In this unit, you will examine how models are used in economics

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Unit 2 Overview

Economic Models: Tradeoffs and Trade

In this unit, you will examine how models are used in economics. You will examine the Production Possibility Frontier model, consider how Comparative Advantage fosters gains from trade, consider the basics of a Circular- Flow Diagram, consider the differences between positive and normative economics and explore why economists often disagree.


After completing this unit you should be able to:

  • Explain how models are used in economics

  • Compare positive and normative economics

  • Review graphing concepts

Course outcomes practiced in this unit:

BU204-1: Use graphs to interpret economic outcomes

BU204-3: Summarize conditions required to promote long term economic growth

BU204-4: Compare the factors in various countries that contribute to economic stability and long term economic growth.

What do you have to do in this unit?

  • Review the announcement area
    for important course information

  • Complete the reading assignments

  • Review the Key Terms and Charts
    on the Course Concepts page

  • Participate in the Discussion Board
    after reviewing the Discussion Board Rubric in the syllabus

  • Complete the Assignment

  • Attend weekly Seminar

  • Continue working on the Mid-Term Assignment

  • Check out Extra!Extra!

Inside Macroeconomics

Worth Noting Blog

Living Graphs - Animated versions of the figures from your textbook readings.

Video Interviews


Chapter 2: Economic Models: Trade-offs and Trade

Chapter Objectives

Students will learn in this chapter:

  • Why models—simplified representations of reality—play a crucial role in economics.

  • Three simple but important models:

    (1) the production possibility frontier,

    (2) comparative advantage, and the
    (3) circular-flow diagram.

  • The difference between:

    positive economics-, which tries to describe the economy and predict its behavior
    normative economics-, which tries to prescribe economic policy - give advice - offer solutions.

  • When economists agree, and why they sometimes disagree.

Chapter 2 Appendix: Graphs in economics

Chapter 5: International Trade

  • pages 117 – 127, and

  • pages 136 – 142.

Chapter Objectives

Students will learn in this chapter:

  • How gains exist from international trade

  • How Comparative Advantage and Absolute Advantage differ in international trade.

  • Arguments for and against trade protection

Appendix Objective

Students will learn how graphs are used in economics, how to interpret the common graphs and how to construct the most common graphs used in this textbook

This Unit's Key ConceptsTop of Form

Bottom of Form

  • Modeling

  • The Production Possibility Frontier

  • Economic Growth

  • Comparative Advantage and Absolute Advantage

  • Circular Flow

  • International Trade

  • Trade Protection


Writing Assignment

General Instructions:

  1. Your assignment should have a cover sheet with the following information:

    1. your name;

    2. the course number;

    3. the section number; and,

    4. the date,

  2. You may either copy and paste the questions and any appropriate graphs into your paper, or you may insert your coversheet, your answers and your references into THIS document, renaming it as required in item 4 below.

  3. Your answers should follow the APA format by being in double spaced paragraph format, with citations to your sources and, at the bottom of your last page, a list of references. Your answers should also be in Standard English with correct spelling and punctuation, grammar and style.

  4. Unless specified differently by your instructor, your completed assignment should be saved with the following file name format: course number, an underscore, Section number, an underscore, your LAST name, underscore, your FIRST name, an underscore, and the word “final”. It will look like this: BU204_xx _LAST_FIRST_ y (where the “xx” is the section number and y is the Unit number).

  5. Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions and other elements asked for in the questions. Your paper should be highly organized, logical and focused.

  6. Maximum grade on format (5 points):

    1. correct filename

    2. correct APA format for answers (coversheet with name, course number, section number, Unit number, date, answers double spaced, in Times Roman black 12 point font)

    3. correct citations within answers

    4. Standard English with no spelling or punctuation errors

    5. correct references at the bottom of the last page.


1. A representative of the American clothing industry recently made the following statement: “Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more productive and as a result earn higher wages. In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing.” Answer the following: (10 points)

a. Which parts of this quote are positive statements? Which parts are normative statements?

b. Would such a policy make some Americans better off without making any other Americans worse off? Explain who and why.

c. Would low-wage Asian workers benefit from or be hurt by such a policy and why?

2. Referring to the same situation in question 1, but instead of legislation banning the imports, assume that the government enacts a special tax on imported clothing that is so high that the selling price of the imports would be equal to the selling price of the same clothing made in America. This kind of tax is called a tariff and is enacted to protect domestic producers of the same items that can be imported at much lower costs. Answer the following: (10 points)

a. What would shoppers see when they shopped in Wal-Mart and the other “big box” stores that sell so many imported items?

b. Would this tax policy have a better effect, worse effect, or no different effect on American workers than the legislation banning the imports discussed in question 1? What kind of effect would the tax have on the Asian workers?

3. A growing economy means that the economy is producing more and more “stuff”, either because it has more resources (workers), or uses those resources more productively (smarter, better workers, working with better machines and systems). A growing economy that produces more and more “stuff” normally means that the people have a higher and higher standard of living. If the government adopts a “free trade” policy towards all imports, including the low cost clothing of question 1 and 2, in which it places no barriers to importing items, can that action help the economy to grow? Explain your answer. (10 points)


Students should carefully read the assigned material and be prepared to ask questions during the seminar.

The instructor will also discuss the main concepts of the material in chapter 2 and part of 5. Students are expected to have read the assigned readings and other material posted by the instructor in “DocSharing” or “announcements.”

The Seminar session is your opportunity to ask any questions or clarify material that has been presented in this week’s learning outcomes or readings. If you have specific questions or topics you would like to be addressed in the Seminar session, please email your instructor prior to the day of your chat.

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