Chapter 5 International Trade
Outsourcing
a company hires another company to perform some task
European Union
a customs union among 27 European nations
Import quota
a legal limit on the quantity of a good that can be imported
What does opening a market to imports lead to?
a net gain in total surplus
Autarky
a situation in which a country doesn't trade with other countries
National security argument
based on the proposition that overseas sources of goods are vulnerable to disruption in times of international conflict; therefore a country should protect domestic suppliers
The sweatshop labor fallacy
belief that trade must be bad for workers in poor exporting countries because those workers are paid very low wages by our standards
The pauper labor fallacy
belief that when a country with high wages imports goods produced by workers who are paid low wages, this much hurt the standard of living of workers in the importing country
Off-shore outsourcing
businesses hire people in another country to perform various tasks i.e. call centers
What are the two key concepts of the Heckscher-Ohlin Model?
factor abundance and factor intensity
Tariff
form of excise tax, one that is levied only on sales of imported goods
Domestic Supply Curve
shows how the quantity of a good supplied by producers inside our own country depends on the price of that good
Customs union
tariffs are levied at the same rate on goods from outside the EU entering the union
What happens if international trade increases/decreases the demand for a factor of production?
that factor's price will rise/fall
International trade agreements
treaties in which a country promises to engage in less trade protection against the exports of another country in return for a promise by the other country to do the same for its own exports
Producer surplus
Either individual or total producer surplus
What is the main reason that trade protection is so limited?
Because economists have convinced governments of the virtues of free trade.
Why aren't the effects of trade limited to just those industries that export or compete with imports?
Because factors of production can often move between industries
When a country engages in trade protection what two groups does it hurt?
Domestic consumers and foreign export industries
What do gains from trade depend on?
comparative advantage
Domestic Demand Curve
shows how the quantity of a good demanded by residents of a country depends on the price of that good
Total surplus
sum of producer and consumer surplus
Globalization
the phenomenon of growing economic linkages among countries
Individual consumer surplus
net gain to an individual buyer from the purchase of a good
World Trade Organization
oversees international trade agreements and rules on disputes between countries over those agreements; plays two roles
What are three common arguments for trade protection?
1) National security 2) Job creation 3) Infant industry argument
What are the two roles of the WTO?
1) Provides the framework for the massively complex negotiations involved in a major international trade agreement 2) the WTO resolves disputes between its members
What are the two ways that tariffs create inefficiencies?
1) Some mutually beneficial trades go unexploited 2) The economy's resources are wasted on inefficient production
What are two common misperceptions about trade between low productivity/wage rate countries and high productivity/wage rate countries?
1) The Pauper labor fallacy 2) The sweatshop labor fallacy
What two concerns reflect the second thoughts about globalization?
1) Worries about the effects of globalization on inequality 2) Worries that new development are increasing economic insecurity
What does international trade indirectly do?
1) increases the demand for the factors used by exporting industries 2) decreases demand for factors used by import-competing industries
What are the three sources of comparative advantage?
1) international differences in climate 2) differences in factor endowments 3) differences in technology
What are the effects of surplus caused by tariffs?
1) the higher domestic price increases producer surplus 2) the higher domestic price reduces consumer surplus 3) the tariff yields revenue to the government
The infant industry argument
Holds that new industries require a temporary period of trade protection to get established
The job creation argument
Points to the additional jobs created in import-competing industries as a result of trade protection
According to the Heckscher-Ohlin Model, which country will have a comparative advantage in goods?
The country that has an abundant supply of a factor of production
How do differences in technology affect comparative advantage?
Those who have more advanced technology are able to produce more of a certain good at a lower opportunity cost
When is it profitable for exporters to buy things domestically and sell them overseas?
When the world price is above the domestic price
How do differences in factor endowments affect comparative advantage?
i.e. Canada has more forested areas and is able to produce more lumber
How do differences in climate affect comparative advantage?
i.e. Tropical products come from tropical countries so they have a comparative advantage in producing those
Cost
lowest price at which he or she is willing to sell a good
Willingness to pay
max price at which he or she would buy a good
Factor intensity
measure of which factor is used in relatively greater quantities than other factors in production
Trade Protection
policies that limit imports
World price
price at which that good can be bought or sold abroad
Import-competing industries
produce goods an services that are also imported from abroad
Exporting industries
produce goods and services that are sold abroad
Consumer surplus
refer to both individual and total consumer surplus
Factor abundance
refers to how large a country's supply of a factor is relative to its supply of other factors
Heckscher-Ohlin Model
relationship between comparative advantage and factor availability
Total consumer surplus
the sum of the individual consumer surpluses achieved by all the buyers of a good
What motivates the anti-globalization movement?
the sweatshop labor fallacy
Individual producer surplus
the total net gain to all sellers in the market
Total producer surplus
the total net gain to all sellers in the market
What are tariffs used for?
to discourage imports and protect import competing domestic producers
North American Free Trade Agreement
trade agreements between the U.S., Canada, and Mexico
Free trade
when the government doesn't attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand
When is it profitable for imports to buy abroad and resell domestically?
when the world price is below the domestic price
Globalization and inequality
when wealthy countries like the US export skill intensive products while importing labor intensive products, they can expect to see the wage gap between more educated and less educated domestic workers widen