The Gains from International Trade

A higher domestic price level will result in

A higher domestic price level will result in higher imports. A higher price level makes domestic goods more expensive relative to foreign goods. As domestic goods become more expensive, exports will fall and imports will rise, thereby making the trade balance worse.

A tax imposed by a government on imported products is called a:

A tax imposed by a government on imported products is called a tariff. Tariffs function to raise the prices on certain imports to protect domestic products and producers. A voluntary export restraint is a negotiated agreement between two countries that limits the quantity of a specific product that may be imported into a country. These agreements are often negotiated to keep the country that is importing a product from imposing a tariff or quota that would be even more restrictive on the imports. A numerical limit on the quantity of a good that can be imported is a quota. Quotas restrict imports on some products in order to drive domestic prices higher and protect certain industries by restricting the overall supply.

Which of the following is not a source of comparative advantage?

Protectionism is not a source of comparative advantage. Sources of comparative advantage include factor endowments, climate, human capital, and political situation

Which of the following is not a factor that can improve the terms of trade?

The presence of deflation in the country is not a factor that can improve the terms of trade. The appreciation of the local currency, depreciation of a trade partner's currency, and an increase in international prices of the country's exports can all improve the terms of trade of a country.

Which of the following is a source of comparative advantage?

The relative abundance of capital and labour is a source of comparative advantage. Other main sources of comparative advantage are climate and natural resources, technology, and external economies. Each of these factors, or some combination, can lead to a comparative advantage as parties take advantage of their relative resources and skill sets. The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources is known as absolute advantage. However, for two countries to benefit from trade does not require an absolute advantage, but instead a comparative advantage. Autarky is a situation in which a country does not trade with other countries.

The terms of trade are:

The terms of trade are price of exports divided by price of imports. They represent the quantity of imported goods that can be obtained per unit of goods exported, on average.

Goods and services produced domestically but sold to other countries are called:

exports

Comparative advantages:

Comparative advantages can be influenced by governments. Comparative advantages are dynamic and can change because of government policies as well as market conditions.

Absolute advantage is the ability of an individual, firm, or country to:

Absolute advantage is the ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources. Some people or firms are just more efficient than others for various reasons, and therefore, have an absolute advantage in some area or skill. The ability to produce a good or service at a lower opportunity cost than others is comparative advantage. Both absolute advantage and comparative advantage are related to production efficiency and not consumption efficiency. While having an absolute advantage and then specializing and engaging in trade can push the PPF outward, it is not the definition of absolute advantage. Additional Learning Comparative advantage can provide us with opportunities to specialize and engage in trade to increase our standard of living. Specializing in what you do best allows you to produce more than your colleagues or other countries and engage in trade to obtain the goods and services that they are better suited to produce.

According to the graph, how many board feet of lumber will be imported if imports are allowed into U.S.?

According to the graph, 500,000 board feet of lumber will be imported if imports are allowed into U.S.. At a price of $2 per board foot, the domestic suppliers will be willing and able to supply 700,000 board feet of lumber. However, the demand for lumber at $2 per board foot is 1,200,000 board feet. Imports will make up the 500,000 board feet shortage.

According to the graph, what is the equilibrium price of lumber in Canada under autarky?

According to the graph, the equilibrium price of lumber in Canada under autarky is $3 per board foot. Autarky is a situation in which a country does not trade with other countries. So, in this case the autarky price is determined by the intersection of supply and demand which occurs at 1,000,000 board feet of lumber priced at $3 per board foot.

According to the graph, how much domestic sugar will be supplied at the $0.12 price under free trade?

According to the graph, there will be zero pounds of domestic sugar supplied at the $0.12 price under free trade. As you can see domestic suppliers are unwilling to supply any output at a price of $0.12 per pound. They will not begin to produce at all until the price reaches $0.26 per pound.

According to the law of one price, a product traded internationally will be sold at:

According to the law of one price, a product traded internationally will be sold at different prices when transportation costs are different. Products would have the same price everywhere, based in the same currency, if transportation was free. Since transportation costs are not zero, differences in prices will reflect differences in transportation.

According to the theory of comparative advantage, specialization and free trade will benefit:

According to the theory of comparative advantage, specialization and free trade will benefit all trading partners who specialize in goods where they have comparative advantage. In order for trading partners to all benefit from trade, they do not need to have an absolute advantage or even a monopoly. Nor do you have to specialize the most, merely specializing in the production of the good or service where you have the lowest opportunity cost (comparative advantage) and then engaging in trade will benefit all parties involved.

Countries gain from specializing in producing goods in which they have a(n) __________ advantage and trading for goods in which other countries have a(n) __________ advantage.

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. If a country has a comparative advantage in the production of a good, then that country has a lower opportunity cost in the production of that good. Countries can benefit by focusing their efforts on goods and services where they have a comparative advantage and then engaging in trade to obtain the goods and services they no longer produce. The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources is known as absolute advantage. However, for two countries to benefit from trade does not require an absolute advantage, but instead a comparative advantage.

