Chapter 7: Comparative Advantage and the Gains from International Trade

Restricting trade

"saves jobs" and "protects high wages"

positive analysis reflects _____ , and normative analysis _____________

"what is" and "what ought to be"

Exports, Imports, Tariffs

: are goods and services produced domestically but sold to other countries. Imports : are goods and services bought domestically but produced in other countries. Tariffs : are taxes imposed by a government on imports of a good into a country.

True or false: Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.

False; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas.

What is a Voluntary Export Restraints (VERs)?

Numerical limits negotiated between countries on the quantity of a good imported by one country from another.

True or False: ​Sometimes governments use these requirements to shield domestic firms from foreign competition.

True

Dumping

is selling a product for a price below its cost of production.

A common argument in favor of maintaining import restrictions is

it saves domestic jobs

The Smoot-Hawley Tariff Act (1930)

raised tariffs to their highest value in U.S. history (~60 percent of value of imports, on average) Its effects continue to this day; e.g. the 2015 U.S. tariff on shoes contains hundreds of entries, detailing tariff levels on different types of shoes.

As a​ result of dumping

the WTO allows countries to determine that dumping has occurred if a product is exported for a lower price than it sells for on the home market.

Comparative advantage is

the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Absolute advantage is

the ability to produce more of a good or service than competitors when using the same amount of resources.

A less-common but still important barrier to trade

the imposition of higher standards on imported goods. ex. Raw milk can be sold in many U.S. states, but cannot be sold across state lines.

Protectionism is

the use of trade barriers to shield domestic firms from foreign competition.

Logrolling

when politicians promise their support in exchange for tariffs on other goods produced in their districts

By​ trading, countries are able to consume more than they could without trade. This outcome is possible because

world production of both goods increases after trade, inefficiencies in resource allocation are reduced, shifting production to the more efficient country (the one with the comparative advantage) increases total production.

What is a Quota?

A numerical limit a government imposes on the quantity of a good that can be imported into that country.

Two main sources of Opposition to WTO and trade in general:

Anti-globalization forces and "Old-fashioned" protectionists

The primary difference between a quota and a voluntary export restraint​ (VER) is that

the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations.

It is difficult to determine whether foreign companies are dumping goods because

the true production costs of a good are not easy for foreign governments to calculate.

Among the main sources of comparative advantage are:

Climate and natural resources,Relative abundance of labor and capital, technology and external economies.

Why do some people oppose the World Trade Organization​ (WTO)?

Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s, some opponents desire to erect trade barriers to protect domestic firms from foreign competition, some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the​ high-income countries at the expense of the​ low-income countries.

Who is harmed when individual nations move from autarky to free​ trade?

The owners of the firms that went out of business.

Protectionism

The use of trade barriers to shield domestic firms from foreign competition.

Tariffs on foreign-made shoes in the U.S. trace back to the 1920s:

U.S. farmers were struggling, and lobbied for protection from imports. Politicians in their districts championed these protections. Other politicians promised their support in exchange for tariffs on other goods produced in their districts

​Autarky, terms of trade

_____ is a situation in which a country does not trade with other countries. _____ is the ratio at which a country can trade its exports for imports from other countries.

Many governments also restrict imports of certain products on national security grounds

fearing that in times of war, they would not have access to those products.

The World Trade Organization​ (WTO)

generally aids in negotiating trade agreements that include not only goods but also services and intellectual property, replaced the General Agreement on Tariffs and Trade​ (GATT) in January 1995 and is an international organization that oversees international trade agreements

Countries are better off if they specialize in producing the goods for which they

have a comparative advantage. They can then trade for the goods for which other countries have a comparative advantage.

One effect of tariffs and quotas

is to cost jobs outside the industries immediately affected.

Advantages of comparative advantage result in

lower costs to firms located in the area. Because these lower costs result from increases in the size of the industry in an​ area, economists refer to them as external economies

Comparative advantage

may change as time passes and circumstances change.

We do not see complete specialization in the real world because

not all goods and services are traded​ internationally, production of most goods involves increasing opportunity​ costs, and tastes for products differ.

These negotiations traced back to the 1920s

resulted in the Smoot-Hawley Tariff Act (1930).

Protectionism is usually justified on the basis of several arguments which​ include:

saving​ jobs, protecting infant​ industries, and protecting national security.