Micro Chapter 26

Arguing for a tariff to __________ becomes fashionable when the economy encounters a recession (such as the severe recession of 2007-2008 in the United States). In an economy that engages in international trade, exports involve spending on domestic output and imports reflect spending to obtain part of another nation's output. So, in this argument, reducing imports will divert spending on another nation's output to spending on Page 535domestic output.

"save U.S. jobs"

_____ means total world output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost.

Comparative advantage

_______ is the sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home.

Dumping

The ________ has abolished tariffs and import quotas on nearly all products traded among the participating nations and established a common system of tariffs applicable to all goods received from nations outside the ___. It has also liberalized the movement of capital and labor within the ___ and has created common policies in other economic matters of joint concern, such as agriculture, transportation, and business practices.

EU

________ cite two plausible reasons for this behavior. First, with regard to below-cost dumping, firms in country A may dump goods at below cost into country B in an attempt to drive their competitors in country B out of business. If the firms in country A succeed in driving their competitors in country B out of business, they will enjoy monopoly power and monopoly prices and profits on the goods they subsequently sell in country B. Their hope is that the longer-term monopoly profits will more than offset the losses from below-cost sales that must take place while they are attempting to drive their competitors in country B out of business.

Economists

Countries have also sought to reduce tariffs by creating regional free-trade zones. The most dramatic example is the______________ Initiated in 1958 as the Common Market, in 2003 the EU comprised 15 European nations—Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. In 2004, the EU expanded by 10 additional European countries—Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. The 2007 addition of Bulgaria and Romania plus the 2013 addition of Croatia expanded the EU to 28 nations.

European Union (EU)

In 1947, 23 nations, including the United States, signed the ____________ GATT was based on three principles: (1) equal, nondiscriminatory trade treatment for all member nations; (2) the reduction of tariffs by multilateral negotiation; and (3) the elimination of import quotas. Basically, GATT provided a forum for the multilateral negotiation of reduced trade barriers.

General Agreement on Tariffs and Trade (GATT).

__________ occurs in this two-nation model where one nation's import demand curve intersects another nation's export supply curve.

International equilibrium

In 1993 Canada, Mexico, and the United States created a major free-trade zone. The _____________ established a free-trade area that has about the same combined output as the EU but encompasses a much larger geographic area. NAFTA has eliminated tariffs and other trade barriers among Canada, Mexico, and the United States for most goods and services.

North American Free Trade Agreement (NAFTA)

_________ raises the price of a product in three ways: (1) The price of the imported product goes up; (2) the higher price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods; and (3) the prices of domestically produced goods rise because import competition has declined.

Protection

The ___________ of 1930 is a classic example. Although that act was meant to reduce imports and stimulate U.S. production, the high tariffs it authorized prompted adversely affected nations to retaliate with tariffs equally high. International trade fell, lowering the output and income of all nations. Economic historians generally agree that the Smoot-Hawley Tariff Act was a contributing cause of the Great Depression.

Smoot-Hawley Tariff Act

_________________ increase the productivity of U.S. resources and allow the United States to obtain greater total output than otherwise would be possible. These benefits are the result of exploiting both absolute advantages and comparative advantages. A country is said to have an absolute advantage over other producers of a product if it is the most efficient producer of that product (by which we mean that it can produce more output of that product from any given amount of resource inputs than can any other producer). A country is said to have a comparative advantage over other producers of a product if it can produce the product at a lower opportunity cost (by which we mean that it must forgo less output of alternative products when allocating productive resources to producing the product in question).

Specialization and international trade

are excise taxes or "duties" on the dollar values or physical quantities of imported goods. They may be imposed to obtain revenue or to protect domestic firms.

Tariffs

The simple answer to the question _________ is "They trade because it is beneficial." The benefits that emerge relate to three underlying facts: The distribution of natural, human, and capital resources among nations is uneven; nations differ in their endowments of economic resources. Efficient production of various goods requires different technologies, and not all nations have the same level of technological expertise. Products are differentiated as to quality and other attributes, and some people may prefer certain goods imported from abroad rather than similar goods produced domestically.

