Chapter 7. Macroeconomics

In addition to tariffs and​ quotas, governments sometimes erect other barriers to trade. For​ example, all governments require that imports meet certain health and safety requirements. Many governments also restrict imports of certain products on national security grounds. Explain whether you agree or disagree with the following​ statement: ​Sometimes, however, governments use these requirements to shield domestic firms from foreign competition. A. ​Yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms. B. ​Yes, sometimes governments impose less strict health and safety requirements on imported goods than on goods produced by domestic firms. C. ​No, politicians never make choices that are more likely to lead to reelection when health and safety issues are involved. D. ​No, governments are always more concerned about national security than appeasing special interests.

A

advantage is the ability of an​ individual, a​ firm, or a country to produce more of a good or service than competitors when using the same amount of resources.

Absolute

The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.

Absolute advantage

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

Autarky, terms of trade

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. A. This statement is false because the U.S. economy is so large that it is not affected by the reduction of tariffs and quotas. B. This statement is​ 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. C. This statement is​ true; the U.S. economy would gain from the elimination of tariffs and quotas but only if other countries also reduce their tariffs and quotas so our industries are able to penetrate their markets. D. This is statement​ true; the U.S. economy would not gain from the elimination of tariffs and quotas especially if other countries do not reduce their tariffs and quotas.

B

The ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as comparative advantage. Referring to your answer​ above, what makes it such a powerful​ insight? A. It explains why if countries specialize and trade they will be better off. B. It explains why if​ individuals, firms, and countries specialize and trade they will be better off. C. It explains why larger firms and countries economically dominate smaller firms and countries. D. It is the basis for establishing an economic advantage over competing firms and countries.

B

Who is harmed when individual nations move from autarky to free​ trade? A. The nation taken as a whole. B. The owners of the firms that went out of business. C. The foreign customers of the firms that now specialize. D. The domestic customers of the firms that went out of business.

B

Comparative advantage A. is unlikely to​ change, once it has been defined. B. is determined by governments of nations across the globe. C. may change as time passes and circumstances change. D. is independent a countries skilled and unskilled labor quantities.

C

The primary difference between a quota and a voluntary export restraint​ (VER) is that A. the VER affects import price while the quota works through quantity restrictions and does not influence the price of the good. B. the quota directly limits imports while the VER only indirectly influences the quantity traded between the nations. C. the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations. D. the VER is unilaterally imposed by one nation on the other while the quota is the result of negotiations between nations.

C

Which of the following is not a​ non-tariff barrier to​ trade? A. Quotas B. National security grounds C. Ad valorem tax on imports D. Embargos E. Health and safety requirements

C

Comparative advantage can derive from a variety of natural and man-made sources:

Climate and natural resources Relative abundance of labor and/or capital Technological differences External economies

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.

Comparative

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

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.

Comparative advantage

By​ trading, countries are able to consume more than they could without trade. This outcome is possible because A. world production of both goods increases after trade. B. shifting production to the more efficient country—the one with the comparative advantage—increases total production. C. inefficiencies in resource allocation are reduced. D. all of the above.

D

One effect of tariffs and quotas A. is to reduce prices to domestic consumers as it protects jobs in the target industry. B. is generally a net gain for the nation enacting the protective legislation. C. is to create jobs outside the industries immediately affected. D. is to cost jobs outside the industries immediately affected.

D

Protectionism is the use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of several arguments which​ include: A. protecting high​ wages, protecting national​ security, and maintaining high prices for imports. B. protecting high​ wages, protecting mature​ industries, and protecting national security. C. protecting national​ security, promoting the wants of select​ industries, and saving jobs. D. saving​ jobs, protecting infant​ industries, and protecting national security.

D

The World Trade Organization​ (WTO) A. replaced the General Agreement on Tariffs and Trade​ (GATT) in January 1995. B. is an international organization that oversees international trade agreements. C. generally aids in negotiating trade agreements that include not only goods but also services and intellectual property. D. all of the above.

D

What events led to the General Agreement on Tariffs and​ Trade? Why did the World Trade Organization eventually replace​ GATT? A. The Great Depression and the Sherman​ Act; Trade in services and in products incorporating intellectual property grew in importance. B. The Great Depression and the​ Smoot-Hawley Tariff; As world trade​ grew, a more formal organization was needed. C. The Great Depression and the Sherman​ Act; As world trade​ grew, a more formal organization was needed. D. The Great Depression and the​ Smoot-Hawley Tariff; Trade in services and in products incorporating intellectual property grew in importance.

