ch. 12: Global Markets in Action

Small Economy Assumption

-A small economy is a PRICE TAKER in world markets: Its actions have no effect on world price -When a small economy engages in free trade, world price is the only relevant price (no country can influence the given price)

four sets of tools government uses to restrict international trade:

-tariffs -import quotas -other import restrictions -export subsidies

subsidy

A government payment that supports a business or market

exports

Goods and Services sold to other countries

import quota

a limit on the number of products in certain categories that a nation can import

export subsidy

a payment from a government to a firm as a reward for exporting products

voluntary export restraint

a self-imposed limitation on the number of products shipped to a particular country

tariff

a tax on a good that is imposed by the importing country

assumption with NO TRADE

all production is consumed, no DWL, equilibrium, etc. BUT not realistic

what drives international trade?

comparative advantage and opportunity cost

The basis for trade is _____ advantage, not _________ advantage

comparative; absolute

When tariffs are imposed, the losers include

domestic consumers and foreign producers

consumers' gain ________ producers' loss, so total surplus increases

exceeds

producers' gain _________ consumers' loss, so total surplus increases

exceeds

trade surplus

exports exceed imports (positive trade balance)

trade deficit

exports less than imports (negative trade balance)

imports

goods and services purchased from other countries

specializing in producing goods for which a nation has a comparative advantage allows for ________ _________

greater efficiency

buyers of ________ goods benefit from lower prices and sellers of _________ goods benefit from higher prices

imported; exported

international trade _____ the price of an imported good and _______ the price of an exported good

lowers; raises

gains from globalization

outweigh the losses

national comparative advantage

the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation

absolute advantage

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

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

trade balance

the difference in value of the goods that a country sells abroad compared to those it purchases from other countries

domestic price

the price of a good or service within a country, determined by domestic demand and supply

world price

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