CH. 40 International Trade

When the world price for a product is below the Canadian price, what will Canada experience?

-a domestic shortage-more imports

What type of graphic shows the amounts of two products a nation can obtain by specializing in one product and trading for the other?

A trading possibilities line

What is the key determinant in whether a country can gain from specialization in international trade?

Comparative advantage

True or false: The diversification for stability argument for protection is a valid one for the U.S.

False Reason: The U.S. is not highly dependent on the exports of one type of good and therefore this argument is not applicable for the U.S.

a. A quota that results in the same level of imports as a tariff is more detrimental to an economy because

the government loses tax revenue.

Dumping occurs in which of the following situations?

-a firm charge a lower price to a foreign market than what is would charge in its home market-a firm charges a price to a foreign market that is lower than its production costs.

Workers who are displaced due to foreign imports are eligible for what kinds of benefits under the Trade Adjustment Assistance Act?

-cash assistance for up to 78 weeks-reimbursement for relocation expenses-refundable tax credits for health insurance

What are the three basic principles of the General Agreement of Tariffs and Trade (GATT)?

-eliminate import quotas-equal, nondiscriminatory treatment of members-reduce tariffs, using multilateral negotiations

How does free trade tend to benefit society?

-it spurs economic growth by encouraging business to innovate-It encourages businesses to use low-cost production techniques-It reduces animosity among nations that trade with each other

According to various studies, how do trade protections, such as tariffs and quotas, tend to affect domestic society?

-some trade protections increase government revenues-the cost to consumers and society exceeds the gains to producers and the government

What are the four direct effects of a tariff?

-tariff revenue-a decline in consumption-Increased domestic production-a decline in imports

What were some of the effects of the trade policy changes under GATT?

-tariffs. were reduced by 33% on average-Intellectual rights were given more protection-tariffs replaced quotas on apparel and textiles

According to the diversification-for-stability argument, why should some nations impose protective tariffs and import quotas?

-their economies are highly specialized and depend on international trade for their income-their economies are usually disrupted by fluctuations in world supply and demand-diversification of their industries would increase domestic stability

What are the purposes of the World Trade Organization?

-to rule on trade disputes among member nations-to oversee trade agreements among member nations-to provide forums for trade negotiations

Since the passage of NAFTA in 1993, what economic events have happened among the member nations?

-trade increased among all three nations-the standard of living generally improved in all three nations

a. Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, Big Country needs to give up

3/4 of a unit of Y for 1 unit of X and should produce good X. Small Nation needs to give up 1 unit of X for 1 unit of Y and should produce good Y.

What is the European Union (EU)?

A regional free-trade zone

Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula ≡ 2 cans tuna fish Tunata: 1 can baby formula ≡ 4 cans tuna fish a. In what product should each nation specialize?

Canswicki should produce baby formula , and Tunata should produce tuna fish.

What argument says that domestic firms and workers must be shielded from competition from countries where wages are low?

Cheap foreign labor argument

Which country has an abundant labor force suited to produce labor-intensive goods?

China

b. Consider the following statement: "The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China." Which ideas of Adam Smith and David Ricardo are represented?

China does not need Smith's absolute advantage to specialize in toys, rather it needs Ricardo's comparative advantage.

a. Which of the following represents land-, labor-, and capital-intensive commodities, respectively?

Corn, clothing, and aircraft

In Country A, the production of 1 bicycle requires using resources that could otherwise be used to produce 11 lamps. In Country B, the production of 1 bicycle requires using resources that could otherwise be used to produce 15 lamps. Which country has a comparative advantage in making bicycles?

Country A

In Country A, a worker can make 5 bicycles per hour. In Country B, a worker can make 7 bicycles per hour. Which country has an absolute advantage in making bicycles?

Country B

b. What are the price-quantity effects of this tariff on the following? (Assume the country imposing the tariff is a small part of the world market.)

Domestic consumers: Price will increase and quantity will decrease Domestic producers: Price will increase and quantity will increase Foreign exporters: Price will not change and quantity will decrease

a. What impact do foreign imports have on domestic price and quantity?

Imports reduce the domestic price, increasing consumption and decreasing domestic production.

Which argument against free trade becomes particularly popular when the economy goes into a recession?

Increased domestic employment

We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don't we see full specialization—for instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among the following choices.

Increasing opportunity costs

Why do economists generally support the Trade Adjustment Assistance Act?

It helps create political support for international free trade.

In addition to the benefits of human and geographical specialization, what are some side benefits to free trade?

It promotes competition. It encourages innovation.

What is the main effect of increasing opportunity costs?

Less-than-complete specialization

In recent years, what has been the general worldwide trend regarding tariffs?

Lower tariffs

What business activity shifts work previously done by American workers to workers located in other countries?

Offshoring

If the domestic price in Canada is $0.75 and the domestic price in the United States is $1.00, what will Canadian companies do?

Produce more than Canadian customers will buy, and sell the surplus to the United States

In a model compiled to show the economic relationship between two nations, what can be used to determine whether each country has an absolute advantage or comparative advantage?

Production possibilities curves

How do trade barriers tend to affect the price, sales, and availability of a product?

Quotas increase the price of imported products.

Why is arguing for a tariff to save U.S. jobs popular during a recession?

Reduced spending on imports can be diverted to domestic spending and increase domestic employment.

How do import quotas affect sales of a product?

Sales of domestic goods increase.-The price of imports increases.-The price of domestically produced goods rises.

