Chapter 7 Homework

exports

goods and services produced domestically but sold to other countries.

autarky

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

opportunity cost

the​ highest-valued alternative that must be given up to engage in an activity.

Among the main sources of comparative advantage are the​ following: A. climate and natural​ resources, relative abundance of labor and​ capital, technology, external economies. B. climate and natural​ resources, relative abundance of labor and​ capital, technology, external diseconomies. C. climate and natural​ resources, relative abundance of labor and​ capital, inefficient​ technology, external economies. D. climate and natural​ resources, relative scarcity of labor and​ capital, technology, external economies.

Among the main sources of comparative advantage are the​ following: 1. Climate and natural resources. 2. Relative abundance of labor and capital. Some countries have many highly skilled workers and a great deal of machinery. Other countries have many unskilled workers and relatively little machinery. As a​ result, the nation with the skilled workers has a comparative advantage in the production of goods that require highly skilled workers or sophisticated machinery to​ manufacture, such as​ aircraft, semiconductors, and computer software. The nations with an abundance of​ low-skilled workers have a comparative advantage in the production of goods that require unskilled workers and small amounts of simple​ machinery, such as​ children's toys. 3. Technology. Broadly​ defined, technology is the process firms use to turn inputs into goods and services. At any given​ time, firms in different countries do not all have access to the same technologies. In​ part, this difference is the result of past investments countries have made in supporting higher education or in providing support for research and development. 4. External economies. Once an industry becomes established in an​ area, firms that locate in that area gain advantages over firms located elsewhere. The advantages include the availability of skilled​ workers, the opportunity to interact with other firms in the same​ industry, and being close to suppliers. These advantages result in lower costs to firms located in the area. Because these lower costs result from increases in the size of the industry in an​ area, economists refer to them as external economies.

Who is harmed when individual nations move from autarky to free​ trade? A. The nation taken as a whole. B. The owners of the firms that went out of business. C. The foreign customers of the firms that now specialize. D. The domestic customers of the firms that went out of business.

B. The owners of the firms that went out of business. In our 2×2 trade​ model, consumption increases in both nations as a result of trade. Everyone​ gains, and no one loses. We referred repeatedly to individual nations producing the two goods. But countries do not produce goods—firms do. In a world without​ trade, there would be firms producing both goods in both countries. In the model with​ trade, there would be complete specialization—only one industry would remain in each nation. ​Overall, total employment would not change and production will increase as a result of trade.​ Nevertheless, the owners of the firms that went out of business are worse off as a result of trade. The losers from trade are likely to do their best to convince the government to interfere with trade by barring imports of the competing products from the other country or by imposing high tariffs on them.

Protectionism is the use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of several arguments which​ include: A. protecting national​ security, promoting the wants of select​ industries, and saving jobs. B. saving​ jobs, protecting infant​ industries, and protecting national security. C. protecting high​ wages, protecting national​ security, and maintaining high prices for imports. D. protecting high​ wages, protecting mature​ industries, and protecting national security.

B. saving​ jobs, protecting infant​ industries, and protecting national security. The​ anti-globalization argument against free trade and the WTO is relatively new. Another argument against free​ trade, called protectionism​, has been around for centuries. Protectionism is the use of trade barriers to shield domestic firms from foreign competition. For as long as international trade has​ existed, governments have attempted to restrict it to protect domestic firms. Protectionism is usually justified on the basis of one of the following​ arguments: saving​ jobs; protecting high​ wages; protecting infant​ industries; protecting national security.

​_____ is a situation in which a country does not trade with other countries. The​ _____ is the ratio at which a country can trade its exports for imports from other countries. A. ​Oikonomia, prices B. ​Plutarky, price ratio C. ​Autarky, terms of trade D. Terms of​ trade, autarky

C. ​Autarky, terms of trade Autarky A situation in which a country does not trade with other countries. Terms of trade The ratio at which a country can trade its exports for imports from other countries. By​ trading, countries are able to consume more than they could without trade. This outcome is possible because world production of both goods increases after trade. Shifting production to the more efficient country—the one with the comparative advantage—increases total production. The key point is​ this: Countries gain from specializing in producing goods in which they have a comparative advantage and trading for goods in which other countries have a comparative advantage.

Why do some people oppose the World Trade Organization​ (WTO)? A. Some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the​ high-income countries at the expense of the​ low-income countries. B. Some opponents desire to erect trade barriers to protect domestic firms from foreign competition. C. Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. D. All of the above.

