econ chapter 9

Trade only occurs if all individuals win, and no individuals lose, as a result of the trade.

false

Why don't we see complete specialization?

1. Not all G&S are traded internationally (ex: haircuts, goods of low value - cement (inexpensive, but heavy, so expensive to transport)) 2. production of most goods involves increasing OC (countries have several G&S that they have a comparative advantage in instead of just focusing on 1) 3. tastes for products differ

NAFTA's goal

to eliminate all tariffs and quotas

free trade

trade between countries that is without government restrictions -benefits consumers (higher consumer surplus) -benefits US - lower prices, buy more stuff, more happiness, higher standard of living, BUT some people lose jobs

Each year, the United States exports about 50 percent of its wheat crop.

true

Jobs lost to foreign trade are generally easy to identify, but jobs created by foreign trade are generally less easy to identify.

true

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

true

The trade model described in the text demonstrates that countries can expand consumption by specializing in the production of goods and services in which they have a comparative advantage. In reality we do not see complete specialization in production. State three reasons why this is case.

1. Not all goods and services are traded internationally. 2. As more exported goods are produced, the opportunity cost of producing additional units eventually increases. 3. Since most products are differentiated, some buyers prefer to purchase domestically produced products while others will prefer to buy similar products produced abroad. The automobile industry is a good example of this.

Where does comparative advantage come from?

1. climate and natural resources (chilé --> copper, denmark --> fish) 2. relative abundance of labor and capital (countries with a lot of people are more suited to labor intensive industries (china and india)) 3. technology 4. external economies (ex: hollywood--> entertainment)

Smoot-Hawley Tariff

A high tariff enacted in 1930 during the Great Depression. By taxing imported goods, Congress hoped to stimulate American manufacturing, but the tariff triggered retaliatory tariffs in other countries, which further hindered global trade and led to greater economic contraction. -turned a recession into the great depression

Distinguish between a voluntary export restraint and a quota.

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. A quota is a numerical limit imposed by the government on the quantity of a good that can be imported into a country.

What is dumping? Who benefits and who loses from dumping?

Dumping refers to selling a product for a price below its cost of production. Consumers benefit by paying a lower price for the product being dumped. Other producers of similar products lose because they must lower their prices to compete with the dumped product.

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

After an infant industry gains experience it can compete in international markets and the trade barriers can be removed. What objections do economists make to this argument in favor of trade barriers?

Many economists believe that this is the most persuasive argument for protection but experience teaches us that tariffs and quotas can stifle the incentive firms have to become more efficient producers, which is the reason for imposing trade restrictions in the first place. Few firms volunteer to have trade restrictions removed once they have been established.

How have U.S. imports and exports, as a fraction of GDP, changed from 1970 to the present?

Since 1950, both exports and imports have been steadily increasing as a fraction of GDP. In 1970, exports and imports were both less than 6 percent of GDP. In 2016, exports and imports were more than 12 percent of GDP.

What is the World Trade Organization? b. When was it established? c. How many countries are members of the World Trade Organization?

The World Trade Organization (WTO) is an international organization based in Geneva, Switzerland, that oversees international trade agreements. b. The WTO replaced the GATT in January, 1995. c. Currently, more than 150 countries are members of the WTO

Anti-globalization and protectionism are both arguments against free trade. How do these two arguments differ?

The anti-globalization argument against trade is relatively new. This argument includes the notion that free trade destroys the culture of many countries and that factories locating to low-income countries do not meet environmental or safety regulations that are imposed in high-income countries. The protectionism argument has been around for centuries. Protectionism is usually justified on the basis of one of the following four arguments: saving jobs, protecting high wages, protecting infant industries, and protecting national security.

opportunity cost

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

protectionism

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

A tariff A) makes domestic consumers worse off. B) makes both domestic producers and consumers worse off. C) makes everyone better off. D) makes domestic producers worse off.

a

Imposing tariffs in cases of dumping A) is allowed under the WTO agreement. B) is not allowed under the WTO agreement. C) is not addressed by the WTO agreement. D) has never occurred, even though it is allowed under the WTO agreement.

a

In 1995 ________, which was established in 1948, was replaced by ________. A) the GATT; the WTO B) the WTO; NAFTA C) the Smoot-Hawley Tariff; the GATT D) NAFTA; the Smoot-Hawley Tariff

a

The "Buy American" provision in the 2009 stimulus package required that stimulus money be spent only on U.S.-made goods, effectively acting as a quota of zero imports when stimulus money was being spent. In the U.S. steel market, the "Buy American" provision in the 2009 stimulus package would A) convert some consumer surplus to deadweight loss. B) transfer some deadweight loss to producer surplus. C) transfer some producer surplus to consumer surplus. D) reduce the producer surplus received by foreign manufacturers.

