Chapter 6

Define Autarky

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

Define Quota

a numerical limit a government imposes on the quantity of a good that can be imported into the country

Define Imports

Goods and services bought domestically, but produced in other countries

Define Tariff

a tax imposed by a government on imports.

Define Absolute Advantage

The ability to produce more of a good/service than competitors when using the same amount of resources.

Using the Ethanol example in the notes, what is the following: - loss of consumer surplus - increase in PS - Government tariff revenue - deadweight loss

- loss of CS: A + C + T + D - increase in PS: A - government tariff revenue: T - Dead-weight Loss: C + D

Why Don't we see complete specialization?

- not all goods and services are traded internationally - production of most goods involves increasing opportunity costs - tastes for products differ

Although foreign trade helps consumers, it tends to hurt firms. For this reason, firms look to implement two policies such as:

- tariffs/quotas - voluntary export restraints (VER)

The top four leading international traders are

1. China 2. U.S 3. Germany 4. Japan

The top for importers internationally are

1. U.S 2. China 3. Germany 4. Japan

What top three countries export and important as a percentage of their GDP?

1. belgium 2. the netherlands 3. germany

What is the WTO?

The world trade organization is an international organization that oversees international trade agreements (and began in 1995). It serves to advocate globalization.

In the Importance of Trade to the U.S Economy diagram, what year show a huge gap and why is it a large concern?

This diagram shows imports and exports. In 1982 and 1992, there was a huge gap between imports and exports. It presents a concern because critics of imports state "we're becoming too dependent on other countries."

Define Free Trade

Trade between countries that is without government restrictions

Does anyone lose as a result from trade?

Yes, while participating countries may gain, some firm lose. The losers are likely to try to convince their governments to interfere by barring imports of the competing products from the other country or by imposing high tariffs on them.

Once an industry becomes established in a certain area, firms that locate in that area gain advantages over firms located elsewhere, leading to lower costs of production. Economists refer to the lower costs that result from increases in size of an industry in certain areas as a) external economies b) positive externalities c) technological change d) strategic advantages

a) external economies

Define Exports

goods and services produced domestically but sold in other countries

What is the difference between Quota and VER?

quota is unilaterally imposed by one nation on other while the VER is the result of negotiations between nations

Define External economies

reduction in a firm's cost that results from an increase in the size of an industry (in other words, all suppliers are located in the same space)

Define Globalization

the process of countries becoming more open to foreign trade and investment

Define Terms of Trade

the ratio at which a country can trade its exports for imports from another country

What do supporters of protection of natural security interests say in opposition of WTO and globalization?

being dependent on other countries for goods that are critical for defense is bad.

Where does Comparative Advantage come from?

- climate and natural resources - relative abundance of labor and capital - technology (includes product technology and process technology) - external economies

What are other concerns of people opposing to WTO and globalization?

- free trade and foreign investment destroying the distinctive cultures of some countries; are lesser developed countries made worse of or better off? - abuse of labor in developing countries (wage, health, safety, and environmental issues)

What are is CS, PS and ES under autarky?

CS - A PS - B + E ES - A + B + E

What are CS, PS, and ES with Imports?

CS - A + B + C + D PS - E ES - A + B + C + D + E

How does Caterpillar Depend on International Trade?

Caterpillar became increasingly dependent on foreign markets, with it's firm exports rising from just over half a total sales in 2004 to more than 2/3rds in 2010.

What do supporters of trade barriers say in opposition of WTO and globalization?

Protection of domestic firms, jobs and high wages are important as well as protection of domestic infant industries

Refer to figure 8.1 --> Under autarky, the equilibrium price is ______, the consumer surplus is _________ and the producer surplus is _________. a. $30; consumer surplus = area R; producer surplus = area S + V b. $30; consumer surplus = area R; producer surplus = area S + T + U + V c. $24; consumer surplus = area R + S + T + U; producer surplus = area V d. $30; consumer surplus = area R + S; producer surplus = area V

a. $30; consumer surplus = area R; producer surplus = area S + V

Refer to figure 8.3 --> With a QUOTA, what is the REDUCTION in peanuts imported, RELATIVE to a position of FREE TRADE? a. 14 million pounds b. 18 million pounds c. 16 million pounds d. 40 million pounds

a. 14 million pounds

Define VER

an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country

In the real world, we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. One reason for this is: a) tastes for many traded goods are similar in many countries because of globalization b) production of most goods involves increasing opportunity costs c) some countries have more resources than other countries d) comparative advantages work better in theory than in practice

b) production of most goods involves increasing opportunity costs

Refer to figure 8-2 --> The loss in domestic consumer surplus as a result of the tariff is equal to the area a. B + D + E + F b. C + D + E + F c. B d. D + E + F

b. C + D + E + F

A consequence of increasing marginal opportunity costs of producing laptop computers in the United States is a) the United States will import laptop computers from countries that don't experience increasing marginal costs b) the United States will not export laptop computers c) the United States will not stop short of complete specialization in the production of laptop computers d) the United States will likely impose trade restrictions on imported laptop computers

c) the United States will not stop short of complete specialization in the production of laptop computers

