Chapter 7 Macroeconomics

In 1930, the US government attempted to help domestic firms that were harmed by the Great Depression by passing the Smoot-Hawley Tariff. In response to this tariff, other countries ______ and international trade _______. (lowered their tariffs, raised their tariffs, eliminated tariffs, or doubled their tariffs; thrived, collapsed, began to grow outside of the US, or became unrestricted)

Raised their tariffs; collapsed

T/F- The following statement is used to justify protectionism. Trade restrictions are necessary to protect new firms until they can gain experience and become more productive.

True

T/F: In 1995, the GATT was replaced by the WTO.

True

T/F: One of the main sources of comparative advantage is natural resources

True

T/F: One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs

True

T/F: The United States is the second largest exporter in the world.

True

Many economist ____ protectionism because it _____ consumers and _____ jobs in domestic industries that use protected products (support or criticize; benefits, causes loss to, lowers prices for, or unfairly rewards; creates, eliminates, raises wages for, or relocates)

criticize; causes losses to; eliminates

Autarky is a situation in which a country

does not trade with other countries

In general, the cost tariffs and quotas impose on consumers are

large in total but relatively small per person

Members of Congress promising to support each other's legislation is known as

logrolling

All else equal, if the Trump administration declines to enact the protectionist measures, such as a tariff, against foreign solar panels, the price of solar panels in the US will be _____ than it would be with a tariff, and the quantity of solar panels demanded in the US will be ______ than it would be with a tariff. (higher or lower)

lower; higher

Economists believe the most persuasive argument for protectionism is to

protect infant industries

The Smoot-Hawley Tariff-

raised average tariff rates by over 50% in the US

Dumping refers to

selling a product for a price below its cost of production

In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to limit their exports to a country. What are these types of agreements called?

voluntary export restraints

a voluntary export restraint is an agreement negotiated by two countries that places _______ that can be imported by one country from another country

a numerical limit on the quantity of a good

A quota is

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

What is an example of a trade barrier?

a requirement that the US government buy military uniforms only from US manufacturers

Which of the following is the best example of a tariff? A) a limit imposed on the number of SUVs the US can import from Japan B) a subsidy granted by the US government to domestic SUV manufacturers so they can compete more effectively with foreign SUV manufacturers C) a tax placed on all SUVs sold in the domestic market D) a $5,000 per-car fee imposed on all SUVs imported into the US

D

T/F: Globalization is the process of countries imposing trade restrictions on other countries.

False (increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies.)

T/F: Dumping refers to countries exporting unwanted and inferior products to other countries.

False (selling a product for a price below its cost of production)

What is the national security argument for protectionism?

Some goods should be insulated from foreign competition to ensure an adequate supply of these goods in the event of an international conflict

In 1995, the General Agreement on Tariffs and Trade (GATT), which was established in 1948, was replaced by the World Trade Organization (WTO). Why did members of the GATT push for the establishment of the WTO?

The GATT agreement only covered trade in goods. The WTO was created to cover trade in goods, services, and intellectual property

In the 1980s, Japan agreed to limit the quantity of automobiles it would export to the United States. Why did the Japanese government agree to this trade restriction?

The Japanese government feared that the alternative would be a tariff or a quota on imports of Japanese automobiles imposed by the US government.

T/F- The following statement is used to justify protectionism. A country should not rely on other countries for goods that are critical to its national defense.

True

T/F- The following statement is used to justify protectionism. Free trade reduces employment by driving domestic firms out of business.

True

T/F: Overall, about 20% of US manufacturing jobs depend directly or indirectly on exports.

True

T/F: Since 1970, both exports and imports have steadily increased as a fraction of US gross domestic product.

True

T/F: The General Agreement on Tariffs and Trade (GATT) is an agreement to reduce barriers to trade in goods, services, and intellectual property.

True

T/F: The US economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas

True

Which of the following is the best example of a voluntary export restraint? A) a limit set by the Japanese government on the number of SUVS that the US can import from Japan B) a subsidy granted by the US government to domestic SUV manufacturers so they can compete more effectively with foreign SUV manufacturers C) a tax placed on all SUVs sold in the domestic market D) a $5,000 per-car fee imposed on all SUVs imported into the US

A

In the US during the Great Depression, tariffs were ______ than they were following WWII, and _____ than they are today.

higher; higher

Effects of eliminating trade barriers-

increases economic efficiency; lowers domestic prices

Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets. This statement describes the _____ argument for protectionism.

infant industry

Free trade ________ living standards by ________ economic efficiency. (raises or lowers; increasing or decreasing)

raises; increasing

It is difficult to determine if foreign companies are selling their products for prices below their costs of production because

the true costs of production are difficult to calculate

Examples of comparative advantage show how trade between two countries can make each better. Compared to their pre-trade positions, trade makes both countries better off because in each country-

total consumption of goods is greater

Protectionism is the use of ______ to spread domestic firms from foreign competition

trade barriers

A product produced in the United States and purchased in France would be (in terms of exports and imports)

A US export and a French import

What is a characteristic that both quotas and tariffs share?

They are both designed to reduce foreign competition faced by domestic firms

What are the three top exporting countries in the world?

China, United States, Germany

Trade restrictions are often motivated by a desire to save domestic jobs threatened by competition from imports. What is one of the main counter-arguments is made by economists who oppose trade restrictions?

Consumers pay a high cost for jobs saved through trade restrictions

T/F- The following statement is used to justify protectionism. Free trade leads to higher prices for imported goods.

False

T/F: A tariff is the same as a quota

False

T/F: Economic efficiency would be increased if the US eliminated all of its trade restrictions, but only if all other countries eliminated their trade restrictions too

False

T/F: Eliminating its tariffs and quotas unilaterally would not benefit the US because this would remove the leverage it would have to persuade other countries to eliminate their trade restrictions

False

T/F: The US economy is highly dependent on international trade for growth in its gross domestic product.

False

T/F: The US economy would gain from the elimination of its tariffs but not from the elimination of its quotas

False

In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. What are reasons for this?

Not all goods and services are traded internationally; some countries have more resources than other countries; tastes for many traded goods are different in many countries because of globalization

The first example of comparative advantage appeared in a book that was published in 1817. This example showed that mutually beneficial trade between two countries (England and Portugal) was possible. The example assumed that two goods (wine and cloth) could be produced by both countries. Which of the following described the conclusion of this example?

Portugal had a comparative advantage in wine and England had a comparative advantage in cloth.

One reason for the success that firms have in getting the government to erect and maintain barriers to foreign competition is members of Congress who engage in logrolling, where members in districts with protected industries

agree to trade votes on issues that concern other members in order to uphold tariffs

Automobiles and many other products are differentiated. As a result

different countries may each have a comparative advantage in producing different types of automobiles