ch. 12: Global Markets in Action
Small Economy Assumption
-A small economy is a PRICE TAKER in world markets: Its actions have no effect on world price -When a small economy engages in free trade, world price is the only relevant price (no country can influence the given price)
four sets of tools government uses to restrict international trade:
-tariffs -import quotas -other import restrictions -export subsidies
subsidy
A government payment that supports a business or market
exports
Goods and Services sold to other countries
import quota
a limit on the number of products in certain categories that a nation can import
export subsidy
a payment from a government to a firm as a reward for exporting products
voluntary export restraint
a self-imposed limitation on the number of products shipped to a particular country
tariff
a tax on a good that is imposed by the importing country
assumption with NO TRADE
all production is consumed, no DWL, equilibrium, etc. BUT not realistic
what drives international trade?
comparative advantage and opportunity cost
The basis for trade is _____ advantage, not _________ advantage
comparative; absolute
When tariffs are imposed, the losers include
domestic consumers and foreign producers
consumers' gain ________ producers' loss, so total surplus increases
exceeds
producers' gain _________ consumers' loss, so total surplus increases
exceeds
trade surplus
exports exceed imports (positive trade balance)
trade deficit
exports less than imports (negative trade balance)
imports
goods and services purchased from other countries
specializing in producing goods for which a nation has a comparative advantage allows for ________ _________
greater efficiency
buyers of ________ goods benefit from lower prices and sellers of _________ goods benefit from higher prices
imported; exported
international trade _____ the price of an imported good and _______ the price of an exported good
lowers; raises
gains from globalization
outweigh the losses
national comparative advantage
the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation
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
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
trade balance
the difference in value of the goods that a country sells abroad compared to those it purchases from other countries
domestic price
the price of a good or service within a country, determined by domestic demand and supply
world price
the price of a good that prevails in the world market for that good