a

quota

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

autarky

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

tariff

a tax imposed by a government on imports -supply curve shifts left, price goes up

world trade organization (WTO)

an international organization that oversees international trade agreements

A consequence of increasing marginal costs of producing digital music players in Japan is A) Japan will not export digital music players. B) Japan will stop short of complete specialization in the production of digital music players. C) Japan will import digital music players from countries that don't experience increasing marginal costs. D) Japan will likely impose trade restrictions on imported digital music players.

b

Assume that China has a comparative advantage in producing corn and exports corn to Japan. We can conclude that A) China also has an absolute advantage in producing corn relative to Japan. B) China has a lower opportunity cost of producing corn relative to Japan. C) Japan has an absolute disadvantage in producing corn relative to China. D) labor costs are higher for corn producers in Japan than in China.

b

Beginning in ________, the government of China adopted market-based reforms of the economy and began exporting significant quantities of goods to the United States and other countries. A) 1949 B) the 1970s C) the 1990s D) 2001

b

By 2016, the U.S. trade deficit with China A) had fallen to almost zero. B) was nearly $300 billion. C) had decreased to the same level of the early 2000s. D) had become a trade surplus.

b

In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to voluntary export restraints. With voluntary export restraints, foreign producers A) agree to meet specific quality standards required by the importing country. B) limit their exports to a country. C) pay a tax on all products they export. D) must agree to import an equal quantity of products that they export.

b

In the 1930s, the United States charged an average tariff rate ________. Today, the rate is ________. A) of 100 percent; 20 percent B) above 50 percent; less than 1.5 percent C) of less than 10 percent; over 40 percent D) of 17 percent; 33 percent

b

Many economists criticize protectionism because it causes losses to consumers and eliminates jobs in domestic industries that use protected products. Why, then, do some people support protectionism? A) The criticisms of economists are based on theory. In fact, protectionism increases consumer and producer surplus as well as employment. B) Supporters of protectionism in high-income countries believe that wages will fall as a result of competition with firms from developing countries. C) Supporters of protectionism believe free trade will cause their countries to lose their comparative advantage. D) Supporters of protectionism believe that free trade will lead to inflation.

b

Measuring the impact of a quota or tariff on the U.S. economy is an example of ________. Stating that a quota or tariff should be eliminated is an example of ________. A) statistical analysis; economic analysis B) positive analysis; normative analysis C) econometric analysis; protectionism D) trade analysis; an opinion

b

The "Buy American" provision in the 2009 stimulus package required that stimulus money be spent only on U.S.-made goods, effectively acting as a quota of zero imports when stimulus money was being spent. In the market for steel, the "Buy American" provision would ________ the price of steel in the United States and ________ the quantity of steel demanded in the United States. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

b

Which of the following statements is true? A) Japan is more dependent on foreign trade than is the United States. B) Imports and exports account for over one-half of the GDP of Belgium. C) France is the leading exporting country, accounting for 10 percent of total world exports. D) Because the cost of labor used on farms is so high, the United States exports very little of its wheat, rice and corn crops.

b

A Federal Reserve publication proclaimed that "Trade is a win-win situation for all countries that participate." This statement is A) false since it ignores the workers who lose their jobs as result of international trade. B) false since not all countries participate in international trade. C) true because it refers to countries; individuals may be losers as a result of international trade. D) true because all consumers and workers benefit from international trade.

c

Disagreements about whether the U.S. government should regulate international trade A) began during the Great Depression. B) began after World War I when government officials no longer believed in isolationism. C) date back to the beginning of the country. D) did not occur until the end of the Mexican War in 1848.

c

Economists studying the effect of the China shock on the U.S. economy point out that the firms most hurt by Chinese imports have been A) evenly distributed across the United States. B) almost exclusively located in the Northeast. C) concentrated in certain states, particularly in the Midwest and Southeast. D) located primarily along the Pacific coast.

