Chapter 9 Econ

What arguments are made to support trade restrictions?

Destroy domestic jobs, reduce national security, harm infant industries, force domestic producers to compete with foreign countries that have unfair advantage, and allow other countries to have trade restrictions when we don't

Tariffs tend to benefit who?

Domestic producers and government (tax revenue)

In January of 2002, how many countries joined the WTO?

144

When did NAFTA go into affect?

1933

World trade Organization was established in what year?

1995

The world trade organization was responsible for what?

97% of all international trade

Describe in words the source of the gains from trade (the additional total surplus) received by an exporting country:

Additional value placed on exported units by buyers in the rest of the world

The WTO did what?

Administered trade agreements, provided a forum for negotiations, and handled disputes

NAFTA made it easier to import and export items in these 5 areas:

Agriculture, automobile parts, banking, clothing and textiles, and trucking

For every tariff, there is what?

An import quota that could have generated a similar result

Present the free trade response to the argument that imports should be restricted on good that a country needs for national security:

Any good can be argued that it is necessary for national security (i.e "watch makers" they can think that the industry for watches needs national security)

When free trade is allowed, why do 93% of economists favor it?

Because the gains of winners exceeds the loss of loser and the net change in total surplus is positive

When domestic price is lower than world price, the country has what in that good?

Comparative advantage

If residents of a county are allowed to import a good, who gains and who loses when compared to the before-trade equilibrium, the produces or the consumers? Why?

Consumers gain and produced lose because domestic price falls to world price

What determines whether a country imports or exports a good?

Depends on the comparative advantage (and also world price and domestic price)

Who gains and loses from free trade among countries?

Depends on who imports of exports

Any time a country participated in trade what equals what?

Domestic price equals world price

Also another benefit of free trade is called what?

Economies of scale

Countries should do what to products they have a comparative advantage in?

Export

If the world price for a good is above a country's before-trade domestic price, will this country import or export a good? Why?

Export because the opportunity cost of production is lower than in other countries

What are the short-comings of using an import quota to restrict trade versus using a tariff?

Import quotas can cause more deadweight loss because government is ripping themselves and people off because they are redistributing money they don't have when they discount the import licenses

A tariff does what to producer surplus, consumer surplus, revenue, and total surplus?

Increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus

What is NAFTA?

It is a multilateral trade approach that lowered barriers among the United States, Mexico, and Canada

Import license are sold at discounted rates because of what?

Lobbying

Price takers

Market participants that cannot influence the price so they view the price as given

What does NAFTA stand for?

North American Free Trade Agreement

One rebuttal for reducing national security is?

Once a country has protection over another industry, it usually lasts a while

Outsourcing means what?

People take jobs from here, find another factory in another country, and make product over there for cheaper

Describe in words the sources of the deadweight loss from a tariff:

Price rises because tariff causes over production and the rise in price causes underconsumption

If tariffs and quotas reduce total surplus and, therefore, total economic well-being, why do government employ them?

Producers are better able to organize than are consumers and they are able to lobby the government on their behalf

The best thing an import quota can do is what?

Raise the same amount of tax revenue as the import quota itself

unilateral approach

Remove trade restrictions on its own

When they put a discount on import licenses, what happens?

The fees go to the license holders and not the government so the government is short of money

Trade increases economic well being of a nation because why?

The gains of the winners exceeds the losses of the losers

If free trade is allowed and a country exports a good, then the gains of the domestic producers exceeds what?

The losses of the domestic consumers and total surplus rises

If a foreign country subsidizes its export industries, its tax payers are paying to improve what?

The welfare of the consumers in the importing countries

Taxes cause deadweight loss because

They place a wedge between what buyers pay and what sellers receive

What was NAFTA's goal?

To reduce tariffs and trade restrictions immediately or gradually within a 10-15 year time period among members

List other benefits of the free trade beyond those suggested by our standard analysis:

Variety, take advantage of economies, more competitive, more competition,

Economies of scale means what?

When a firms average total surplus costs fall as output rises

Economies of scale is achieved when what happens?

When firms grow in size, they add more machinery and workers specialize

When can two parties not benefit from trade?

When there's no comparative advantage

import quota

a limit on the quantity of a good that can be produced abroad and sold domestically

Tariff

a tax on goods produced abroad and sold domestically

if free trade is allowed, a country will export a good if the world price is

above the before-trade domestic price of the good

multilateral approach

an approach to achieving free trade in which a nation reduces its trade restrictions while other countries do the same

suppose the world price is below the before-trade domestic price for a good. if a country allows free trade in this good,

consumers will gain and producers will lose

when a country allows trade and exports a good,

domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.

World price

the price of a good that prevails in the world market for that good