Essential Economics.

Models Applied in Economies

I

Production Possibility Frontier

A fundamental concept in economics that helps understand the trade-offs,

efficiency, and growth faced by any economy due to the scarcity of resources.
Trade-off. The P.P.F1 maximum and minimum combinations of two goods
that an economy can produce given its resources. It is a simplification of the
reality by focusing on these two goods1; making easier to visualize the trade-offs
that an economy faces when allocating resources.
Efficiency 2. An economy is efficient if it is operating on its P.P.F; at any
point of the frontier, all resources are being used, and no more of one good can be
produced without reducing the production of another resource.
“Efficiency in Allocation”: By producing those goods as services, consumers most
demand. Even if a production is efficient, the allocation might not be optimal if
the society’s preferences are not met. “Waste of Resources ”.
“Efficiency in Production”: When the economy cannot produce more of one good
without producing less of another; by making the most of its available resources.
Opportunity Cost3: The cost of forgoing the next best alternative when a
choice is made. In terms of the P.P.F, is shown by the slope of the curve.
Economic Growth: The P.P.F shift outward; representing Economic
Growth.
“Technological Progress”: Improving the efficiency of the economic production.
“Increases in the Factors of Production 4”: Mening a growth; by its resources to
get a production that can satisfy the demand on markets and others.

1
Economic Model represented by Graph on “x, “y axes.
2
Conditions based on Economic Recourses:
A plan would be Efficient on the production after turned out Feasible.
It is not possible to increase any good without giving up at least one of the
goods used; Efficiency. Not being able to produce any good giving up
others.
3
Opportunity Cost; O.C.
4
Labor, Capital, Land; as Resources.
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Essential Economics. Models Applied in Economies

Advantages and Gains from Trade

Refer to the net benefit that set 5 obtain from engaging in trade with each other.
Absolute 6Advantage: The ability of set 5 to produce a good or service, in a
more efficiently way than others. This means that set 5 can produce the same
quantity “Q, of a good using fewer resources 4, or also set 5 can produce more “Q
of the good with the same amount of resources.
Comparative Advantage7: O.C.- Which refer to what must be given up in
order to produce a good. Even if one country can produce everything more
efficiently, set 5 might be still benefit from trade by specializing in the goods for
which it has the lowest Opportunity Cost; as the comparative.
“Gains from Trade”: Even if a set 5 has an Absolute Advantage in
producing both goods, trade can still be beneficial if both countries
specialize in the goods for which they have a Comparative Advantage. By
doing so, they can trade and both end up specializing on production.

“The comparative advantages in International Trade”. Explains why the

view of the international trade as a resource of set 5 to turn efficient 8.
“e.g, Real world concerns about the trade”; “Japanese farmers” wanting to project
the rice market from “American Imports- Steelworkers” fearing competition from
the “European steel”. Benefiting both “Japanese” and “American” by trade 9.
“e.g, the Pajama Republics” How the Comparative Advantage plays out in the
clothing industry across different countries worldwide; lower-income, mid-
income.
“Comparative advantage of lower-income countries”. Bangladesh has a
relatively low productivity in all industries, but its productivity is higher in
clothing compared to other sectors. This gives Bangladesh a comparative
advantage in clothing production, meaning it makes sense for the country to focus
on clothing even though overall productivity is low. As a result, a large portion of
Bangladesh's workforce is employed in the clothing sector, despite challenges like
low literacy, outdated technology, and labor unrest.
“Declining Clothing Sector in Higher-Income Countries”. Costa Rica has
relatively higher productivity in both clothing and non-clothing industries.
Because its non-clothing sectors are more productive than those in Bangladesh,
Costa Rica has shifted away from clothing production over time. Even though
Costa Rica has some advantages in clothing manufacturing, its comparative
advantage lies in other industries, so a smaller share of its workforce is employed
in clothing.
“Negative Relationship Between Income and Clothing Employment”. The
graphic illustrates a clear pattern: poorer countries tend to have large clothing
industries, while wealthier countries have smaller clothing industries. This reflects
the fact that in richer countries, higher productivity in other industries shifts
resources away from low-skill sectors like clothing production.

