Question

name one economic decision that must be made by each of the four sectors of the economy: households • businesses • government • the foreign sector. Be sure to state what a possible opportunity cost might be for each of these economic decisions. Recall that the opportunity cost is the highest valued thing that is sacrificed when a choice is made. Feel free to discuss this topic in one of two ways: either discuss how one economic decision impacts each of the four sectors, or discuss how unrelated economic decisions impact each of the four sectors.

Answer 1

Economic decision:

Household : decision to what proportion of income to consume and what proportion to save.

Business: how much to invest at the prevent interest rate.

Government: to spend on cresting social overhead capital suvh as infrastructure or spend on provibdibg social security benefits to the population.

Foreign sector; reducing or raising trade barriers such as tariff or subsidy.

Opportunity cost:

Household:. Opportunity cost of consumption is the interest that could haVe been earned on the savings

Businesses: the opportunity cost of investing is the interest foregone by keeping the invested capital at bank or the earnings foregone had the same capital was used in sone other project.

Government: the opportunity cost if creating infrastructure is the outcome score hone by investing social benefits such as health or old age pension. The opportunity cost of providing social security is the outcomes foregone from investing in infrastructure such as increased employment and economic output.

Foreign sector: the opportunity cost of raising tariff is the outcomes foregone on the next best alternative say imposing quota. We can compare dead weight loss to get better idea of earning and distortion created by raising tariff as against imposing a quota.

Impact on other sectors:

Of household:

(!1)on businesses: if household decides to consume mire then the demand for business product increases.Bussiness sector will boost.

(2) on government: the rise in consumption will lower the savings this wil lead to reduce loanable funds fund for government borrowing.

3) foreign sector: rise in imports since consumption also include imported goods.

Of businesses:

1) on household: eMploymenf will.increase

2) on government: increase in tax revenue from the businesses

3) foreign sector: demand for imports will increase

Of government:

1)on household: increased employment in caSe of govt spending on infrastructure and social security benefits if government spending on that are higher.

2) business: infrastructure creation by govt may lead to direct productivity activity by businesses.

3) on foreign sector: iMpirts will increase dur yo increase in economic activity and output in the ecoNkmy when govt spends on infrastructure

Of foreign sector:

1) household: reduction in demand for imports due to higher import price after tariff is rsiSed..

2) businesses: demand for domestic goods increase as imports become expensive thus boosting business of the private sector

3) government:. Increased revenue from increase on tariff