ECO 101 (Module 14 - Globalization and Trade)

value chain:

how a good is produced in stages

If the U.S. government only allowed so many jars of peanut butter to be allowed into its borders from foreign producers than this would be considered a(n) ________.

import quota (Trade barriers are frorms or tools used to enforce protectionist policies. Import quotras are numerical limitations on the quantitiy of products that a country can bring into U.S. borders)

There are different types of economic integration across the globe, ranging from free trade agreements,

in which participants allow each other's imports without tariffs or quotas,

to common markets,

in which participants have a common external trade policy as well as free trade within the group,

to full economic unions,

in which, in addition to a common market, monetary and fiscal policies are coordinated.

As globalization increases over time,

individuals, firms, institutions, and politicians work within and across countries to define exactly how "open" they want to be.

disruptive market change:

innovative new product or production technology which disrupts the status quo in a market, leading the innovators to earn more income and profits and the other firms to lose income and profits, unless they can come up with their own innovations

intra-industry trade:

international trade of goods within the same industry

A country has an absolute advantage over another country if

it can produce a given product using fewer resources than the other country needs to use

A country has a comparative advantage when

it can produce a good at a lower opportunity cost than another country.

If a country has an absolute advantage in producing both goods,

it has higher labor productivity in both and its workers will earn higher incomes than those in the other country.

Economists have concerns about regional trade agreements because ________.

it may inhibit trade outside of the regional agreement (These regional agreements may promise free trade, but actually act as a way for the countries within the regional agreement to try to limit trade from anywhere else. In some cases, the regional trade agreements may even conflict with the broader agreements of the World Trade Organization.)

One of the advantages of intra-industry trade is the division of labor which leads to ________.

learning, innovation, and unique skills (The division of labor allows workers to focus on a particular aspect of the production process. This results in increased learning and skills, which in turn increase productivity.)

The role of the World Trade Organization (WTO) is to succeed GATT, encourage trade disputes, and ________.

lower barriers to trade (The WTO is committed to lowering barriersto trade. The world's nations meet through the WTO to negotiate how they can reduce barriers to trade, such as tariffs. WTO negotiations happen in "rounds", where all countries negotiate one agreement to encourage trade, take a year or two off, and then start negotiating a new agreement.)

Grubel-Lloyd Index:

measure of interindustry trade in some industry; values closer to zero indicate low interindustry trade; values closer to one indicate high interindustry trade

The GATT process was to

negotiate an agreement to reduce barriers to trade, sign that agreement, pause for a while, and then start negotiating the next agreement. The rounds of talks in the GATT, and now the WTO, are shown in Table 1.

If the U.S. government only allowed childrens toys that are lead-free to be imported into the United States then this would be viewed as a(n) ________.

non-tariff barrier (Trade barriers are forms or tools used to enforce protectionist policies. Non-tariff barriers are all the other ways that a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products. This can include safety measures.)

The "average person," however, is hypothetical,

not real—representing a mix of those who have done very well, those who have done all right, and those who have done poorly.

import quotas:

numerical limits on the quantity of products that a country can import

If trade is still a good thing even if some people lose, the government can help workers affected by disruptive market change by ________.

offering re-employment services (Providing job search tools such as resume writing, counseling, job referrals, and travel costs help workers displaced by disruptions in the market.)

One of the main reasons the government would consider protectionist policies include ________.

political pressures from domestic producers (Some trade barriers including tariffs and imirt quotas can protect domestic producers by raising prices of imports and reducing the number of imports allowed.)

Globalization is the

process by which the world, previously isolated through physical and technological distance, becomes increasingly interconnected.

Protectionist policies are used by governments in order to ________.

protect domestic producers (Protectionist policies seek to shield domestic producers and domestic workers from foreign competition.)

dumping:

selling imports at a price below fair market value, i.e. cost

Protectionism takes three main forms:

tariffs, import quotas, and nontariff barriers.

Tariffs are

taxes that a government imposes on imported goods and services. This makes imports more expensive for consumers, discouraging purchases of imports in favor or domestic substitutes. For example, in recent years large, flat-screen televisions imported to the U.S. from China have faced a 5% tariff rate.

tariffs:

taxes that governments place on imported goods

The Commerce Department estimates a dumping "margin,"

that is, the difference between price and cost.

In the arena of trade policy,

the battle often seems to be between national laws that increase protectionism and international agreements that try to reduce protectionism, like the WTO.

globalization:

the increase in interaction between peoples around the world that involves the sharing of ideas, cultures, goods, services and investment

Globalization happens through

the increase in interaction between peoples around the world that involves the sharing of ideas, cultures, goods, services and investment.

There are also nontariff barriers in the form of "rules-of-origin" regulations;

these rules describe the "Made in Country X" label as the one in which the last substantial change in the product took place.

Typically, the average country is better off because of international trade, but it is a zero sum gain meaning there are winners and losers. The winners are those involved with a product that is in high demand by foreign markets, while the losers are ________.

those involved with a product whose demand decreases due to free trade (Protectionism is an attempt to mitigate the harm done by international trade to those firms that produce subsititudes for the imported products. The most prominent argument for tariffs, quotas. and other barriers to trade is to protect jobs and incomes that otherwise would be at risk from foreign imports. )

Economies of scale and intra-industry trade combine to produce ________.

variety for consumers (Specialization through machinery is not necessarily the result of intra-industry trade. This is not the best answer.)

