Econ 102: Comparative Advantage & International Trade

What are some other barriers to trade?

-A government may impose stricter health and safety requirements on imported goods than on goods produced by domestic firms. -Many governments also restrict imports of certain products on national security grounds. The argument is that in time of war, a country should not be dependent on imports of critical war materials. Once again, these restrictions are sometimes used more to protect domestic companies from competition than to protect national security.

Where does comparative advantage come from?

-Climate and natural resources. -Relative abundance of labor and capital. -Technology. -External economies (Reductions in a firm's costs that result from an increase in the size of an industry).

What are factors of products divided into?

-Labor -Capital -Natural Resources -Entrepreneur (someone who operates a business)

Why don't we see complete specialization?

-Not all goods and services are traded internationally. -Production of most goods involves increasing opportunity costs. -Tastes for products differ.

Why do some people oppose the World Trade Organization?

-Opposition to globalization because people want to protect domestic firms from foreign competition (protectionsism). -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. -Some believe that free trade and foreign investment destroy the distinctive cultures of many countries. -Globalization has also allowed multinational corporations to relocate factories from high-income countries to low-income countries. -Protectionsists want to protect domestic high wages, infant industries, and national security. -To economists, the infant industry argument is the most persuasive of the protectionist arguments.

How has international trade grown tremendously over the years?

-The decreasing costs of shipping products around the world. -The spread of inexpensive and reliable communications. -Changes in government policies.

If the U.S. specialized in wheat and the Chinese specialized in smartphones for trade, what would be the end result?

-The owners of Chinese wheat farms, the owners of U.S. smartphone firms, and the people who work for them are worse off as a result of trade. -The losers from trade are likely to try to persuade the Chinese and U.S. governments to interfere with trade by barring imports of the competing products from the other country or by imposing high tariffs on them.

What is a quota?

A numerical limit on the quantity of a good that can be imported, and it has an effect similar to that of a tariff. -A quota is imposed by the government of the importing country. -A voluntary export restraint (VER) 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.

What is Autarky?

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

What is a tariff?

A tax imposed by a government on imports into a country. -Imports are goods and services purchased domestically that have been produced in other countries. -Exports are goods and services produced domestically and sold in other countries.

What is the circular flow diagram?

A visual model of the economy that shows how dollars flow through markets among households and firms.

What is the World Trade Organization?

An international organization that oversees international trade agreements.

How do you calculate opportunity cost?

Divide first number by second number. -Your subjects on top. -In comparative advantage, choose the category with the smallest number.

What does increasing marginal opportunity costs​ mean?

Increasing the production of a good requires larger and larger decreases in the production of another good. -The production possibilities frontier will be bowed outward. -Because the curve is bowed out, the opportunity cost of automobiles in terms of tanks depends on where the economy currently is on the production possibilities frontier. -As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs.

Why is the basis for trade comparative advantage, not absolute advantage?

Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading. -The fastest apple pickers do not necessarily do much apple picking.

What are product markets?

Markets for goods and services. -Households are demanders and firms are suppliers.

What are factor markets?

Markets for the factors of production. -The inputs used to make goods and services.

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Production Possibilities Frontier (PPF) -Y is a combination that is unattainable with current resources (Above PPF). -X is inefficicent because not all resources are being used (Below PPF). -In reality, that's supposed to be a straight line but we'll let that go.

What is dumping?

Selling a product for a price below its cost of production. Using tariffs to offset the effects of dumping is controversial, despite being allowed under the WTO agreement. -It is difficult to determine whether foreign companies are dumping goods because the true production costs of a good are not easy for governments to calculate. As a result, 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.

What is the result of tariffs?

Tariffs succeed in helping domestic producers but hurts domestic consumers and the efficiency of the economy.

What shifts the production possibilities frontier outward?

Technological change makes it possible to produce more goods with the same number of workers and the same amount of machinery. -When the amount of resources increases. -Outward shifts in the production possibilities frontier represent economic growth because they allow the economy to increase the production of goods and services, which ultimately raises the standard of living.

What is 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.

What is absolute advantage?

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.

How do you find quotas?

The difference between the new quantity demanded and new quantity supplied

What is the purpose of tariffs and quotas?

The main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face. -Whenever one industry receives tariff or quota protection, other domestic industries lose jobs and the firms move overseas. -The U.S. economy would experience a gain in economic surplus from the elimination of tariffs and quotas even if other countries did not reduce their tariffs and quotas.

The idea of increasing marginal opportunity costs is illustrated by what economic concept?

The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. -The more hours you have already spent studying economics, the smaller the increase in your test grade from each additional hour you spend—and the greater the opportunity cost of using the hour in that way.

What is tax revenue based on tariffs?

The new quantity consumed subtracted by the new quanity supplied by firms multiplied by the increase in price.

What is the terms of trade?

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