Mankiw (2012) simplifies economics as a social science whereby scholars learn about people’s behaviors when dealing with unlimited resources. Hence, economics characterizes the analysis of trade choices we make, which can be through ideological perspectives, and via evidence-based methods like graphs and calculated scientific elements. This paper looks at the applicability of Gregory Mankiw’s Principles of Economics. Although Mankiw illustrates ten principles, this article looks at only five of them, which are observable from their applicability in real-world events.
Principle: Rational People Make Decisions by Comparing Marginal Costs
News Article: “Dubai’s Buy Now, Move In, and Pay Later Mantra is Working”
Source: Gulf News, Retrieved from https://bit.ly/2UcFpbX
People make economic decisions depending on available opportunities (Mankiw, 2012). This is rational thinking whereby people do their best to achieve their goals and objectives, which is to save as much money as possible. Hence, similar sentiments are applicable in the news article whereby real estate investors in Dubai are selling houses to potential customers. The intentions are to win their need to achieve personal goals, one of which is to own a home. As revealed in the article, buyers find the process of acquitting a house is not only straightforward, but it also offers them “a low down payment option” (par.6). Any rational person cannot forgo this available opportunity, thus proving the economic principle of rational decision-making.
At the same time, the principle of rational economic decisions states that an action is only possible once an individual finds the marginal benefits supersedes the minimal costs. For example, the real estate developers in Dubai are offering buyers longer payment periods, which go over five years. This gives buyers enough time “to keep their commitments” (par.9). Better yet, one of the developers offers a zero down payment, whereby buyers only have to make monthly payments. Any rational person would never pass this offer.
The news article is a perfect example of the economic principle on rational decision-making because it illustrates the rationality amongst the buyers, who weigh their options before finally making an important decision. The buyers are particularly attracted to these deals by the fact that they work directly with the developers. This way, they do not have to go through the hassle of finding the right bank to help in getting a mortgage. It is also cheaper. The payment plans similar to loan installments, but without the issue of approval processes.
Principle: Trade Can Be Mutually Beneficial
News Article: “Chill in Global Economy Prompts the G20 to Call for Trade Truce”
Source: Gulf News, Retrieved from https://bit.ly/2Ug7kI7
Mankiw (2012), who claims that countries can always benefit from trade and specialization, reiterates the principle of trade is mutually beneficial to all parties involved. For instance, the request for a truce in the article is a perfect example of the need for trade between countries. That is, the principle requires that people (and countries) need to specialize in producing a good or service rather than being self-sufficient. It is impossible to rely on oneself to produce everything. Hence, representatives of the G20 countries agreed to “recognize the risks involved in growth prospects,” (par.3) which, if not handled early enough, can result in a weakened global economy.
The principle of the economy on mutual trade benefits asserts the need for countries to get better deals between countries, whereby a nation can benefit by producing goods abroad, or by buying resources from abroad. Therefore, “President Trump’s threats to impose tariffs on European countries” (par.7) was received with skepticism from other G20 nations. Germany’s representative Olaf Scholz insists on countries focusing on long-term goals rather than short-term benefits. This shows the worries the European countries have over the trade tariffs threats. The G20 meeting was meant to fulfill the principle of economics on trade benefits whereby a deal has to be struck to make sure all parties benefit.
Principle: People Respond To Incentives
News Article: “EU Plans Retaliatory Strike against U.S. Tariffs Threat”
Source: The National, Retrieved from https://bit.ly/2v1cWM7
The principle of people reacting to incentives is characteristic of incentives, which are things induced by an individual whereby some form of reaction by another person may ensue. With incentives, there is an expectation of either a reward or a punishment. From the news article, U.S. President Trump has threated the European Union that America would be imposing tariffs on their products. The cost for the tariffs would amount to $11 Billion, which is incredibly very high. As expected, such threats prompted reactions from the European countries, which is a typical thing expected of the counties. This further cements the features of the economic principle of people responding to incentives.
