Chapter 9

comparative advantage​ (World Trade Organization publication calls )

"arguably the single most powerful insight in​ economics."

sources of comparative advantages

1) climate and natural resources 2) relative abundance of labor and or capital 3) technological differences 4) external economices

two observations about international trade.

1. Trade allows a country​ "to produce more with​ less." 2. There is little doubt who wins​ [from trade] in the long​ run: consumers.

japan exports

12% gdp

japan trade

20% of gdp

Why do countries not completely​ specialize?

Because production of most goods involves increasing opportunity costs. Because tastes for products differ. Because not all goods are traded internationally.

reason for all trade

Comparative advantage​ is, arguably, the underlying

trade with country

Every​ country, no matter how​ poor, will have a comparative advantage in producing some good.​ (Often countries are poor because they cannot or will not trade with​ others.)

If the government imposes a​ tariff, which area shows the government tariff​ revenue?

Government tariff revenue is equal to the imports multiplied by the tariff. Area C is the​ government's tariff revenue.

Arguments for Protection

Protect national security. Protect infant industries. Protect high wages. Save jobs.

net exports

exports - imports

trade deficit

imports > exports

A tariff

is basically an ad valorem tax on imports.

us exports is typically smaller than imports

since 1980

Autarky

situation when countries do not trade

free trade benefits

small country with fewer people more

us stops inter trade

some service industry + agriculture industry + manufacturing industry will see sales decline

why dont we see complete specialization?

th the real world products are not generally produced by one nation reasons include 1) not all goods and services can be traded internationally 2) production of many goods involves increasing opportunity costs 3) tastes for products differ; countries might have comparative advantages in different sub-types of products

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.

importance on intra trade in us

though it is steadily increasing not all sectors have been affected

importance on intra trade

us has smaller fraction than most other countries

country benefits from free trade

A country benefits from free trade even if other countries do not engage in it. It gains because it can obtain goods and services at a lower opportunity cost via trading.

What is a​ quota?

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

Autarky

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

What is a voluntary export​ restraint?

A voluntary export restraint is an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country.

quota

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

who benefits from trade

Both countries benefited from their bilateral trade. It is not possible to determine which country benefited​ more; however, the question asked assumes that exports benefit a country more than its imports. This is a fallacy. Countries gain when they import goods that are not produced in their own country or can only be produced at a higher cost domestically. The concept of comparative advantage proves that trade is mutually beneficial.

GATT

By the end of World War II in​ 1945, government officials in the United States and Europe were looking for a way to reduce tariffs and revive international trade. To help achieve this​ goal, they set up the General Agreement on Tariffs and Trade​ (GATT) in 1948.

benefits and who loses from​ dumping

Consumers benefit while competing firms​ lose;

country gains

Countries gain from specializing in producing goods in which they have a comparative advantage and trading for goods in which other countries have a comparative advantage.

country shifts resources toward producing only those goods where it has a comparative​ advantage, it is specializing in the production of those goods.

However, there are several reasons why countries do not completely​ specialize: 1. Not all goods and services can be traded internationally. 2. At some​ point, producing more of a particular good involves increasing opportunity costs. 3. Consumers in different countries have different tastes and preferences.

tariff

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

What is meant by a country specializing in the production of a​ good?

It shifts resources toward producing only those goods where it has a comparative​ advantage;

Explain how it is possible that​ middle- and​ lower-income Americans are both the biggest losers and at the same time the biggest winners from free trade.

It would be possible for​ middle- and​ lower-income Americans to be both the biggest losers and at the same time the biggest winners from free trade if they are the ones most likely to work in industries that produce at higher opportunity cost than in other countries and purchase those goods that can be produced at lower opportunity cost in other countries

positive economic​ analysis example

Measuring the effect of the sugar quota on the U.S. economy is an example of positive economic analysis.

fact 1

Once a country has lost its comparative advantage in producing a​ good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.

Economists believe the most persuasive argument for protectionism is to protect infant industries. But the argument has a drawback. What is this​ drawback?

Protection lessens the need for firms to become productive enough to compete with foreign​ firms; this often results in infant industries never​ "growing up."

Protectionism is the use of trade barriers

Protectionism is the use of trade barriers to shield domestic firms from foreign competition. For as long as international trade has​ existed, governments have attempted to restrict it to protect domestic firms. Protectionism is usually justified on the basis of one of the following​ arguments: saving​ jobs; protecting high​ wages; protecting infant​ industries; protecting national security.

Dumping

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

terms of trade

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

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

Some opponents desire to erect trade barriers to protect domestic firms from foreign competition. B. Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. C. 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.

GATT was replaced by the World Trade Organization​ (WTO).

The GATT agreement covered only goods. As trade in services and in products incorporating intellectual property grew in​ importance, many GATT members pressed for a new agreement that would cover services and intellectual​ property, as well as goods. A new agreement was​ negotiated, and in January​ 1995, GATT was replaced by the World Trade Organization​ (WTO

events led to the General Agreement on Tariffs and​ Trade

The Great Depression and the​ Smoot-Hawley Tariff

Sherman antitrust act of 1890

The Sherman antitrust act of 1890 made it illegal for firms to engage in anticompetitive practices.