If a country has a comparative advantage in the production of a good, then that country:

If a country has a comparative advantage in the production of a good, then that country has a lower opportunity cost in the production of that good. By definition comparative advantage means you can produce a good at a lower opportunity cost than other countries. You may or may not have an absolute advantage in the production of that good. A country, firm, or individual will be better off producing the products where they have a comparative advantage and then engaging in trade to obtain other goods. Additional Learning Assume you have a team project due tomorrow that you have not started yet and you have one team member that is not nearly as skilled as you are at creating a presentation using presentation software. However, your teammate is also not really good at collecting data and organizing thoughts. In this case, you have the absolute advantage in both skills. But the time is short, and you may not be able to finish the presentation if you just do the entire thing and let your teammate be a free rider. The solution is to focus on the skill where you have a comparative advantage.

If a country has an absolute advantage in the production of only one good, then that country:

If a country has an absolute advantage in the production of a good, then that country has a comparative advantage in that same good. Countries can benefit by focusing their efforts on goods and services where they have a comparative advantage and then engaging in trade to obtain the goods and services they no longer produce. An absolute advantage occurs when a country can produce more of a good or service using the same amount of resources. However, for two countries to benefit from trade does not require an absolute advantage, but instead a comparative advantage. Think about it in the following context. Assume a lawyer can also type 80 words a minute and her secretary can only type 60 words a minute. The lawyer has the absolute advantage in both practicing law and typing. However, the opportunity costs are lower for the lawyer to give up typing and practice law so her comparative advantage is law. The lawyer can then allow her secretary to focus on her comparative advantage of typing. Additional Learning Specialization in the area of comparative advantage raises the standard of living of all parties. The lawyer and the secretary are now better off because the firm can bill more hours and both parties will have a larger revenue stream to share.

If a country is importing a product, we know that:

If a country is exporting a product, we know that the country's equilibrium price is higher than the international price. If the country's equilibrium price is lower than the international price, the country would be importing the product. It doesn't matter if the country's equilibrium quantity is higher or lower than the international supply. What matters is the local price when compared to the international price.

In the above graph, which country has a comparative advantage in the production of shirts?

In the above graph, country B has a comparative advantage in the production of shirts. The country with the lowest opportunity costs in shirt production will have the comparative advantage. Country A has to give up the production of 1 computer chip to produce another shirt. However, country B only has to give up 1/3 of a computer chip to produce another shirt (notice that country B can produce 3 shirts or 1 chip). So, in this case the lowest opportunity cost to produce another shirt is 1/3 of chip for country B. Since the country's PPF's differ, one will have a comparative advantage in one good and the other will have a comparative advantage in the other good. This fact makes "neither" and "both" inaccurate responses. Additional Learning Note that Country A has an absolute advantage in the production of both goods. Comparative advantage and trade can increase the standard of living for all parties involved.

Ms. Boulware is both the best lawyer and the best secretary in town. She has:

Ms. Boulware is both the best lawyer and the best secretary in town. She has an absolute advantage in both jobs. While Ms. Boulware can do both jobs better than anyone else, she will still be better off focusing on her legal career, which is her comparative advantage. She can work one hour and likely make $100 or more as a lawyer and hire a secretary that is almost as good as she is for $15 an hour. You can see that she will be better off focusing on her comparative advantage as a lawyer.

Multinational corporations expanding into foreign markets often:

Multinational corporations expanding into foreign markets often provide thousands of jobs for foreign nationals. MNCs typically employ workers from the country where they make the investment. It is much easier to teach business operations than it is to teach language and culture. The payment of bribes is illegal according to Canadian law and the laws of many other nations. It is not an accepted practice in international business.

The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources is known as:

The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources is known as absolute advantage. However, for two countries to benefit from trade does not require an absolute advantage, but instead a comparative advantage. If a country has a comparative advantage in the production of a good, then that country has a lower opportunity cost in the production of that good. Countries can benefit by focusing their efforts on goods and services where they have a comparative advantage and then engaging in trade to obtain the goods and services they no longer produce. Comparative advantage is one justification for international trade. Specialization in the area of comparative advantage raises the standard of living of all parties. Additional Learning In addition to increasing the overall standard of living for a country, international trade also makes goods available that would not otherwise be available without trade.

The global trend towards large multinational firms is partially driven by:

The global trend towards large multinational firms is partially driven by comparative advantage. Firms can gain an advantage in the production of a good or service due to economies of scale and other factors. This in turn enables a firm to provide the good at a lower opportunity cost than competitors which can be a source of comparative advantage for a firm that allows them to profitably enter other markets. Protectionism can prevent firms from entering markets. The zero-sum argument stems from the belief that both parties to a trade do not benefit, but there are instead winners and losers. What one party gains must be lost by the other party.

You and your neighbour pick apples and cherries. If you can pick apples at a lower opportunity cost than your neighbour can, which of the following is true?

You and your neighbour pick apples and cherries. If you can pick apples at a lower opportunity cost than your neighbour can, you have a comparative advantage in picking apples. You should specialize in picking apples and let your neighbour specialize in picking cherries. After that specialization you and your neighbour can engage in trade and both of you will be better off and have more units of both apples and cherries.