Chapter 5: International Trade

What are exports?

goods and services purchased from other countries.

What is offshore outsourcing?

hiring people in another country to perform various tasks

What is the Domestic demand curve?

a demand curve that shows how the quantity of a good demanded by domestic consumers depends on the price of that good.

What is the Ricardian model of international trade?

a model that analyzes international trade under the assumption that opportunity costs are constant.

What is autarky?

a situation in which a country does not trade with other countries.

What is the Domestic supply curve?

a supply curve that shows how the quantity of a good supplied by domestic producers depends on the price of that good.

What is a tariff?

a tax levied on imports

What is North American Free Trade Agreement (NAFTA)?

a trade agreement between the United States, Canada, and Mexico

In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 ton of corn. a. Determine the pattern of comparative advantage. b. In autarky, the United States can produce 200,000 bicycles if no corn is produced, and China can produce 3,000 tons of corn if no bicycles are produced. Draw each country's production possibility frontier assuming constant opportunity cost, with tons of corn on the vertical axis and bicycles on the horizontal axis. c. With trade, each country specializes in its production. The United States consumes 1,000 tons of corn and 200,000 bicycles; China consumes 3,000 tons of corn and 100,000 bicycles. Indicate the production and consumption points on your diagrams, and use them to explain the gains from trade.

a. The United States has the comparative advantage in corn since its opportunity cost in terms of bicycles is 50, a smaller number. b. Given that the United States can produce 200,000 bicycles if no corn is produced, it can produce 200,000 bicycles × 0.02 ton of corn/bicycle = 4,000 tons of corn when no bicycles are produced. Likewise, if China can produce 3,000 tons of corn if no bicycles are produced, it can produce 3,000 tons of corn × 100 bicycles/ton of corn = 300,000 bicycles if no corn is produced. These points determine the vertical and horizontal intercepts of the U.S. and Chinese production possibility frontiers, as shown in the accompanying diagram. c. The diagram shows the production and consumption points of the two countries. Each country is clearly better off with international trade because each now consumes a bundle of the two goods that lies outside its own production possibility frontier, indicating that these bundles were unattainable in autarky.

Explain the following patterns of trade using the Heckscher-Ohlin model. a. France exports wine to the United States, and the United States exports movies to France. b. Brazil exports shoes to the United States, and the United States exports shoe-making machinery to Brazil.

a. this pattern of trade occurs because the United States has a relatively larger endowment of factors of production, such as human capital and physical capital, that are suited to the production of movies, but France has a relatively larger endowment of factors of production suited to wine-making, such as vineyards and the human capital of vintners. b. this pattern of trade occurs because the United States has a relatively larger endowment of factors of production, such as human and physical capital, that are suited to making machinery, but Brazil has a relatively larger endowment of factors of production suited to shoemaking, such as unskilled labor and leather.

What is the World Trade Organization?

an international organization of member countries that oversees international trade agreements and rules on disputes between countries over those agreements.

A tariff results in a higher: 1. consumer surplus. 2. producer surplus. 3 government revenue. a. I and 2 only b. 2 and 3 only c. 1 and 3 only d. 1, 2, and 3

b. 2 and 3 only

Why are import protections imposed?

because groups representing import-competing industries are more influential than groups of consumers.

What are the main sources of comparative advantage?

climate, factor endowments, and technology.

What effect does Import quota have on the economy?

except instead of government revenue, "quota rents" will go to quota license holders (usually foreigners)

What is free trade?

trade that is unregulated by government tariffs or other artificial barriers;

What are imports?

goods and services sold to other countries.

What is European Union (EU)?

a customs union among 28 European nations

What is the job creation argument for Trade Protection?

Argues that additional jobs created in import-competing industries as a result of trade protection.

What is the infant industry argument for Trade Protection?

Argues that new industries require a temporary period of trade protection to get established.

What is the national security argument for Trade Protection?

Argues that overseas goods are vulnerable to international conflicts

What is Import-competing industries?

industries that produce goods or services that are also imported.

What are Exporting industries?

industries that produce goods or services that are sold abroad.

What does the Heckscher-Ohlin model show?

shows how comparative advantage can arise from differences in factor endowments: goods differ in their factor intensity, and countries tend to export goods that are intensive in the factors they have in abundance.

What effects does a tariff have on the economy?

Increase in domestic production, reduction in domestic consumption. and less is consumed, leading to lower gains from trade.

What are the two roles that the World Trade Organization plays?

It provides the framework for the massively complex negotiations involved in a major international trade agreement and resolves disputes between its members that typically arise when one country claims that another country's policies violate its previous agreements.

What are the three common arguments for Trade Protection Advocates for tariffs and import quotas?:

National security, job creation, and the infant industry.

What is Trade Protection and or Protection?

policies that limit imports

What is an Import quota?

the legal limit on the quantity of a good that can be imported

Hyperglobalization

the phenomenon of extremely high levels of international trade.

What is the World price?

the price at which a good can be bought or sold abroad.

What happens if the world price is higher than the autarky price?

trade leads to exports and the domestic price rises to the world price.

What happens if the world price is lower than the autarky price?

trade leads to imports and the domestic price falls to the world price.