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PERFECT COMPETITION AND EFFICIENCY: Perfect competition is the idealized market structure that achieves an efficient allocation of resources. The conditions of perfect competition, including (1) large number of small firms, (2) identical products sold by all firms, (3) freedom of entry into and exit out of the industry, and (4) perfect knowledge of prices and technology, ensure that perfect competition efficiently allocates resources. This is in fact the purpose of perfect competition: a market structure that illustrates perfection, the best of all possible resource allocation worlds. The real world falls short of this perfection.

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Lesson 19: Money Creation | Unit 2: Fred Returns Page: 8 of 23

Topic: Money Creation <=PAGE BACK | PAGE NEXT=>

The money creation mechanism is a profitable opportunity.
  • With 10% of his receipts redeemed at any given time Fred can issue up to 1,000 pounds of receipts.
  • 100 pounds for the original deposits plus another 900 pounds for loans.
Important points:
  • Fred has created money: Because his receipts are money, he can create money by making loans.
  • The new extra 900 pounds of money is used for investment that promotes economic growth.
A precarious balancing act:
  • If people redeem more than the 10% of the receipts, Fred is in trouble.
  • If so, the receipts become worthless, the money supply shrinks, and the local economy enters a recession.

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BALANCE OF TRADE

The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services.

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