Microeconomics Chapter 16

Quota

A legal limit on the amount of a good or service that can be imported.

Antidumping Tariff

A tariff or a duty imposed by the domestic government on imports that it believes are priced below market value or below the price charged in the exporting country's domestic market.

Give one reason why a country might decide to place a tariff or a quota on an imported good? What are the real costs to the country of doing so?

A tariff or quota may be placed upon a good in order to protect workers in that industry, to protect an industry that is deemed vital for national security, or to allow a new industry time to grow before being subject to competition. The costs to the country are higher prices of imported and domestic goods and less overall production.

Tariff

A tax on an imported good.

Tariff-Rate Quota

A two-level tariff which imposes a lower tariff rate on a given volume of imports and a higher tariff rate on all subsequent imports.

Voluntary Export Restraint

A voluntary export restraint is a limit imposed by the exporting country on the quantity of exports to a specified country during a given period of time.

Comparative Advantage

An individual or a business has a comparative advantage over another in one good relative to another good if its opportunity cost is less.

Absolute Advantage

An individual or a business in a country has an absolute advantage in the production of a good if it can produce that good using fewer resources.

Specialization

An individual, business, or country focusing on the production of a limited number of goods and services in order to attain a higher level of efficiency.

What elasticity of supply or demand curves will cause the consumers to have to pay a larger portion? A smaller portion?

As the price begins to increase with a tariff, the quantity demanded decreases more with very elastic demand than if demand were less elastic. An equilibrium is reached before the price has increased as much as it would have with a less elastic demand curve. Consumers will therefore pay a smaller portion of the tax and producers a larger portion. If demand is relatively inelastic, consumers will end up paying a larger portion. We will not dwell on the issue here, but the elasticity of supply will also affect the portions paid by consumers and producers.

Are there any disadvantages associated with limiting the amount of imports coming into the country?

Consumers end up paying higher prices, reducing their purchases of imported goods, and increasing their consumption of domestic goods. In addition, we lose the increased production that we gain from specialization. A more subtle cost of protecting local firms is the possibility of retaliation by other countries.

Can you think of some reasons why economies of scale may arise?

Economies of scale take place when firms expand their scale of production and, as a result, the unit cost of production decreases. By producing larger quantities of output, businesses are able to specialize and produce goods more efficiently, reducing the resources needed per unit of output. Another possible reason for a lower average cost of production is that the business overhead costs are spread over a larger scale of output, which decreases the overhead costs attributed to a single unit of output.

Why might two countries want to specialize and trade even when both countries could produce all goods?

Even though he was more efficient in both programming and managing than anyone else, he specialized in the area where he was the most efficient relative to others and let someone else specialize in the area where Bill Gates was, on a relative basis, less efficient. Total production thus increased. An alternative answer would be that he specialized where the opportunity cost was less and let someone else specialize where their opportunity costs were less. For example, he would have had to give up very valuable results of successful business management, if he were to program. However, by managing he gave up a less valuable output, that of programming.

Non-Tariff Barrier

Government policy to restrict imports through methods other than a tariff or a quota.

Explain why the concept of opportunity cost should be used to determine how countries specialize and trade.

If country A's opportunity cost is less than another's (B), country A should specialize where its opportunity cost is the smallest. Country A, by producing where the opportunity cost is the lowest, is giving up less than if Country B produced the good. Thus, the world gives up less by producing where opportunity cost is the lowest.

Will a low-wage country take jobs and business away from the U.S.? Explain why or why not in your own words.

It may seem that due to international trade, low-wage workers in other countries will unfairly compete with workers in the U.S. This may not always be true, because even if other countries are not as efficient as the U.S. is in producing goods, it still pays to trade. The low-wage countries will indeed specialize where they are least disadvantaged and U.S. workers in those industries will be hurt. Yet, since total output increases, total output per person (or the average standard of living) increases. Moreover, as shown in the examples above, it is not true that all "low-wage countries" are also low-cost countries and thus will not be able to compete with a high-wage country. Due to dramatic differences in productivity, there can be dramatic differences in wages and the products will still be less expensive to produce in the high-wage economy.

We have shown that all individuals and countries can gain from trade. Can you think of a reason why some individuals or countries may object to free trade?

Someone who loses his or her job or business as a result of competition from someone else pays significant costs from trade. The next section lists some of the objections to free trade.

What are the core issues in the article about importing shrimp?

The core issue seems to be whether to place tariffs on imported shrimp. The article discusses the investigation by the U.S. Department of Commerce that was supposed to determine if China and Vietnam had been unfairly dumping cheap shrimp in U.S. markets. It also addresses some of the pros and cons of imposing such a tariff. Subjecting shrimps to a tariff will hurt consumers who will now have to pay a higher price for the imported shrimp. Moreover, foreign producers and local restaurants will be adversely affected if such a tariff is imposed. However, the U.S. shrimp fishermen will benefit by subjecting shrimps to tariffs. A tax on foreign shrimp will make it more expensive compared to domestic shrimp, resulting in an increase in the demand of U.S. shrimp and a rise in the price received by U.S. shrimp fishermen.

Production Possibilities Frontier

The production possibilities frontier plots the maximum output of goods and services that a country can produce with its resources.

Infant Industry Argument

The reason for temporarily protecting new industries because they do not yet have the economies of scale that their older foreign competitors enjoy.

A lowering of tariffs and an elimination of quotas will mean increased competition from foreign producers. This shift will lead to increased unemployment and decreased profits in some industries. Why should we allow this to happen?

The reason we may allow this to happen is that with increased trade, prices will be kept low and businesses will be forced to produce products which are competitive in quality. With the specialization that will result, more can be produced and consumed by both countries. The resulting unemployment in the formerly protected industries can be reduced with the use of proper fiscal and monetary policy.

If a country is better than every other country at producing almost all of the goods it wants, why would it benefit from trade? Explain in your own words.

Total production can increase when countries can engage in specialization. If total production increases and trade takes place, both countries can have more of both goods and therefore be better off.

Why do individuals, businesses and countries trade with one another? Make a list of the benefits of trade.

Trade is buying and selling of goods and services on the parts of individuals and businesses. Trade occurs between rational people because everyone benefits. Trade enables individuals and countries to obtain goods and services that they cannot produce for themselves, either because they do not possess the resources to produce them or simply because they cannot produce them in an efficient way. Specialization and trade allow us to produce more with the same resources and the average real standard of living is greater as a result.

Dumping

When a country exports a product at a price that is lower in the foreign market than the price charged in the domestic market.

Economies of Scale

When all inputs are doubled, output more than doubles.