was a wrong policy to develop trade and industry at the expense of agriculture.
So in France also attention was diverted to agriculture.
5. They put economics on a scientific basis in France.
6. Their emphasis on the net product was notable.
7. Their analysis of capital pointed the true nature of that factor of production.
8. They made important contribution to the theory of taxation.
9. High and stable price for agriculture.
10. Physiocrats will be mostly remembered for their emphasis on inter-connectedness in and
economy and their formulation of "Tableu Economique".
11. Physiocrats correctly perceived the inter-connected nature of the economy and the fact
that even someone freely choosing her occupation she ends up doing work for someone.
12. The physiocrats also believed that a natural order exists in the economic system which is
self-regulating.

Showing the circulation of wealth among the three classes of people:

TABLEAU 1: Circulation of wealth.
The tableau economique is based on the existence of social structure; land is owned by the
landlords but cultivated by the farmers who became the productive class. The net product or
Surplus produced by the productive class is used for the satisfaction of sterile and proprietary
classes. The tableau economique assumes constant prices for the commodities. Further, it
assumes that the harvest is 100 percent and the expenses of the productive and unproductive
classes are equal.
b) Explain Adam Smith Invisible Hand Theory? Can you suggest an example where this
seems true and economics works that way?
Answer: The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth
of Nations'. He proposed the idea of an invisible hand-the tendency of free markets to
regulate themselves by means of competition, supply and demand, and self- interest. He
assumed that an economy can work well in a free market scenario where everyone will work
for his/her own interest. The unobservable market force that helps the demand and supply of
goods in a free market to reach equilibrium automatically is the invisible hand.
He explained that an economy will comparatively work and function well if the government
will leave people alone to buy and sell freely among themselves. He suggested that if people
were allowed to trade freely, self- interested traders present in the market would compete
with each other, leading markets towards the positive output with the help of an invisible
hand.
In a free market scenario where there are no regulations or restrictions imposed by the
government, if someone charges less, the customer will buy from him. Therefore, you have to
lower your price or offer something better than your competitor. Whenever enough people
demand something, it will be supplied by the market and everyone will be happy. The seller
end up getting the price and the buyer will get better goods at the desired price.
In other words, the approach holds that the market will find its equilibrium without
government or other interventions forcing it into unnatural patterns.
Here we suggested an example where invisible hand seems true and economics works that
way:
Cars, Driving, and the Automotive Industry
Consider the need for cars:
The amount of people in the market for a new car fluctuates depending on the overall health
of the economy. As more people purchase cars, car manufactures have to produce more cars
in order to meet the demand. They then have to hire more workers to meet that demand. If
workers are in short supply due to a healthy economy, the car manufacturer must than offer
the workers better pay or benefits in order to entice them to come to work.
The market forces led by the Invisible Hand dictate that this set of circumstances is likely to
happen, because if the car manufacturer refuse to pay more and cannot hire more employees,
it will not be able to produce more cars, which means the cost of cars will go up due to short
supply, which would dissuade consumers from purchasing their cars entirely and potentially
push the consumer to a different car manufacturer.
C) Adam Smith said that people work for self-interest. Do you agree? If you agree show
an example. If you disagree, express another reason?
Answer: Self -interest refers to actions that elicit personal benefit. Economic agent are self-
interested. Agents maximize their objectives. Adam Smith explains that benefits for all can
usually be accomplished when individuals act in their own self-interest.
In most cases I agree with the statement of Adam Smith as he said that people work for self-
interest. Smith believed that when people are free to trade without any restrictions and in their
self-interest thus would lead to creation of better quality goods and more of those goods
which would then cost less. We can give examples from our real life experiences.
Why do we go to University? Or why do we go to work? If we go to the University, we can
gather knowledge .Which creates the perfect foundation for a career that interest us. And, we
go to work because our goal is to earn money. Both for our Self-interest.
An example were given below: Suppose, A dairy farm was producing dried milk powder and
charging a very high price, say 350 (per 500gm). This create an incentive for another dairy
farm who charges same dried milk powder at a lower price, say tk. 280(per 500gm).They
produced dried milk powder to earn profit for themselves. Both the producer charges
different price because of their self-interest. Now consumer will buy this product to satisfy
their own needs and they switch from the high-cost dried milk powder to the low cost milk
powder for their own Self-Interest.