Why do nations trade?

The Uruguay Round agreement established the _____________ as GATT's successor. Some 161 nations belonged to the WTO in 2015. The WTO oversees trade agreements reached by the member nations, and rules on trade disputes among them. It also provides forums for further rounds of trade negotiations.

World Trade Organization (WTO)

Industrially advanced economies such as the United States and Germany that have relatively large amounts of capital can inexpensively produce goods whose production requires much capital, including such ___________ as airplanes, automobiles, agricultural equipment, machinery, and chemicals.

capital-intensive goods

One side benefit of free trade is that it promotes _______ and deters monopoly. The increased competition from foreign firms forces domestic firms to find and use the lowest-cost production techniques.

competition

Tariffs and quotas impose costs on domestic consumers but provide gains to domestic producers and, in the case of tariffs, revenue to the federal government. The consumer costs of trade restrictions are calculated by determining the effect the restrictions have on ?

consumer prices

Domestic supply and demand determine the equilibrium _________ —the price that would prevail in a closed economy that does not engage in international trade. The domestic price equates quantity supplied and quantity demanded domestically.

domestic price

In the absence of trade, the ___________ in a closed economy may or may not equal the world equilibrium prices. When economies are opened for international trade, differences between world and domestic prices encourage exports or imports.

domestic prices

the U.S. import demand curve from these data. This ________- curve shows the amounts of aluminum that will be imported at world prices below the $1 U.S. domestic price. The relationship between world prices and imported amounts is inverse or negative.

downsloping

The amount of a good or a service a nation will export or import depends on differences between the equilibrium world price and the equilibrium domestic price. The interaction of world supply and demand determines the ________—the price that equates the quantities supplied and demanded globally.

equilibrium world price

One of the most significant accomplishments of the EU was the establishment of the so-called _________ or euro area in the early 2000s. As of 2015, 19 members of the EU (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia, and Spain) use the euro as a common currency.

eurozone

An ___________ consists of a government payment to a domestic producer of export goods and is designed to aid that producer. By reducing production costs, the subsidies enable the domestic firm to charge a lower price and thus to sell more exports in world markets. Two examples: Some European governments have heavily subsidized Airbus Industries, a European firm that produces commercial aircraft. The subsidies help Airbus compete against the American firm Boeing. The United States and other nations have subsidized domestic farmers to boost the domestic food supply. Such subsidies have artificially lowered export prices on agricultural produce.

export subsidy

The case for free trade reduces to one compelling argument: Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources and a higher level of material well-being than it can without ?

free trade

If the world price is below the domestic $1 price, the United States will _______ aluminum. Consider a $0.75 world price. The supply curve reveals that at that price U.S. firms produce only 75 million pounds of aluminum. But the demand curve shows that the United States wants to buy 125 million pounds at that price. The result is a domestic shortage of 50 million pounds. To satisfy that shortage, the United States will import 50 million pounds of aluminum.

import

An________ is a limit on the quantities or total values of specific items that are imported in some period. Once a quota is filled, further imports of that product are choked off. Import quotas are more effective than tariffs in impeding international trade. With a tariff, a product can go on being imported in large quantities. But with an import quota, all imports are prohibited once the quota is filled.

import quota

______ is a legal limit placed on the amount of some product that can be imported in a given year. Quotas have the same economic impact as a tariff, with one big difference: While tariffs generate revenue for the domestic government, a quota transfers that revenue to foreign producers.

import quota

the downsloping U.S. import demand curve. It reveals that as world prices fall relative to U.S. domestic prices, U.S. imports ?

increase

The gains that U.S. trade barriers create for protected industries and their workers come at the expense of much greater losses for the entire economy. The result is economic _______ reduced consumption, and lower standards of living.