How does the World Trade Organization​ (WTO) allow countries to determine whether dumping has​ occurred?

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

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

advantages the Bay Area

The advantages the Bay Area has are likely to persist over time because more software firms will locate​ there, enhancing the external economies

deadweight loss is the​ area(s)

The deadweight loss is the​ area(s) that represent the reduction in economic surplus resulting from a market not being in competitive equilibrium.

domestic producer surplus

The domestic producer surplus is the area above the supply curve and below the price line

economy as whole loses

The economy as whole loses because a tariff or a quota produces a deadweight​ loss, which is the loss of economic surplus caused by the tariff or quota.

if meat import is banned

The prices charged by U.S. producers will rise by the amount of the tariff or​ more, if foreign competition is entirely eliminated. With a​ tariff, the price in the U.S. will be Upper P Subscript US PUS instead of the world​ price, Upper P Subscript Upper W Baseline . PW. If imports are banned​ altogether, the price in the U.S. will rise to Upper P Subscript NT Baseline comma PNT, the​ no-trade price. ​Also, if the imported goods are a different style or quality than the U.S.​ goods, U.S. consumers will face a reduced variety of goods.

Globalization

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

problems arise when implementing​ anti-dumping laws

The true production costs are not easy for foreign governments to calculate.

quantity limits

The two kinds of quantity limits discussed in the text are quotas and voluntary import restraints. Quotas can be imposed by the government.

economic nationalism

The use of quotas to protect domestic industries. The use of tariffs to protect domestic industries. The use of​ non-tariff barriers to protect domestic industries.

Protectionism

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

better athletes

This is a normative question.​ Objectively, one can conclude that Usain Bolt ran faster than Eaton in the 100 meter​ race, but it is doubtful whether Bolt would defeat Eaton any of the other decathlon events.

free trade

Trade between countries that is without government restrictions.

World Trade Organization eventually replace​ GATT

Trade in services and in products incorporating intellectual property grew in importance

specializes in the production

When a country specializes in the production of the goods or services in which it has a comparative​ advantage, it will be allocating resources toward their most productive use.​ Then, it can exchange these goods and services for other goods and services. By doing​ this, it will be able to consume more than without trade.

job loss

When​ more-efficient foreign firms drive​ less-efficient domestic firms out of​ business, jobs are​ lost, but jobs are also lost when​ more-efficient domestic firms drive​ less-efficient domestic firms out of business. These job losses are rarely permanent. In the U.S.​ economy, jobs are lost and new jobs are created continually.

does 6trade barriers protect domestic jobs.

While some jobs are saved by trade​ restrictions, many more jobs are lost in industries that use trade restricted goods as inputs. It is a fallacy to think that trade barriers protect domestic jobs.

Quota

a numerical limit a government imposes on the quality of a good that can be imported into that country

Tariff

a tax imposed by a government on imports

Comparative advantage​ is,

arguably, the underlying reason for all trade

why poor

because they cannot or will not trade with others

globalization is opposed because

believe globalization destroys the distinctive cultures of many countries. want to erect trade barriers to protect domestic firms from foreign competition. believe globalization favors the interests of​ high-income countries at the expense of​ low-income countries.

high tariffs

believing that such measured made their own firms and consumers better off

International trade can help consumers

by keeping prices down. Businesses that use the imported products or inputs also benefit from less expensive imports. But the cheaper imports can negatively affect the companies that are directly competing with the imports.​ Consequently, workers in these sectors can also lose jobs.

cheaper imports can negatively affect

cheaper imports can negatively affect the companies that are directly competing with the imports.​ Consequently, workers in these sectors can also lose jobs.

GDP

consumption spending + gross private domestic investment + government spending + net Exports

external economies

decrease in cost with the increase in size4

us economy dont relay

dont rely on inter trade as it is a small % of gdp

trade surplus

exports > imports

protection from free trade

for quotas or tariffs

opponents of globalization contend

globalization destroys cultures.

imports

goods and services bought domestically but produced in other countries

exports

goods and services produced domestically but sold in other countries

powerful insight because

it explains why if individuals, firms, and countries specialize and trade they will be better off

terms of trade

its the ratio at which a country can trade its exports for imports from other countries no country would accept terms of trade worse than its opportunity cost

tariff removes no opposition

lowers the cost of imports from other countries

Removing a tariff on imports of canned tuna

lowers the price of tuna in the United​ States, and U.S. producers decrease the quantity they supply. U.S. consumers increase their purchases. Equilibrium rises. Removal of the tuna tariff causes a gain of consumer surplus equal to the area under the demand curve between the initial price after the tariff and the price before the tariff.

gains from trade

more consumption

us economy gdp

more imports n exports to what they were 40 years ago

Is it typical for countries to be completely​ specialized?

no

country trades

when it has comparative advantage

deadweight​ loss

which is the loss of economic surplus caused by the tariff or quota

Smoot-Hawley Tariff in​ 1930

which raised average tariff rates to more than 50 percent. As other countries retaliated by raising their​ tariffs, international trade collapsed.

Are they correct in asserting that free trade costs U.S.​ jobs?

​No, since free trade creates more jobs for the U.S. economy than it costs the U.S.