ECON; Unit 3 - International Trade

Compare and contrast absolute advantage, comparative advantage, and specialization using an example of shoes and computers.

- Absolute adv exists when a country can produce both shoes and computers at a lower domestic opportunity costs than its trading partners - Comparative adv exists when one country has a lower domestic production cost in shoes and the other trading partner has a lower domestic production cost in computers - When comparative advantage occurs, each country specialized in the product in which they have comparative advantage and trades the surplus production not the other country

Benefits of Trade with Other Countries

- Lower-cost alternatives - Increased diversity of choices - Access to resources

Discuss how the terms of trade are established and give an example

- the TOT establish a trading range for trading partners - the rage will fall between the domestic opportunity cost of each country - Suppose that in Canada the domestic OC of producing one car is 500 logs of lumber and in the US the domestic OC of producing one car is 200 logs of lumber. This means the terms of trade will fall somewhere between 200 and 500. The US must receive more than 200 logs of lumber in exchange for 1 car. Canada must give up less than 500 logs of lumber for 1 car

List the three major ways that international trade creates wealth.

: International trade creates wealth by providing alternative products at a lower cost, giving producers and consumers access to scarce resources not available in their domestic economy, and making a more diverse mix of goods and services available.

Comparative Advantage

A country has a comparative advantage in the production of a good or service if its domestic opportunity cost of production is lower than the domestic opportunity cost of other countries.

Which of the following scenarios is an example of specialization? A) A country produces a variety of products. B) A country produces products for which it has an absolute advantage. C) A country produces products for which it has a comparative advantage. D) A country is closed to trade.

A country produces products for which it has a comparative advantage.

Quota

A numerical limit on the amount of a good that can imported.

Tariff

A tax or fee that must be paid on goods that are imported from other countries. Notice the tax is just on the imported good and not on the same good produced domestically.

Suppose a quota on foreign-made automobiles is proposed in Congress. Which group is most likely to oppose the bill?

Consumers

Introduction to Barriers to Trade

Consumers may favor restricting exports in a certain industry. The restriction would come at the loss of overall efficiency and producer surplus.

Comparative Advantage

Due to differences in available resources and technology, the opportunity cost of producing a good for one country may be different from that of another.

Suppose Germany gives up the production of 50 bikes to make 1 car and Spain gives up the production of 75 bikes to make 1 car. Which country has the comparative advantage in making cars? A) Germany B) Spain C) Neither

Germany

Japan can produce either 90 cars or 110 pounds of soybeans and South Korea can produce either 50 cars or 80 pounds of soybeans. Which of the following statements is true? A) South Korea has the comparative advantage in cars and should specialize in producing cars. B) South Korea has an absolute advantage in both cars and soybeans and should specialize in both. C) Japan has the comparative advantage in cars and should specialize in producing cars. D) Japan has the comparative advantage in soybeans and should specialize in producing soybeans.

Japan has the comparative advantage in cars and should specialize in producing cars.

According to the principle of comparative advantage, total output and consumption levels will be highest when goods are produced in nations according to which of the following conditions? a. Opportunity costs are lowest. b. Absolute advantages are highest. c. Opportunity costs are equal. d. Absolute advantages are lowest.

Opportunity costs are lowest.

Introduction to Barriers to Trade

Producers may favor restricting imports within their industry. The restriction would come at the loss of overall efficiency and consumer surplus.

Opening to Trade

Regardless of how prices change, the overall volume of trade rises when moving from autarky to open trade.

The new equilibrium will be where

S+quota hits the demand curve

Describe the impact of a tariff on the quantity demanded and supplied, and discuss why governments enact them.

Tariffs are taxes or fees placed on an imported product to increase its price in the domestic market. The tariff will increase prices for consumers in the domestic market, which decreases quantity demanded. Producers receive a higher price with the tariff imposed, and the quantity supplied increases. Imports will decline as the price of the imported product rises. Policy makers establish tariffs as a way to insulate domestic producers from foreign competition. This is often an attempt to "save" domestic jobs in the industries impacted. The overall impact is a decrease in quantity demanded due to the higher price.

Comparative Advantage

The ability to produce a good or service at a lower relative opportunity cost than another producer. In order to utilize our scarce resources and get the most out of their use, we need to find low-cost producers of the goods and services that we want.

Small-Country Assumptions

The country under consideration is a price taker. - It cannot affect the world price of the good. - If open to trade, the world price becomes the domestic price.

What would be expected if the tariff on foreign-produced shoes were decreased?

The domestic price of shoes would fall.

Comparative Advantage

The opportunity cost of producing a good or service can be found by solving for the cost of one good in terms of another. This is all identical to the way we discussed comparative advantage between two individuals.

Compare and contrast what happens in the small-country model when the price of a product is more than the world price and less than the world price.

The small-country model is based on the size of economic activity in a country, not geographic size or population. In the small-country model, the output generated has no impact on the world price for the product—the producers must take the world price. If a small country opens itself to trade, then the world price could be higher or lower than the domestic price. If the world price is lower than the domestic price, then the quantity demanded increases in the domestic market. Unlike many markets, there will not be a shortage, because buyers can purchase imports from other countries to fulfill the demand for the product. If the world price is higher than the domestic price, the quantity demanded decreases in the domestic market. Unlike many markets, there will not be a surplus, as producers can export at the world price. The end result is that prices change in the domestic economy when the country is open to trade in the small-country model.