D. All of the above. Globalization is the process of countries becoming more open to foreign trade and investment. During the​ 1990s, opposition to globalization began to increase. The opposition to the WTO comes from three sources. ​First, some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. ​Second, other opponents desire to erect trade barriers to protect domestic firms from foreign competition. ​Third, some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the​ high-income countries at the expense of the​ low-income countries. Globalization has increased the variety of products available to consumers in developing​ countries, but some people argue that this is too high a price to pay for what they see as damage to local cultures. Some people have argued that firms with factories in developing countries should pay workers wages as high as those paid in the​ high-income countries. They also believe these firms should follow the​ health, safety, and environmental regulations that exist in the​ high-income countries.

terms of trade

The ratio at which a country can trade its exports for imports from other countries.

tariff

a tax imposed by a government on imports of a good into a country

quota

is a numeric limit on the quantity of a good that can be​ imported, and it has an effect similar to a tariff. A quota is imposed by the government of the importing country.

comparative advantage

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

absolute advantage

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

protectionism

the use of trade barriers to shield domestic firms from foreign competition. For as long as international trade has​ existed, governments have attempted to restrict it to protect domestic firms.

As illustrated in the​ diagram, when a nation moves from autarky to free​ trade, economic surplus increases by the areas represented by A. C and D. B. ​B, C and D. C. ​A, B, C and D. D. B and E.

A. C and D. Free trade​, or trade between countries that is without government​ restrictions, makes consumers better off. Under​ autarky, consumer surplus would be area A in the above diagram. With​ imports, the reduction in price increases consumer​ surplus, so it is now equal to the sum of areas​ A, B,​ C, and D. Although the lower price increases consumer​ surplus, it reduces producer surplus. Under​ autarky, producer surplus was equal to the sum of the areas B and E. With​ imports, producer surplus is equal to only area E. Recall that economic surplus equals the sum of consumer surplus and producer surplus. Moving from autarky to allowing imports increases economic surplus in the United States by an amount equal to the sum of areas C and D.

The diagram on the right represents a tariff imposed on an individual market. The total deadweight loss​ (loss in economic​ surplus) from this tariff is illustrated by areas A. C and D. B. ​A, C, T and D. C. ​C, T and D. D. A and T.

A. C and D. The most common interferences with trade are tariffs​, which are taxes imposed by a government on goods imported into a country. Like any other​ tax, a tariff increases the cost of selling a good. The tariff reduces consumer surplus by the sum of areas​ A, T,​ C, and D. Area A is the increase in producer surplus from the higher price. The government collects tariff revenue equal to the tariff multiplied by the amount imported. Area T represents the​ government's tariff revenue. Areas C and D represent losses to U.S. consumers that are not captured by anyone. They are deadweight loss and represent the decline in economic efficiency resulting from the tariff. Area C shows the effect on U.S. consumers of being forced to buy from U.S. producers who are less efficient than foreign​ producers, and area D shows the effect of U.S. consumers buying less of the product than they would have at the world price. As a result of the​ tariff, economic surplus has been reduced by the sum of areas C and D.

Dumping A. is selling a product for a price below its cost of production. B. is selling a product for a price the same as its cost of production. C. is selling a product for a price above its cost of production. D. none of the above.

A. is selling a product for a price below its cost of production. In recent​ years, the United States has extended protection to some domestic industries by using a provision in the WTO agreement that allows governments to impose tariffs in the case of dumping. Dumping is selling a product for a price below its cost of production. In​ practice, it is difficult to determine whether foreign companies are dumping goods because the true production costs of a good are not easy for foreign governments to calculate. As a​ result, the WTO allows countries to determine that dumping has occurred if a product is exported for a lower price than it sells for on the home market. pg 236

Comparative advantage A. may change as time passes and circumstances change. B. is independent a countries skilled and unskilled labor quantities. C. is determined by governments of nations across the globe. D. is unlikely to​ change, once it has been defined.

A. may change as time passes and circumstances change. A country may develop a comparative advantage in the production of a​ good, and​ then, as time passes and circumstances​ change, the country may lose its comparative advantage in producing that good and develop a comparative advantage in producing other goods. Once a country has lost its comparative advantage in producing a​ good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.

