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