2. QUESTION: Production possibilities of two cities in Bangladesh:

Pairs of Red Socks Per Pairs of White Socks Per
worker per hour worker per hour
Dhaka City 3 3
Chittagong City 2 1
a) Which city has an absolute advantage in the production of each good?
Answer: Dhaka city has an absolute advantage in the production of each color Socks.
Because a worker in Dhaka City produces more (3 pair of socks) than a worker in
Chittagong City (2 pair of socks) in per hour.

b) Find out the opportunity cost (How many pairs of red socks or white socks have
to given up to produce a pair of the other color?)
Answer: In the absence of trade,
DHAKA CITY
3 Red socks = 3 White socks, 1RS = 1WS (The Dhaka city must give up 1 pair of White
socks to release just enough resources to produce one additional pair of Red socks, Then
the opportunity cost of Red socks is a pair of White socks).
Again, 3 White socks = 3 Red socks, 1 WS = 1 RS (The opportunity cost of White socks
is a pair of Red socks).
CHITTAGONG CITY
2 Red Socks = 1 White Socks, 1 RS = 0.5 WS (The opportunity cost of Red Socks is 0.5
White Socks).
Again, 1 White Socks = 2 Red Socks ( The Chittagong City must give up two pair of Red
Socks to release just enough resources to produce one additional pair of White Socks, The
opportunity cost of White Socks is 2 pair of Red Socks).
Now, we can say that Dhaka has lower opportunity cost in White Socks and Chittagong
has lower opportunity cost in Red Socks.
Pairs of Red Socks Pairs of White Socks
Dhaka City 3/3 = OC = 1 3/3 = OC = 1
Chittagong City ½ = OC = 0.5 2/1 = OC = 2

c) Which country has a comparative advantage in each good?

Answer: From b, Dhaka city has a comparative advantage in White Socks as opportunity
cost is lower in this city, Chittagong City has a comparative advantage in Red Socks as
opportunity cost of Red Socks is lower there.

d) Find out the situation without specialization and without trade. (Producing per
day 8 hour: 4 hours producing red socks and 4 hours producing white socks).
Answer: In the absence of specialization and without trade,
Producing per day 8 hours (4 hours in Red Socks and 4 hours in White Socks)
Pairs of Red Socks Pairs of White Socks
Dhaka 4 × 3=12 4 × 3=12
Chittagong 4 ×2=8 4 ×1=4
Dhaka City can Produce 12 Pair of Red Socks and 12 Pair of White Socks.
Chittagong City can produce 8 Pair of Red Socks and 4 Pair of White Socks.

e) Find out the situation with specialization?

Answer: With specialization,
Dhaka city is specialized in the production of White Socks because the opportunity cost
of White Socks is lower in Dhaka city.
So, Dhaka City produce zero Red Socks and (8 × 3) = 24 White Socks.
Again, Chittagong city is specialized in the production of Red Socks because the
opportunity cost of Red Socks is lower in Chittagong city.
Chittagong City produce (8 × 2) = 16 Red Socks and zero White Socks.

f) You just overhead from your friend Md. Monir said that: Developing countries
like Bangladesh have no Absolute Advantages. They have poor soil, low investments,
low-skilled workers, no capital, and few natural resource. Because they have no
advantage, they cannot benefit from trade,” How would you respond?
Answer: Even if Developing countries like Bangladesh have no absolute advantage. If
they have poor soil, low investments, low skilled workers, no capital, and a few natural
resources. It is possible that they can benefit from trade. They should be included in the
international trade by Adam Smith’s comparative advantage.
Most economists would respond saying that what matters is not absolute advantage.
Bangladesh may have low productivity and not many resources, but they will have a
comparative advantage in the production of a good. For example, they give up less apples
than any other nation to produce a single banana. With this in mind, they can produce
bananas and get apples from foreign producers at a lower cost than it would take to
produce them domestically. In this regard, Bangladesh can benefit from trade. The
country should specialize in the production of that commodity which absolute
disadvantage is smaller or opportunity cost is lower.