Chapter 2, 15 The Economic Problem, International Trade Policy

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 another country is known as a(n):

*voluntary export restraint*

The United States accounts for ___ % of world exports and ____% of world imports

10; 13

What is critical to the success of the market system?

Allowing individuals and firms to have *exclusive use* of their property

The name given to the sale of a product for less than its COGS? Why does this happen?

Dumping; To establish monopoly

Vocab: Proectionism

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

When does a producer *lose* from international trade

When the *world price is lower* than the price the producer was selling; (producer must lower prices or not sell)

Allocative efficiency occurs when

When the marginal cost of a good equals the marginal benefit *of that same good* (not the other given)

Specialization and the gains from trade make the economy PPF outward bowed because​ _______

a good is initially produced by producers with lower opportunity costs and eventually produced by producers with higher opportunity cost

The World Trade Organization (WTO) determines that dumping has occurred if:

a product is *exported* for a lower price than it sells for in a home market

Ms. Boulware is the best lawyer and the best secretary in town. She has: a comparative advantage or an absolute advantage in both jobs

absolute advantage

Vocab: Production Possibilities Fronteir

boundary between those combinations of goods and services that can be produced and those that cannot Function: Makes *opportunity cost* measurable

Countries gain from specializing in producing goods in which they have a(n) __________ advantage and trading for goods in which other countries have a(n) __________ advantage

comparative; comparative

People specialize and trade so that they can (consume or produce) at a point outside of their production curve

consume

Economic growth​ ______ overcome scarcity because​ ______.

does​ not; we can produce more goods and services but it is still impossible to satisfy all our wants

As you move down the PPF, the opportunity cost

increases

When nations specialize in their comparative advantage and engage in trade:

overall standards of living increase

Failure to specialize and reap the gains from trade is​ _______ because​ _______.

production is at a point inside the PPF

Arguments for trade restrcitions

*Protects/Helps infant industries grow* Counteracts dumping Saves domestic jobs Allows us to compete with cheap foreign labor Penalizes lax environmental standards Prevents rich countries from exploiting developed countries Reduces offshore outsourcing

According to the theory of comparative advantage, specialization and free trade will benefit:

All trading partners who have a comparative advantage in producing the good that they sell

International trade provides a *net gain* for a country because

For imports, consumers gain *more* than producers lose; For exports, producers gain *more* than consumers lose

Vocab:Marginal Cost

Opportunity cost of prodcuing one more unit

Markets coordinate decisions through

Price Adjustments

Vocab: Production Efficiency

goods are produced at lower possible cost

As an economy experiences economic growth, shares of production shift:

initially from agriculture to industry and then from industry to services

The opportunity cost of producing one good one PPF is equal to _____ the opportunity cost of the other good

inverse

In high-income countries, technological advances release labor from ____ jobs and expand production in ____ jobs

manufacturing; service

The PPF bowes outwards because

opportunity cost increases

*Absolute advantage* is the ability of an individual, firm, or country to:

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

Absolute advantage compares ____ whereas comparative advantage compares _____

productivities: opportunity costs

Because points outside of the PPF are unattainable, the model represents

scarcity

The principle of increasing opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.

smaller

*TEST* Vocab: Opportunity Cost

the *highest-valued alternative* forgone. Ratio: *decrease* in the quantity of one good divided by *increase* in quantity produced of another good

Vocab: Economic growth

the expansion of production possibilities

Vocab: Allocative Efficiency

the point at which goods and services are produces at the *lowest possible cost* and at quantities that produce the *highest possible benefit*

Major reason that international trade is restricted

*Rent seeking* Lobbying for special treatment by the government to create economic profit or to divert the gains from free trade away from others

Economic growth comes from what two things

*Technological Change*: the development of new goods and services. *Capital Accumulation*: the growth of capital resources including human

*TEST* Missed How to calculate opportunity cost from PPF graph Test # 32

*The SLOPE of the PPF = the opportunity cost* It is not in the word problem for the corresponding amounts of goods and services sold

Four tools that govt uses to influence international trade and *protect* domestic industries from foreign competition

1. *Tariffs* : Tax on good imposed by the importing country; money goes to government 2. *Import Quotas*: Restriction that limits the quantity of a good that may be imported in a given period 3. *Import Barriers*: Health, safety, regulation barriers; voluntary export restraints 4. *Export subsidies*: Payment from govt for producer to produce more

Arguments Against trade restrcitions

Dumping is hard to detect;can't estimate a firm's cost of production Creates more jobs than destroys Low wage labor is low productivity labor; it is *comparative advantage*, not labor productivity, that drives international trade It is income growth that will help countries to improve env. conditions

In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered? Goods markets Factor markets Financial Markets

Goods markets

How can marginal benefit be calculated from the PPF curve

It cannot; unrelated

Effects of both import tariffs and imports quotas

Price *rises* Quantity bought *decreases* Quantity produced domestically *increases* *supply curve shifts right*

In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?

The *division of labor*

Describe the cost of saving jobs through protectionism

The cost of saving jobs through trade barriers like tariffs and quotas is *relatively high* Consumers bear this cost through higher prices paid for products. Free trade increases the variety of goods available and also lowers their cost.

Which of the following is a drawback to the infant industry justification for protectionism?

The industries under protection may never become efficient enough to compete with foreign firms.

Why is the PPF curve steeper towards the high quantities of goods produced

The more of either good we try to produce, the less productive are the additional resources we use to produce that good and the larger is the opportunity cost of a unit of that good.

Vocab: Marginal Benefit

The most someone is willing to pay for a good or service This is independent of the marginal cost and cannot be derived from it

Why does a country import something from the rest of the world

The rest of the world has a *comparative advantage* in producing that good

The opportunity cost of economic growth is faster when

the rate of production growth is greater

The flows in the market economy that go from firms to households are​ _______. The flows in the market economy that go from households to firms are​ _______.

the real flows of goods and services and the income flows of​ wages, rent,​ interest, and​ profit; the real flows of​ labor, land,​ capital, and entrepreneurship and the flow of expenditure on goods and services

Resources are *misallocated* when

they are assigned to tasks for which they are not the best match

People who are in favor of protectionist regulations are those that

want to protect domestic firms

allocative efficiency occurs when

we are producing at a point on the PPF such that marginal benefit at the quantity produced equals marginal cost