inefficiency

The ______________ contends that protective tariffs are needed to allow new domestic industries to establish themselves. Temporarily shielding young domestic firms from the severe competition of more mature and more efficient foreign firms will give infant industries a chance to develop and become efficient producers.

infant industry argument

China can produce efficiently (at low cost of other goods forgone) a variety of___________-, such as textiles, electronics, apparel, toys, and sporting goods.

labor-intensive goods

Australia has vast amounts of land and can inexpensively produce such ___________ as beef, wool, and meat. Mexico has the soil, tropical climate, rainfall, and ready supply of unskilled labor that allow for the efficient, low-cost production of vegetables.

land-intensive goods

The primary effect of increasing opportunity costs is _______ specialization. For this reason, we often find domestically produced products competing directly against identical or similar imported products within a particular economy.

less-than-complete

A __________ (NTB) includes onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures.

nontariff barrier

Not only are some U.S. jobs lost because of international trade, but some are lost because of globalization of resource markets. In recent years, U.S. firms have found the outsourcing of work abroad to be increasingly profitable. Economists call this business activity __________ —shifting work previously done by American workers to workers located in other nations.

offshoring

This idea is summarized in the ______________, which says that total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good. In our two-nation illustration, the United States has the lower domestic opportunity cost for beef; the United States must forgo only 1 ton of vegetables to produce 1 ton of beef, whereas Mexico must forgo 2 tons of vegetables for 1 ton of beef. The United States has a comparative (cost) advantage in beef and should specialize in beef production. The "world" (that is, the United States and Mexico) in our example would clearly not be economizing in the use of its resources if a high-cost producer (Mexico) produced a specific product (beef) when a low-cost producer (the United States) could have produced it.

principle of comparative advantage

A ________ is implemented to shield domestic producers from foreign competition. These tariffs impede free trade by increasing the prices of imported goods and therefore shifting sales toward domestic producers. Although protective tariffs are usually not high enough to stop the importation of foreign goods, they put foreign producers at a competitive disadvantage. A tariff on imported auto tires, for example, would make domestically produced tires more attractive to consumers.

protective tariff

The distribution of resources, technology, and product distinctiveness among nations is__________ in short time periods but certainly can change over time. When that distribution changes, the relative efficiency and success that nations have in producing and selling goods also change.

relatively stable

A ________ is usually applied to a product that is not being produced domestically, for example, tin, coffee, or bananas in the case of the United States. Rates on revenue tariffs tend to be modest and are designed to provide the federal government with revenue

revenue tariff

As national economies evolve, the size and quality of their labor forces may change, the volume and composition of their capital stocks may shift, new technologies may develop, and even the quality of land and the quantity of natural resources may be altered. As such changes take place, the relative efficiency with which a nation can produce specific goods will also change. As economists would say, comparative advantage can and does sometimes change. t or f

t

Aware of the detrimental effects of trade wars and the general weaknesses of arguments for trade protections, nations have worked to lower tariffs worldwide. Their pursuit of freer trade has been aided by recently emerged special-interest groups that have offset the more-established special-interest groups that have traditionally supported tariffs and quotas. Specifically, lower tariffs are now supported by exporters of goods and services, importers of foreign components used in "domestic" products, and domestic sellers of imported products. t or f

t

Economizing requires that any particular good be produced by the nation having the lowest domestic opportunity cost or the nation having the comparative advantage for that good. t or f

t

In our example, for instance, the United States has an absolute advantage over Mexico in producing both vegetables and beef. But it is still the case that the United States can gain from specialization and trade with Mexico. That is because what actually matters is whether the opportunity costs of producing the two products (beef and vegetables) differ in the two countries. If they do, then each nation will enjoy a comparative advantage in one of the products, meaning that it can produce that product at a lower opportunity cost than the other country. As a result, total output can increase if each country specializes in the production of the good in which it has the lower opportunity cost. t or f