We do not see complete specialization in the real world because A. not all goods and services are traded​ internationally, production of most goods involves increasing opportunity​ costs, and tastes for products differ. B. not all goods and services are traded​ internationally, production of most goods involves decreasing opportunity​ costs, and tastes for products differ. C. all goods and services are traded​ internationally, production of most goods involves increasing opportunity​ costs, and tastes for products are remarkably uniform. D. not all goods and services are traded​ internationally, production of most goods involves constant opportunity​ costs, and tastes for products are remarkably uniform. part 2 By​ trading, countries are able to consume more than they could without trade. This outcome is possible because A. shifting production to the more efficient country—the one with the comparative advantage—increases total production. B. inefficiencies in resource allocation are reduced. C. world production of both goods increases after trade. D. all of the above.

A. not all goods and services are traded​ internationally, production of most goods involves increasing opportunity​ costs, and tastes for products differ. With two countries producing only two​ products, each country specializes in producing one of the goods. In the real​ world, many goods and services are produced in more than one country. For​ example, the United States and Japan both produce automobiles. We do not see complete specialization in the real world for three main​ reasons: 1. Not all goods and services are traded internationally. 2. Production of most goods involves increasing opportunity costs. 3. Tastes for products differ. part 2: D. all of the above.

In addition to tariffs and​ quotas, governments sometimes erect other barriers to trade. For​ example, all governments require that imports meet certain health and safety requirements. Many governments also restrict imports of certain products on national security grounds. Explain whether you agree or disagree with the following​ statement: ​Sometimes, however, governments use these requirements to shield domestic firms from foreign competition. A. ​Yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms. B. ​No, governments are always more concerned about national security than appeasing special interests. C. ​Yes, sometimes governments impose less strict health and safety requirements on imported goods than on goods produced by domestic firms. D. ​No, politicians never make choices that are more likely to lead to reelection when health and safety issues are involved.

A. ​Yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms. In addition to tariffs and​ quotas, governments sometimes erect other barriers to trade. For​ example, all governments require that imports meet certain health and safety requirements. ​Sometimes, however, governments use these requirements to shield domestic firms from foreign competition. This can be true when a government imposes stricter health and safety requirements on imported goods than on goods produced by domestic firms. Many governments also restrict imports of certain products on national security grounds. The argument is that in time of​ war, a country should not be dependent on imports of critical war materials. Once​ again, these restrictions are sometimes used more to protect domestic companies from competition than to protect national security.

Comparative advantage A. is the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower absolute cost than competitors. B. is the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors. C. is the ability of an​ individual, a​ firm, or a country to produce a good or service at a higher absolute cost than competitors. D. is the ability of an​ individual, a​ firm, or a country to produce a good or service at a higher opportunity cost than competitors.

B. is the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors. Recall that opportunity cost is the​ highest-valued alternative that must be given up to engage in an activity. ​People, firms, and countries specialize in economic activities in which they have a comparative advantage. In​ trading, we benefit from the comparative advantage of other people​ (or firms or​ countries), and others benefit from our comparative advantage.

One effect of tariffs and quotas A. is generally a net gain for the nation enacting the protective legislation. B. is to cost jobs outside the industries immediately affected. C. is to reduce prices to domestic consumers as it protects jobs in the target industry. D. is to create jobs outside the industries immediately affected.

B. is to cost jobs outside the industries immediately affected. The sugar quota is not alone in imposing a high cost on U.S. consumers to save jobs at U.S. firms. Just as the sugar quota costs jobs in the candy​ industry, other tariffs and quotas cost jobs outside the industries immediately affected. In​ fact, whenever one industry receives tariff or quota​ protection, jobs are lost in other domestic industries.

Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange. A. This is statement​ true; the U.S. economy would not gain from the elimination of tariffs and quotas especially if other countries do not reduce their tariffs and quotas. B. This statement is false because the U.S. economy is so large that it is not affected by the reduction of tariffs and quotas. C. This statement is​ true; the U.S. economy would gain from the elimination of tariffs and quotas but only if other countries also reduce their tariffs and quotas so our industries are able to penetrate their markets. D. This statement is​ false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas.

D. This statement is​ false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange. It is easier to gain political support for reducing or eliminating tariffs or quotas if it is done as part of an agreement with other countries that involves their eliminating some of their tariffs or quotas. But as the example of the sugar quota​ shows, the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. pg 233

The World Trade Organization​ (WTO) A. generally aids in negotiating trade agreements that include not only goods but also services and intellectual property. B. is an international organization that oversees international trade agreements. C. replaced the General Agreement on Tariffs and Trade​ (GATT) in January 1995. D. all of the above.