c

One reason for the success that firms have in getting the government to erect and maintain barriers to foreign competition is members of Congress who engage in ________, where members in districts with protected industries agree to trade votes on issues that concern other members in order to uphold tariffs. A) vote fixing B) gerrymandering C) logrolling D) filibustering

c

Suppose that American firms claim that protectionism in Canada is on the rise as the Canadian government attempts to protect its infant industries. This protectionism will cause the greatest harm to A) Canadian manufacturers. B) the Canadian government. C) manufacturers who export to Canada. D) Canadian consumers.

c

The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In recent years opposition to globalization has led to violent protests at meetings of the WTO. One reason for these anti-globalization protests is A) foreign trade and investment are examples of zero-sum games. B) protesters believe that globalization will result in a return to communism in developing countries. C) protesters believe that free trade destroys the distinctive cultures of many countries. D) protesters object to the loss of intellectual property (such as software programs and movies) that results from foreign trade and investment.

c

The main purpose of most tariffs and quotas is to A) raise revenue for the government. B) reduce the prices consumers pay for goods and services. C) reduce the foreign competition that domestic firms face. D) improve the quality of goods and services imported into the country.

c

Which of the following is the best example of a voluntary export restraint? A) a limit imposed by the U.S. government on the number of cell phones that the United States can import from Korea B) a subsidy granted by the U.S. government to domestic cell phone manufacturers so they can compete more effectively with foreign cell phone manufacturers C) a limit set by the Korean government on the number of cell phones that the United States can import from Korea D) a $50 per-cell phone fee imposed on all cell phones imported into the United States

c

Which of the following statements about the importance of trade to the U.S. economy is true? A) Since 1950, both exports and imports have steadily decreased as a fraction of U.S. gross domestic product. B) Overall, about 80 percent of U.S. manufacturing jobs depend directly or indirectly on exports. C) The United States is the second largest exporter in the world. D) The U.S. economy is highly dependent on international trade for growth in its gross domestic product.

c

Which of the following statements is used to justify protectionism? A) Free trade leads to higher prices for imported goods. B) Free trade increases employment by protecting domestic firms. C) A country should not rely on other countries for goods that are critical to its national defense. D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection.

c

A quota A) makes domestic consumers better off. B) makes both domestic producers and consumers better off. C) makes everyone worse off. D) makes domestic producers better off.

d

An agreement negotiated by two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is called A) a non-tariff trade barrier. B) an export quota. C) an import quota. D) a voluntary export restraint.

d

As a percentage of GDP, exports are greater than imports for which of the following countries? A) the United Kingdom B) France C) the United States D) China

d

Economists believe the most persuasive argument for protectionism is to protect infant industries. But the argument has a drawback. What is this drawback? A) Governments always make the level of protection for infant industries too high. B) Governments are usually too impatient and do not allow protection to remain in place long enough to allow industries to be competitive in international markets. C) Governments usually use tariffs, rather than quotas, to protect infant industries in order to collect tariff revenue. (Quotas do not result in government revenue). D) Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never "growing up."

d

In the real world, we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. One reasons for this is A) comparative advantage works better in theory than in practice. B) because some countries also have an absolute advantage in the production of those goods. C) tastes for many traded goods are similar in many countries because of globalization. D) production of most goods involves increasing opportunity costs.

d

Many economists support trade agreements, maintaining that the agreements improve economic efficiency because they result in goods being produced A) at the highest profit margin. B) with maximum deadweight loss. C) with zero producer surplus. D) at the lowest opportunity cost.

d

Which of the following describes the infant industry argument for protectionism? A) An industry must be protected in its early stages of development so that firms can compete with government-subsidized foreign competition. B) Some strategic industries must be protected to ensure adequate supplies of resources needed for national defense in emergencies. C) Domestic producers in high-wage countries must be protected from foreign producers in low-wage countries to produce a level playing field. D) Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets.

d

________ raised average tariff rates by over 50 percent in the United States in 1930. A) The GATT B) The WTO C) NAFTA D) The Smoot-Hawley Tariff

d

In the United States, imports and exports make up more than half of GDP.

false

exports

goods and services produced domestically and sold in other countries

imports

goods and services purchased domestically that are produced in other countries

How important is trade to the US compared with European countries?

not as important because of location -Us is only close to Canada and Mexico, while European countries are so close together, so their proximity makes them trade more

external economies

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

dumping

selling a product for a price below its cost of production

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

absolute advantage

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

globalization

the process of countries becoming more open to foreign trade and investment -allows us to specialize in what we're good at and trade for what we're not good at

terms of trade

the ratio at which a country can trade its exports for imports from other countries -exchange rates and prices of goods are major factors in this