5
Set: Individuals, Business, Countries.
6
Absolute sense producing more goods with fewer resources.
7
Focused in the Opportunity Costs; by reaching the lowest Cost of Opportunity.
8
Mutual Gains from Trade and Comparative Advantages.
9
Greater Consumption Possibilities.
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Essential Economics. Models Applied in Economies

II
Gross Domestic Product

Gross Domestic Product G.D.P is the standard measure of the value added
created through the production of goods and services in a country during a certain
period. Consequently, also measures the income earned from that production, or
the total amount spent on final goods and services less the imports.
This indicator is based on nominal G.D.P value; also called at current
prices. As such, this indicator is less suited for comparisons over time, as
developments are not only caused by real growth, but also by changes in prices
and P.P.Ps.

Expenditures Approach
Involves adding up all spending on final goods and services in an
economy.
Y= Consumption +Investment +Government Spending +(Exports -Imports)10;
Flow Diagram Illustrates how the expenditures approach and the income approach
must equal each other, with physical goods and services flow through an
economy.
Households: Consist of Individuals or groups “families” that provide
factors of production 4 and consume goods and services.
Markets for Goods and Services: Households buy goods and services from
firms in exchange for money. This creates a flow of goods and services from firms
to households and corresponding flow of money.
Firms, Companies: Organizations that produce goods, services and hire
factors of production from households’ resources as a production 4.
Factor Markets: Firms buy Factors of Production 4 from households. In
return they pay households in the form of wages, rent and profits. The flow of
resources goes from house holds to firms, while money flows.

10
“X –“M= Net Exports.
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Essential Economics. Models Applied in Economies

III
Descriptive Analysis of Economics

“Positive Economics”: Helps predicting the consequences of policies.

“e.g, models can predict how a toll increase will affect revenue, traffic, costs.
“Normative Economics”: Comes into play when deciding whether
outcomes are desirable. Different stakeholders may value different outcomes, and
economists may help weigh this option by comparing efficiencies, trade-offs,
social impacts.
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Role of Models: The use of models simplifies real-world complexities,
helping analyze specific scenarios or predict outcomes. For instance, a model can
predict changes in toll revenue based on different toll rates. Models are especially
helpful in answering "what if" questions, such as the potential revenue impact of
increasing tolls. Allow policymakers anticipate outcomes of different policy
changes and make informed decisions.
Application in Policy: Positive economics often underpins policy analysis
by providing data-driven predictions; inform policymakers, though they don’t
prescribe a particular action since the ultimate decision depends on values
normative economics.12
“e.g., When comparing rent control and rent subsidies, economists may prefer
subsidies as they generally achieve the policy goal (affordable housing) more
efficiently by minimizing negative impacts on other market participants.
Efficiency and Value Judgments: The analysis may advocate for certain
policies by focusing on efficiency rather than personal opinions.
“e.g, If one policy improves outcomes without harming others more than another,
it is typically considered more efficient, and may be recommend it to apply.

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Primarily are used models for positive analysis (description and prediction), also
it contributes to the normative discussions by highlighting efficiency and trade-
offs in policy choices. This approach helps provide guidance on implementing the
most effective, as meaning to achieve personal or collective (societal) values.
12
Normative advice, often grounded in Efficiency.
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Essential Economics. Models Applied in Economies

IV
Economic Perceived Disagreement

Media Amplification of Differences: Media coverage tends to emphasize

disagreements among economists because debates are more newsworthy than
consensus. As a result, the public often sees only areas where economists
disagree, even though they agree on many core issues.
“e.g., Rent control’s effect on housing shortages.
Political Influence: Economics is closely tied to policy, and its interest
groups may promote the support of specific agendas, sometimes giving minority
opinions disproportionate visibility.
Differences in Values: Personal values often influence the policy view,
such as the preference for “e.g Income Equality”, which might lead some to
oppose regressive taxes “e.g, a value-added tax V.A.T”.
By simplifying complex realities to focus on specific aspects of an issue or
problematic. Different assumptions in modeling can lead to differing
conclusions.13
“e.g, Economist “A might emphasize the administrative costs of a “V.A.T”, while
another Economist “B; focuses on its potential to increase savings rates. As
evidence accumulates, certain models gain credibility, but disagreements can
persist due to the economy's evolving nature.
“The importance of Economic Analysis as a Method”. Economics is a
method of analysis, not a set of conclusions. This methodological approach
supports diverse applications across business and government, helping
organizations make informed decisions based on projected economic outcomes.

13
Variations in Economic Models.
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