Refer to figure 8-2 --> Without the tariff in place, the U.S consumes, a. 31 million pounds of rice b. 15 million pounds of rice c. 42 million pounds of rice d. 9 million pounds of rice

c. 42 million pounds of rice

Refer to figure 8-2 --> The tariff revenue collected by the govenrment equals to the area a. D + E + F b. C + D + E + F c. E d. B + D + E + F

c. E

Refer to figure 8.3 --> With a quota, which statement is true? a. domestic production = 28 million pounds, imports = 12 million pounds, and quantity purchased by consumers = 40 million pounds b. domestic production = 10 million pounds, imports = 18 million pounds, and quantity purchased by consumers = 28 million pounds c. domestic production = 18 million pounds, imports = 16 million pounds, and quantity purchased by consumers = 34 million pounds d. domestic production = 18 million pounds, imports = 10 million pounds, and quantity purchased by consumers = 28 million pounds

c. domestic production = 18 million pounds, imports = 16 million pounds, and quantity purchased by consumers = 34 million pounds

The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In recent years, opposition to globalization has led to violent protests at meetings of WTO. One reason for these anti-globalization protests is a. international trade and investment cover up child labor problems b. protesters object to the loss of intellectual property (such as software programs and movies) that result from foreign trade and investment c. protesters believe that free trade destroys the distinctive cultures of many countries d. protesters believe that globalization will result in a return to free trade in developing counties.

c. protesters believe that free trade destroys the distinctive cultures of many countries

Refer to Figure 8.1 --> Suppose the government moves away from Autarky and allows imports of leather footwear into the U.S. What happens to the market price and the quantity produced by the U.S? a. the price drops from $30 to $24, and the quantity produced by U.S producers becomes Q1 b. the price stabilizes at $30, and the quantity produced by the U.S producers becomes Q1. c. the price drops from $30 to $24, and the quantity produced by the U.S producers become Q0. d. The price increases to $24, and the quantity produced by U.S producers becomes Q0.

c. the price drops from $30 to $24, and the quantity produced by the U.S producers become Q0.

Assume that China has a comparative advantage in producing corn and exports corn to Japan. We can conclude that a) Japan has an absolute advantage in producing corn relative to China b) China also has an absolute advantage in producing corn relative to Japan c) Labor costs are higher for corn producers in Japan than in China d) China has a lower opportunity cost of producing corn relative to Japan

d) china has a lower opportunity cost of producing corn relative to japan

Refer to figure 8.1 --> Suppose the government allow imports of leather footwear into the U.S. The market price moves to ______. What areas represent consumer surplus and domestic producer surplus? a. a price of $30. consumer surplus = R + S; producer surplus = V. b. a price of $24. consumer surplus = R + S + T + U; producer surplus = V + W + X + Y. c. a price of less than $24. consumer surplus = R + S + T; producer surplus = W + X + Y. d. a price of $24. consumer surplus = R + S + T + U; producer surplus = V.

d. a price of $24. consumer surplus = R + S + T + U; producer surplus = V.

Trade restrictions are often motivated by a desire to save domestic jobs threatened by competition from imports. Which of the following counter-arguments is made by economists who oppose trade restrictions? a. trade restrictions have a limited impact because most Americans prefer domestic goods over imports b. statistics show that trade restrictions actually do not save jobs c. trade restrictions benefit consumers in the short run but not in the long run. d. consumer pay a higher cost for jobs saved through trade restricitons

d. consumer pay a higher cost for jobs saved through trade restricitons

Refer to figure 8.2 --> the tariff causes domestic consumption of rice a. to rise by 16 million pounds b. to rise by 6 million pounds c. to fall by 27 million pounds d. to fall by 11 million pounds

d. to fall by 11 million pounds

Define Comparative Advantage

the ability of an individual, a firm, or a country to produce a good/service at a lower opportunity cost than competitors.

Define Product technology

the ability to develop new products

Define processes technology

the ability to improve the processes used to make existing products

Define Opportunity Cost

the highest valued alternative that must be given up in order to do an activity.