D. all of the above. By the end of World War II in​ 1945, government officials in the United States and Europe were looking for a way to reduce tariffs and revive international trade. To help achieve this​ goal, they set up the General Agreement on Tariffs and Trade​ (GATT) in 1948. Countries that joined GATT agreed not to impose new tariffs or import quotas. In​ addition, a series of multilateral negotiations​, called trade rounds​, took​ place, in which countries agreed to reduce tariffs from the very high levels of the 1930s. In the​ 1940s, most international trade was in​ goods, and the GATT agreement covered only goods. In the following​ decades, trade in services and in products incorporating intellectual property​, such as software programs and​ movies, grew in importance. Many GATT members pressed for a new agreement that would cover services and intellectual​ property, as well as goods. A new agreement was​ negotiated, and in January​ 1995, GATT was replaced by the World Trade Organization ​(WTO)​: an international organization that oversees international trade​ agreements, headquartered in​ Geneva, Switzerland. More than 130 countries are currently members of the WTO.

The primary difference between a quota and a voluntary export restraint​ (VER) is that A. the VER affects import price while the quota works through quantity restrictions and does not influence the price of the good. B. the VER is unilaterally imposed by one nation on the other while the quota is the result of negotiations between nations. C. the quota directly limits imports while the VER only indirectly influences the quantity traded between the nations. D. the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations.

D. the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations. Excellent! A quota is a numeric limit on the quantity of a good that can be​ imported, and it has an effect similar to a tariff. A quota is imposed by the government of the importing country. A voluntary export restraint​ (VER) is an agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country. The main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face.

international trade

International trade has grown tremendously over the past 50 years. The increase in trade is the result of the falling costs of shipping products around the​ world, the spread of inexpensive and reliable​ communications, and changes in government policies. In​ addition, over the past 50​ years, many governments have changed policies to facilitate international trade. For​ example, tariff rates have fallen.

The diagram shows the actual statistics for the U.S. sugar market in​ 2018, reflecting a quota of 6.4 billion pounds placed on U.S. imports. Complete the table illustrating the welfare effects of this quota.

The diagram above shows the actual statistics for the U.S. sugar market in 2018. By limiting​ imports, a quota forces the domestic price of a good above the world price. In this​ case, the sugar quota limits sugar imports to 6.4 billion pounds ​(24.6−​18.2), forcing the U.S. price of sugar up to​ $0.25 per​ pound, or​ $0.13 higher than the world price. At a price of​ $0.25 cents per​ pound, U.S. producers increased the quantity of sugar they supply from 7.3 billion pounds to 18.2 billion​ pounds, and U.S. consumers cut back their purchases of sugar from 27.4 billion pounds to 24.6 billion pounds. Equilibrium moves from point E to point F. The sugar quota causes the U.S. price to rise to​ $0.25 cents and reduces consumer surplus by the area A​ + B​ + C​ + D. The higher U.S. price resulting from the sugar quota increases the producer surplus of U.S. sugar producers by an amount equal to area A. The gain to foreign sugar producers is area B. Areas A and B represent transfers from U.S. consumers of sugar to U.S. and foreign producers of sugar. Areas C and D represent losses to U.S. consumers that are not captured by anyone. They are deadweight losses and represent the decline in economic efficiency resulting from the sugar quota. Area C shows the effect of U.S. consumers being forced to buy from U.S. producers that are less efficient than foreign​ producers, and area D shows the effect of U.S. consumers buying less sugar than they would have at the world price.

comparative and absolute advantage in international trade

The principle of comparative advantage can explain why people pursue different occupations. It can also explain why countries produce different goods and services. International trade involves many countries importing and exporting many different goods and services. Countries are better off if they specialize in producing the goods for which they have a comparative advantage. They can then trade for the goods for which other countries have a comparative advantage.

\voluntary export restraint​ (VER)

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

imports

are goods and services bought domestically but produced in other countries.

Suppose the United States and Japan produce only cell phones and digital music​ players, like​ Apple's iPod. Assume that each country uses only labor to produce each​ good, and that Japanese and U.S. cell phones and digital music players are exactly the same. Determine the missing opportunity costs in the table below and fill in the missing values. ​(Enter your responses rounded to one decimal​ place.) part 2: From the tables above it is clear that​ _____ has an absolute advantage in the production of both goods and that​ _____ has a comparative advantage in cell​ phones, while​ _____ has a comparative advantage in digital music players. A. Japan​,the United States​,the United States B. Japan​,Japan​,the United States C. the United States​,the United States​,Japan D. the United States​,Japan​,

part 1: 0.5, 0.5 part 2: C. the United States​,the United States​,Japan (look at lowest opportunity cost)