The second feature of the principle is the rationality of the people involved. Thereby, the countries threatened had to react by stating that making retaliatory plans. They claim that the countermeasures taken by the U.S. President are exaggerated and that the WTO (World Trade Organization) is the only arbitrator allowed to make any changes. Despite the EU refuting those threats as uncalled for, the European countries are still making plans on ways they can withstand any decisions made by the arbitrator. Such spurs and motivations considered by the EU are the exact reflections of the economic principle on response to incentives.
Moreover, the threats are particularly hurtful to the EU, because the U.S. has already placed tariffs on “steel and aluminum exports” (par.12) coming from Europe. This will probably cripple the economic overview of Europe. Such a situation is also a reflection of the economic principle on a country’s dependence on the ability to produce and provide goods and services. Therefore, when President Trump threatens the EU, their reaction is understandable because the states need to survive from their exportations into the U.S.
Principle: The Cost of Any Action Is Measured In Terms Of Foregone Opportunities
News Article: “Jet Suspends All International Flights”
Source: Khaleej Times, Retrieved from https://bit.ly/2UgrHF5
From the principle as described by (Mankiw, 2012), decision-making usually requires making comparisons between costs affecting a product against its benefits. Business-wise, if the benefits are superseded the costs, then a company is likely to support the action. However, if the costs are overweighing benefits, then it is safe to make decisions that might save the company, which is exactly what India’s Jet Airways did. That is, the firm extended its “suspension of all international flights” (par.3) as a way of saving further losses. The firm is debt-ridden, and thus any continued operations are likely to dampen the company’s performance.
Despite being the second-largest airline in India (at least until recently), Jet Airline is very close to facing bankruptcy due to a $1 billion debt. This decision is a perfect example of an opportunity cost whereby the airline company had to settle on the extended suspensions over further losses. The company had to forgo the opportunity to win the loyalty of their customers by stranding thousands of them. The company’s poor performance was affected mainly by the global fluctuation of oil prices. This weakened India’s currency Rupee, which prompted fierce competition from their rivals. At the same time, the firm’s management was plagued by ineffective strategies, which is traced back more than ten years back. They bought Air Sahara at $500 million in cash, thus the debt issues surrounding the firm.
Principle: Markets Are Usually A Good Way of Coordinating Trade
News Article: “UAE Well Set To Attract More Foreign Investment This Year”
Source: Retrieved from https://bit.ly/2DaT4dI
The principle states that a market consists of buyers and sellers, as well as comprising of supply and demand. This makes a market the best aspect for any trade negotiations. Because of this, the UAE has been attracting more FDIs (Foreign Direct Investments). Its major areas of attracting FDIs are oil and gas. Hence, with the presence of a thriving market, the UAE has managed to organize a successful economic activity in the name of FDIs. A market’s economic organization helps in determining the types of goods to produce and at what price. Therefore, the country’s oil and gas sector has helped it gain the power to influence its investments.
The principle also states that a market’s economy usually allocates its resources through a decentralized system, which involves consideration of households’ expenditures, alongside performances of businesses within a specified market. Thereby, the example news article illustrates the concept of buyer-seller interaction whereby the UAE is receiving FDIs amounting more than $15 billion from foreign investors.
The economic principle states that prices reflect the value of a product or market. Hence, the $15 billion FDIs are a reflection of UAE’s importance to the investors. Better yet, prices are usually guidance to self-interested firms and households (Mankiw, 2012). The intention is to influence decision-making that may improve a country’s economy – which is precisely the case in UAE, as illustrated in the news article.
Gulf News. (2019). Chill in global economy prompts G20 call for trade truce. Retrieved from https://bit.ly/2Ug7kI7
Khaleej Times. (2019). Jet suspends all international flights. Retrieved from https://bit.ly/2UgrHF5
Khan, S., & Sharma, A. (2019). UAE is well set to attract more foreign investment this year. Retrieved from https://bit.ly/2DaT4dI
Mankiw, N. (2012). Principles of Economics (6th ed., pp. 455-856). Mason, Ohio: Southwestern Cengage Learning. Retrievable at https://bit.ly/2DcuYzj
Nair, M. (2019). Dubai’s ‘buy now, move in and pay later’ mantra is working. Retrieved from https://bit.ly/2UcFpbX
The National. (2019). EU ‘plans retaliatory strike’ against US tariffs threat. Retrieved from https://bit.ly/2v1cWM7