D

Why do some people oppose the World Trade Organization​ (WTO)? A. Some opponents desire to erect trade barriers to protect domestic firms from foreign competition. B. 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. C. Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. D. All of the above.

D

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

Dumping

Briefly explain whether the value of U.S. exports is typically larger or smaller than the value of U.S. imports. The value of U.S. exports A. has always been smaller than the value of U.S. imports. B. has been larger than the value of U.S. imports since about 1980. C. has been smaller than the value of U.S. imports since about 1940. D. has always been larger than the value of U.S. imports. E. has been smaller than the value of U.S. imports since about 1980.

E

are goods and services produced domestically but sold to other countries.

Exports

•are reductions in a firm's costs that result from an increase in the size of an industry.

External economies

The process of countries becoming more open to foreign trade and investment.

Globalization

are goods and services bought domestically but produced in other countries.

Imports

•have less strict regulations including worker protections, creating perception of unfairness.

Lesser-developed countries (L D Cs)

The highest-valued alternative that must be given up to engage in an activity.

Opportunity cost

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

Protectionism

Numerical limits imposed upon (quotas) or negotiated between (V E Rs) countries on the quantity of a good imported by one country from another country.

Quotas and Voluntary export restraints (V E Rs)

What is the difference between quotas and VERS?

Quotas and voluntary export restraints are effectively similar; the difference is that quotas are imposed unilaterally (by one country), whereas V E Rs are negotiated agreements.

If the government wants to protect import competing industries and its workers from foreign​ competition, it can impose a tax on imports called a

Tariff

are taxes imposed by a government on imports of a good into a country.

Tariffs

An international organization that oversees international trade agreements.

World Trade Organization (W T O)

For the U.S.​ economy, imports and exports represent _______________ fraction of GDP compared to what they were in 1970.

a larger

a situation in which a country does not trade with other countries

autaky

Among the main sources of comparative advantage are the​ following:

climate and natural​ resources, relative abundance of labor and​ capital, technology, external economies.

A country will always be an exporter of a good where it has a _____________ advantage in production.

comparative

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

dumping

Goods and services produced domestically but sold in other countries.

exports

Traditionally, countries imposed high tariffs on imports, believing that such measures made their own firms and consumers better off. •But that meant their _____ were similarly taxed.

exports

Trade between countries that is without government restrictions.

free trade

Traditionally, countries imposed ____ tariffs on imports

high

Goods and services bought domestically but produced in other countries.

imports

Some individual firms and consumers will

lose out due to international trade.

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.

The United States is ________________ exporter in the world. International trade remains _________ important to the United States than it is to most other countries.

one of the largest exporters, less important

Comparative advantage arises from having a lower ________than your competitor.

opportunity cost

Consumers and firms that lose out to international trade will most likely ask the government to implement

protectionist measures like tariffs and quotas, in order to protect them from foreign competition.

Another restriction with a similar outcome would be to impose a limit on the amount of a specific good that can be imported. This restriction is called a

quota

Taxes imposed by a government on imports.

tariffs

Since countries are producing goods and services at different opportunity​ costs, _________ can be negotiated that will allow all countries to consume more with trade than in autarky.

terms of trade

is the ratio at which a country can trade its exports for imports from other countries.

terms of trade

A tax imposed by a government on imports

traiff

How can we decide whether allowing free trade makes Americans better off overall?

•By comparing the economic surplus in the market with and without free trade.

When a country loses its comparative advantage in producing a good:

•Its income will be higher from the goods it has a comparative advantage at producing. •It can consume the goods other countries are relatively good at making, at a lower cost.

In the real world, products are not generally produced by only one nation. Reasons include:

•Not all goods and services can be traded internationally (medical services, for example). •Production of many goods involves increasing opportunity costs (so small amounts of production are likely to take place in several countries). •Tastes for products differ (cars, for example); countries might have comparative advantages in different sub-types of products.

Protectionism that happens:

•Restricting trade "saves jobs" and "protects high wages" -We have seen that overall people are better off with trade, even though some individuals are worse off. •"Infant industries" need protection -Industries might need some time to "start-up" and become competitive; but tariffs must eventually be removed. •Protecting national security Maybe we shouldn't import all our guns from elsewhere...