International Trade

Trade creates wealth, whether it's between two people in the same town or two people across the world. The imaginary lines in the sand that we draw do not diminish the gains from trade; country borders do not change the logic of trade.

The argument that import restrictions save jobs and promote prosperity fails to recognize that

US imports provide people in other countries with the dollar power required for the purchase.

Price changes will impact some positively and others negatively.

When imports flow into a market, prices fall; domestic consumers benefit from lower prices and higher consumption, but domestic producers suffer. When exports flow out of a market, domestic producers benefit from higher prices and increased output, but domestic consumers suffer. In either case, since one side of the market is worse off, that side has an incentive to use the political process to set up barriers to restrict free trade. But make no mistake: International trade benefits an economy overall, so trade barriers that restrict free trade end up reducing the country's wealth.

This increases the quantity supplied domestically.

When you include the tariff domestic producers can now produce the quantities between Qs and Qs,t at a lower cost than the world producers.

Autarky refers to: A) a country open to trade. B) a country closed to trade. C) a country's inability to set a price. D) a country's complete control over price.

a country closed to trade.

A limit on the quantity of a good that may be imported in a given time period is called:

a quota

A tariff differs from a quota in that a tariff is:

a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported.

A tariff is:

a tax on an import.

A country that can produce a good using fewer resources than another country has a(n): a. lower opportunity cost of producing the good than another country. b. absolute advantage. c. specialization in the production of the good. d. all of these.

absolute advantage.

A major advantage of trade is: A) an increase in consumption relative to production possibilities. B) an increase in production possibilities relative to consumption possibilities. C) a decrease in consumption relative to production possibilities. D) no change in consumption.

an increase in consumption relative to production possibilities.

If policy makers enact a tariff on a product in a country open to trade, we would see: A) an increase in the product's price and a decrease in imports. B) an increase in the product's price and an increase in imports. C) a decrease in the product's price and an increase in imports. D) a decrease in the product's price and a decrease in imports.

an increase in the product's price and a decrease in imports.

A nation should specialize in the production of the product for which it has a(n): a. absolute advantage. b. exchange rate. c. specialization. d. comparative advantage. e. terms of trade.

comparative advantage.

Specialization and trade allow an economy to expand its: a. production possibilities. b. consumption possibilities. c. technological advantage. d. absolute advantage.

consumption possibilities.

Autarky

country, state, or society that is economically independent

A tariff has the effect of granting __________ a larger share of the domestic market.

domestic producers

The primary benefits derived from tariffs usually accrue to the:

domestic suppliers of goods protected by the tariffs.

The quantity demanded in the domestic market

drops from Qd to Qd,t as the higher price moves us along our demand curve to a lower quantity.

A quota

essentially increases the supply of a product available in the domestic market by the amount of the quota.

A nation benefits from international trade if it: a. exports more than it imports. b. imports more than it exports. c. imports goods for which it is a low opportunity cost producer. d. exports goods for which it is a low opportunity cost producer.

exports goods for which it is a low opportunity cost producer.

One big difference between tariffs and quotas is that tariffs:

generate tax revenue while quotas do not.

for seller the price or terms of trade must be

greater than the seller opportunity cost, do not sell below your opportunity cost, you will receive less in trade than you could produce on your own at the same cost

The quantity produced domestically

has increased

The price

has now increased

The theory of comparative advantage suggests that nations should produce a good if they: a. have the lowest opportunity cost. b. have the lowest wages. c. have the most resources. d. can produce more of the good than any other nation

have the lowest opportunity cost.

Imposing a restrictive quota on imported plasma TVs will:

increase the price of the plasma TVs and decrease the quantity consumed.

International trade has the potential to ____ the availability of goods and services to ____. a. increase; those nations who export more than they import b. increase; nations that have an absolute advantage in the production of a good or service c. increase; all nations d. decrease; all nations

increase; all nations

what is true with respect to a tariff on imported cheese?

it creates tax revenues for the government.

If a country has comparative advantage in a product it means: A) it has absolute advantage as well. B) the terms of trade will favor the country without comparative advantage. C) it has the highest domestic cost of production. D) it has the lowest domestic cost of production.

it has the lowest domestic cost of production.

If a country has a comparative advantage in oil, then this means that the opportunity cost of producing oil is: a. high. b. low. c. zero. d. infinite. e. equal to all other goods.

low.

Trade is

mutually beneficial

A tariff

raises the price of the imported good from the world price to the world price plus the tax.

A tariff has the effect:

raising the price of the imported product.

A tax levied on imported goods is called a(n):

tariff

For two different countries to benefit by trading, the price (terms of trade) must be less than

the buyer's opportunity cost but greater tan the seller's opportunity cost.

For buyer's the price or terms of trade must be less than

the buyer's opportunity cost.

Once the tariff is in place, however,

the quantity supplied domestically increases to Qs,t and the quantity demanded domestically drops to Qd,t. With more of the good made domestically, and a lower overall total quantity, imports have shrunk substantially. Imports are reduced by the tariff.

The original quantity supplied by domestic producers

was Qs and the original quantity demanded was Qd, making imports the area between the two.

The main explanation for why the cheap foreign labor argument is a poor reason for restricting international trade is that:

workers who get paid less tend to have lower productivity than those who get paid more.