20: Ch 9 - Application International Trade
How is Increased Productivity a benefit of International Trade?
- Productive firms expand markets. Less productive firms forced out by competition - As resources move from least à most productive firms, overall productivity rises
How does ↓ Costs through Economies of Scale benefit firms in a small country?
- Some goods can be produced at low cost only if they're produced in large quantities - Firm in small country can't take full advantage of economies of scale if it can only sell in small domestic market. Free trade gives firms access to larger world markets, allowing them to realize economies of scale more fully
What are the arguments for restricting trade? (5)
- The Jobs Argument - National-Security - Infant-Industry - Unfair-Competition - Protection-as-a-Bargaining-Chip
If trade should make a country's economy better off, why is this not always the case?
- w/o winners compensating losers, opening an economy to international trade expands the size of the economic pie but can leave some people w/ a smaller slice -Sometimes losers from free trade are better organized than winners & may turn their cohesiveness into political clout & lobby for trade restrictions like tariffs or import quotas
What are the 2 effects of deadweight loss from tariffs?
1. ↑ domestic production 2. ↓ domestic consumption
What does the National-Security Argument claim?
An industry threatened w/ foreign competition is vital to national security - Threatened w/ steel trade: steel is used to make guns & tanks. Free trade allows country to become dependent on foreign steel suppliers. If war broke out & interrupted foreign supply, might not be able to quickly produce enough steel & weapons to defend self
Why does trade raise the economic well-being of a nation, even though there is a loser?
Because gains of winners > losses of losers
How is an importing country a price taker?
By buying their good at the world price
The effects of free trade can be determined how?
By comparing the domestic price before trade w/ the world price
How is an exporting country a price taker?
By selling their good at the world price
Trade among nations is ultimately based on what?
Comparative Advantage
How is Increased Competition a benefit of International Trade?
Doesn't allow 1 company to rule market, lowers costs
When a country allows trade & becomes an exporter, who is the loser? Why?
Domestic Consumers Have to buy at higher prices
Who do tariffs & quotas hurt?
Domestic Consumers Overall economy
When a country allows trade & becomes an importer, who is the winner? Why?
Domestic Consumers can buy @ lower price
Who do tariffs & quotas help?
Domestic Producers
When a country allows trade & becomes an importer, who is the loser? Why?
Domestic Producers have to sell @ lower price
When a country allows trade & becomes an exporter, who is the winner? Why?
Domestic Producers Can sell at higher prices
Who loses from tariffs?
Domestic buyers
Who benefits from tariffs?
Domestic sellers Government
When a country has a comparative advantage on a good, do they import or export it?
Export
What does the Unfair-Competition Argument claim?
Free trade is desirable only if all countries play by the same rules
What does Domestic Price tell?
How much a citizen must give up to obtain 1 unit of a good
Why is trade beneficial?
It allows each nation to specialize in what it does best
How does a tariff reduce the gains from trade?
It moves the market closer to the equilibrium that would exist w/o trade
Define Quotas
Limiting of the amount of a good that's allowed into the country
What does the Infant-Industry Argument claim?
Need for new industries to have temporary trade restrictions to help them get started Older industries sometimes argue they need temporary protection to help them adjust to new conditions
What kind of effect do countries with a small economy have on the world market?
Negligible - changes in trade policy won't affect world price of the good they produce
What are the effects of quotas for government?
No revenue, no benefit. They prefer tariffs
What does Domestic Price reflect?
Opportunity Cost
When trade is allowed, what happens to domestic price of an exporting country?
Rises to equal world price
Define Tariff
Tax on goods produced abroad & sold domestically
What does a low domestic price before trade indicate about trade?
The country has a comparative advantage in producing the good & the country will become an exporter?
What is deadweight loss of a tariff?
The fall in total surplus (b/c a tariff is a type of tax)
Define World Price
The price of a good that prevails in the world market for that good
What does a high domestic price before trade indicate about trade?
The rest of the world has a comparative advantage in producing the good & the country will become an importer
Why do governments benefit from tariffs?
They raise revenue, which it can use for public purposes
What does the Protection-as-a-Bargaining-Chip Argument claim?
Threat of a trade restriction can help remove a trade restriction already imposed by a foreign government
What does the Jobs Argument claim?
Trade w/ other countries destroys domestic jobs
What are the effects of quotas for Domestic Consumers?
Unhappy b/c they have to pay higher price
When does a country have a comparative advantage?
When World price > Domestic Price
What is a price taker?
When a country takes the price of a good as given by the forces of supply & demand in the world market
Why does deadweight loss from tariffs cause ↑ domestic production
When tariff ↑ domestic price, it encourages domestic producers to ↑ production. Even though cost of production > cost of products @ the world price, tariffs make it profitable for domestic producers to manufacture them
Why does deadweight loss from tariffs cause ↓ domestic consumption
When tariffs ↑ prices that domestic consumers have to pay, it encourages them to ↓ consumption. Even though domestic consumers value these incremental units at more than the world price, the tariff induces them to cut back their purchases.
When is a tariff on a a certain good irrelevant?
When the country is an exporter of that good
The country Autarka does not allow international trade. In Autarka, you can buy a wool suit for 3 ounces of gold. Meanwhile, in neighboring countries, you can buy the same suit for 2 ounces of gold. This suggests that a. Autarka does not have a comparative advantage in producing suits and would become a suit importer if it opened up trade. b. Autarka has a comparative advantage in producing suits and would become a suit importer if it opened up trade. c. Autarka has a comparative advantage in producing suits and would become a suit exporter if it opened up trade. d. Autarka does not have a comparative advantage in producing suits and would become a suit exporter if it opened up trade.
a. Autarka does not have a comparative advantage in producing suits and would become a suit importer if it opened up trade.
The nation of Openia allows free trade and exports steel. If steel exports were prohibited, the price of steel in Openia would be ________, benefiting steel ________. a. lower, consumers b. lower, producers c. higher, producers d. higher, consumers
a. lower, consumers
If a nation that imports a good imposes a tariff, it will increase a. the domestic quantity supplied. b. the efficiency of the equilibrium. c. the domestic quantity demanded. d. the quantity imported from abroad.
a. the domestic quantity supplied.
When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation? a. Domestic production of coffee rises, and Ectenia becomes a coffee exporter. b. Domestic production of coffee falls, and Ectenia becomes a coffee importer. c. Domestic production of coffee rises, and Ectenia becomes a coffee importer. d. Domestic production of coffee falls, and Ectenia becomes a coffee exporter.
b. Domestic production of coffee falls, and Ectenia becomes a coffee importer.
When a nation opens itself to trade in a good and becomes an importer, a. producer surplus, consumer surplus, and total surplus all increase. b. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous. c. producer surplus decreases, but consumer surplus and total surplus both increase. d. producer surplus and total surplus increase, but consumer surplus decreases.
c. producer surplus decreases, but consumer surplus and total surplus both increase.
Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade? a. starting to allow trade when the world price is less than the domestic price b. the reduction of a tariff in an importing country c. starting to allow trade when the world price is greater than the domestic price d. the increase of a tariff in an importing country
c. starting to allow trade when the world price is greater than the domestic price
What are the 'other' benefits of International Trade (5)
↑ Variety of Goods ↓ Costs through Economies of Scale ↑ Competition ↑ Productivity Enhanced Flow of Ideas
What are the effects of quotas for Domestic Producers?
↑ price of imported goods = domestic producers get more of the market
What does a tariff increasing the price of a good do to Qty demanded & Qty supplied?
↓ Qty Demanded ↑ Qty supplied