t

Recent advances in computer and communications technology have enabled U.S. firms to offshore service jobs such as data entry, book composition, software coding, call-center operations, medical transcription, and claims processing to countries such as India. Where offshoring occurs, some of the value added in the production process accrues to foreign countries rather than the United States. So part of the income generated from the production of U.S. goods is paid to foreigners, not to American workers. t or f

t

The United States leads the world in the combined volume of exports and imports, as measured in dollars. t or f

t

We know that a nation can expand its production possibilities boundary by (1) expanding the quantity and improving the quality of its resources or (2) realizing technological progress. We have now established that international trade can enable a nation to circumvent the output constraint illustrated by its production possibilities curve. An economy can grow by expanding international trade. The outcome of international specialization and trade is equivalent to having more and better resources or discovering and implementing improved production techniques. t or f

t

The____________________ smartphones from Pw to Pt, has four effects: Decline in consumption :Consumption of smartphones in the United States declines from d to c as the higher price moves buyers up and to the left along their demand curve. The tariff prompts consumers to buy fewer smartphones and reallocate a portion of their expenditures to less desired substitute products. U.S. consumers are clearly injured by the tariff, since they pay Pt − Pw more for each of the c units they buy at price Pt. Increased domestic production :U.S. producers—who are not subject to the tariff—receive the higher price Pt per unit. Because this new price is higher than the pretariff world price Pw, the domestic smartphone industry moves up and to the right along its supply curve Sd, increasing domestic output from a to b. Domestic producers thus enjoy both a higher price and expanded sales; this explains why domestic producers lobby for protective tariffs. But from a social point of view, the increase in domestic production from a to b means that the tariff permits domestic producers of smartphones to bid resources away from other, more efficient, U.S. industries. Decline in imports : Chinese producers are hurt. Although the sales price of each smartphone is higher by Pt − Pw, that amount accrues to the U.S. government, not to Chinese producers. The after-tariff world price, or the per-unit revenue to Chinese producers, remains at Pw, but the volume of U.S. imports (Chinese exports) falls from ad to bc. Tariff revenue: The yellow rectangle represents the amount of revenue the tariff yields. Total revenue from the tariff is determined by multiplying the tariff, Pt − Pw per unit, by the number of smartphones imported, bc. This tariff revenue is a transfer of income from consumers to government and does not represent any net change in the nation's economic well-being. The result is that government gains this portion of what consumers lose by paying more for smartphones.

tariff, which raises the price of imported

The rate at which countries can trade units of one product for units of another product is referred to as the ?

terms of trade

A ________ occurs when imports exceed exports. The United States has a trade deficit in goods

trade deficit

A __________ occurs when exports exceed imports.

trade surplus

A ________ shows the amounts of two products that a nation can obtain by specializing in the production of one product and then trading for the other.

trading possibilities line

Just as a production possibilities curve shows the amounts of these products that a full-employment economy can obtain by shifting resources from one to the other, a ____________ shows the amounts of the two products that a nation can obtain by specializing in one product and trading for the other.

trading possibilities line

To the extent that one country is able to expand its economy through an excess of exports over imports, the resulting excess of imports over exports worsens another economy's __________ problem. It is no wonder that tariffs and import quotas meant to achieve domestic full employment are called "beggar my neighbor" policies: They achieve short-run domestic goals by making trading partners poorer.

unemployment

The U.S. export supply curve, found by connecting points a, b, and c, shows the amount of aluminum U.S. producers will export at each world price above $1. This curve slopes _________ indicating a direct or positive relationship between the world price and the amount of U.S. exports. As world prices increase relative to domestic prices, U.S. exports rise.

upward

A _________ (VER) is a trade barrier by which foreign firms "voluntarily" limit the amount of their exports to a particular country. VERs have the same effect as import quotas and are agreed to by exporters to avoid more stringent tariffs or quotas.

voluntary export restriction