What was the European Union called when it was initiated in 1958?

The Common Market

What tends to happen to a nation that increases its participation in an open economy with an international sector?

The country produces more of its most profitable goods.

What is the equilibrium world price?

The price that equates the quantities supplied and demanded globally through international trade

What is the exchange ratio at which two countries trade their products?

The terms of trade

How do nations benefit from international trade?

They can acquire more goods and services. They can specialize their production.

How do nations benefit from international trade?

They can specialize their production. They can acquire more goods and services. They can enhance their resource productivity.

According to the infant industry argument, why is import protection needed?

Trade barriers allow protected industries the time to become efficient and competitive.

Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. What will happen if the world price of corn exceeds $1.00?

U.S. firms will produce more than 100 tons of corn and export the excess, selling it at the world price.

a. In 2018, manufacturing workers in the United States earned average compensation of $21.86 per hour. That same year, manufacturing workers in Mexico earned average compensation of $3.20 per hour. U.S. manufacturers can possibly compete if

U.S. workers are more productive.

When does a trade deficit occur?

When imports exceed exports

What institution is in charge of overseeing trade agreements and ruling on disputes relating to them?

World Trade Organization

c. The eurozone is

a common currency zone in which members have adopted the euro as their common currency.

a. The World Trade Organization (WTO) is

a group that oversees trade agreements reached by member nations and arbitrates trade disputes among them.

d. NAFTA is

a trade bloc made up of the United States, Canada, and Mexico whose purpose is to reduce tariffs and other trade barriers among the three countries.

b. The European Union (EU) is

a trading bloc of 28 European countries who have agreed to abolish tariffs and import quotas on most products and have liberalized the movement of labor and capital.

b. Distinctions between land-, labor-, and capital-intensive commodities are important because

an abundant supply of one type of resource gives a country a comparative cost advantage in products using that resource.

b. Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. The limits of the terms of trade between these two countries will be

between 1 unit of good X for a unit of good Y and 4/3 units of good X for a unit of good Y.

a. Trade adjustment assistance in the United States takes the form of

cash assistance for up to 78 weeks and relocation allowances.

Tariffs and/or quotas tend to impose ______ on domestic consumers, and ______ to the producers of the protected goods in the importing economy.

costs; gains

b. Trade adjustment assistance promotes political support for free-trade agreements by

creating an incentive to reduce trade barriers and export subsidies.

The four direct effects of tariffs are: a decline in consumption, increased domestic production, tariff revenue, and a(n) ______.

decline in imports

A trade ______ occurs when imports exceed exports.

deficit

If a firm charges a foreign market a lower price than it charges the domestic market, that firm is said to be ______ its product.

dumping

Because of trade wars and other factors, more nations have been moving toward ______.

free trade

The North American Free Trade Agreement (NAFTA) created a ______ zone among Mexico, the United States, and Canada in 1993.

free-trade

In a two-nation model, international equilibrium is determined by the ______ of one country and the ______ of the other country.

import demand, export supply

b. Over the past few decades, offshoring has

increased to countries with an educated labor force such as India.

The primary effect of ______ opportunity costs is less-than-complete specialization.

increasing

The ______ argument calls for the trade protection of newly developing industries.

infant industry

The intersection of one nation's import demand curve and another nation's export supply curve represents ______.

international equilibrium

c. The equilibrium world price of a tradable good is determined by the

intersection of the world supply and demand schedules.

Because China has abundant low-wage workers, it can efficiently produce ______-intensive goods.

labor

The cheap foreign ______ argument says that trade protection is required to ensure that cheap imports do not flood U.S. markets, dragging down prices of goods and U.S. wages.

labor

Economizing requires that any particular good be produced by the nation having the ______ domestic opportunity cost, or the ______ advantage for that good.

lowest; comparative Reason: Absolute advantage refers to the ability of one nation or country to produce more output than its competitors.

Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. If the world price of corn exceeds $1.00, then U.S. producers will produce ______ than 100 tons of corn, creating a ______ that will be ______.

more; surplus; exported

b. The net outcome of either tariffs or quotas for the world economy is

negative, since the costs to consumers substantially exceed the gains to producers and government.

b. All manufacturing is not done in Mexico and other low-wage countries because

of trade barriers.

Shifting work that was previously done by American workers to workers abroad is called what?

offshoring

a. Protective tariffs might reduce both the imports and the exports of the nation that levies tariffs because

other countries may follow with their own import tariffs.

c. Distinctive products

provide an export niche for a country.

b. Import competition can lead to

quality improvements and cost reductions by American firms.

a. Offshoring of white-collar service jobs

refers to jobs relating to data entry, book composition, and software coding.

Graded assignment: In percentage terms, our exports of goods and services are

small when compared to other industrialized countries.

A trading possibilities line reveals the amounts of two products a nation can obtain by ______.

specializing in one product and trading for the other

A tax on an imported good is known as a(n) ______.

tariff

The exchange ratio at which two countries trade their products is called the ______ of trade.

terms

a. Consider the following statement: "The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China." We import these toys from China because

the United States has an absolute advantage in producing toys, but China has a comparative advantage in producing toys.

a. An export supply curve is

the difference between quantity supplied and quantity demanded in the domestic market for a price above the domestic equilibrium price.

b. An import demand curve is

the difference between quantity supplied and quantity demanded in the domestic market for a price below the domestic equilibrium price.

The interaction of world supply and demand determines the equilibrium ______.

world price