9/28/11

• Circular Flow of Economy
• Two groups: People and Businesses
• Factor Market
• People send "stuff" in exchange for money so businesses can make their products
• "stuff"= labor, capital, machinery etc.
• "Goods" Market
• People pay businesses for their products
•  Income = Expenditures
• Increase in Expenditures will have to lead to increase in income
• Consumers can consume
• Consumers can invest
• Government can purchase materials
• Individuals can't be self-sufficient at least not successfully 
• Pysiocrats' Source of Wealth
• Agriculture was source of wealth
• Mercantilists' Sources of Wealth
• Gold in treasury
• more gold produced more means to execute war
• Wealth/Finances of the King
• king's purpose is to produce a positive balance of trade
• Positive Balance of Trade
• Arguments against other sources
• trade is zero-sum(giver is loser and receiver is winner)
• the King should control trade
• Restrict Imports
• Promote Exports
• NO Free Trade
• money is wealth 
• Is Capitalisim compatible with justice?
• 'conforms to some preexisting notion of goodness'
• Hume
• even more prominent than adam smith
• most widely read author among the founding fathers
• rejected that the source of wealth is agriculture
• scared that jealousy would prevent us from trading's benefits
• Hume's Source of Wealth
• Commerce
• Specie-flow mechanism: Law of One Price 
• amount of money relative to amount of goods in circulation 
• Hume's Important Elements
• Competition 
• separates the weaker from the stronger
• "trabant" example a car made only in east germany
• Learning and Innovation 
• learn from failed attempts of other countries
• Division of Labor
• unattainable without  a lot of trade
• Idea: Economies of Scale
• you wouldn't use more resources than a task required
• Prices change when money goes in and out
• England's prices inflate, British buy French goods, French prices go up and English prices go back down