The United Nations was unable to agree to this. Instead, the General Agreement on Tariffs and Trade (GATT),

was established in 1947 to provide a forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade. In 1995, the GATT was transformed into the World Trade Organization (WTO).

nontariff barriers:

ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products

Comparative Advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

As always, the slope of the production possibility frontier for each country is the opportunity cost of one refrigerator in terms of foregone shoe production-

when labor is transferred from producing the latter to producing the former (see Figure 1).

Absolute Advantage

when one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country

Another way to control trade is through import quotas,

which are numerical limitations on the quantity of products that a country can import. For instance, during the early 1980s, the Reagan Administration imposed a quota on the import of Japanese automobiles. In the 1970s, many developed countries, including the United States, found themselves with declining textile industries. Textile production does not require highly skilled workers, so producers were able to set up lower-cost factories in developing countries.

A common complaint is dumping,

which means that foreign imports are being sold at less than their fair market value, i.e. their cost.

The benefits of trade do not stop at national boundaries, either. The division of labor could increase output for three reasons:

(1) workers with different characteristics can specialize in the types of production where they have a comparative advantage; (2) firms and workers who specialize in a certain product become more productive with learning and practice; and (3) economies of scale.

Assuming that Brazil can produce 100 pounds of beef or 10 autos and the United States can produce 40 pounds of beef or 30 autos, what is the opportunity cost of producing one pound of beef in Brazil?

1/10 of an auto. (For each pound of beef produced, Brazil must give up 1/10 of an auto.)

Incomes depend on labor productivity.

A country with an absolute advantage in some product has higher labor productivity than another country does in the production of that product.

The world has seen a flood of regional trading agreements in recent years. About 100 such agreements are now in place.

A few of the more prominent ones are listed in Table 2. Some are just agreements to continue talking; others set specific goals for reducing tariffs, import quotas, and nontariff barriers. One economist described the current trade treaties as a "spaghetti bowl," which is what a map with lines connecting all the countries with trade treaties looks like.

Say that Aliceland can produce 32 units of food per person per year or 16 units of clothing per person per year, but Georgeland can produce 16 units of food per year or 8 units of clothing. Which of the following is true?

Aliceland has an absolute advantage, but not comparative advantage, in producing food. (Aliceland produces more food and has an absolute advantage in food production compared to Georgeland. Aliceland does not have a comparative advantage in the production of food.)

U.S. tariffs have followed this general pattern: After rising sharply during the Great Depression, tariffs dropped off to less than 2% by the end of the century.

Although measures of import quotas and nontariff barriers are less exact than those for tariffs, they generally appear to be at lower levels, too.

Globalization has brought fear of loss of jobs and loss of income, which are often described as the "race to the bottom," as industrialized countries are thought to have to reduce wages to be competitive with those in the developing world. Globalization has also spawned fears about loss of culture. Many countries worry about their cultures being overwhelmed by that of the United States. France is a good example. Others fear replacement of their cultures by that of Western nations (e.g., some Islamic states). Countries also fear the loss of national sovereignty as they become part of supranational entitles, like the European Union or the International Monetary Fund.

And yet, history shows that globalization has corresponded to higher national incomes and increased opportunities. How can these conflicting views be reconciled?

The EU has a number of goals. For example, in the early 2000s it introduced a common currency for Europe, the euro, and phased out most of the former national forms of money like the German mark and the French franc, though a few have retained their own currency.

Another key element of the union is to eliminate barriers to the mobility of goods, labor, and capital across Europe.

Comparative advantage asks this same question slightly differently. Instead of comparing how many workers it takes to produce a good, it asks, "How much am I giving up to produce this good in this country?"

Another way of looking at this is that comparative advantage identifies the good for which the producer's absolute advantage is relatively larger, or where the producer's absolute productivity disadvantage is relatively smaller.

Which area in the graph below illustrates the loss to domestic shoe producers if the government decided against placing a tariff on foreign shoes?

B+C (Area C represents only part of the loss. Area F represents an area below the producers willingness to accept. Producers would not supply their goods at this price regardless of the tariff.)

Which of the following best fits an explanation of why the World Trade Organization (WTO) was established?

Bring all sizes of nations together to negotiate trade deals between each other. (The WTO was established to remove barriers to trade so that all nations can benefit.)

It is natural for people to want to protect their own products through tariffs or trade restrictions, while having open access to foreign markets.

But if one country protects its products, its trading partners are likely to do the same.

For example, if Canada can produce 100 pounds of beef using two ranchers, while Argentina needs three ranchers to produce 100 pounds of beef,

Canada has an absolute advantage over Argentina in beef production

Most people who live in market-oriented economies would oppose trying to block better products that lower the cost of services.

Certainly, there is a case for society providing temporary support and assistance for those who find themselves without work. Many would argue for government support of programs that encourage retraining and acquiring additional skills. Government might also support research and development efforts, so that other firms may find ways of outdoing Technotron.

What United States government department determines if imports from other countries are being traded fairly?

Department of Commerce (The United States International Trade Commission (USITC) is an independent, Federal agency with broad investigative responsibilities on matters of trade.)

In the context of a global economy that currently produces more than $30 trillion of goods and services each year, this amount is not huge: it is an increase of 1% or less. But before dismissing the gains from trade too quickly, it is worth remembering two points.

First, a gain of a few hundred billion dollars is enough money to deserve attention! Moreover, remember that this increase is not a one-time event; it would persist each year into the future. Second, the estimate of gains may be on the low side because some of the gains from trade are not measured especially well in economic statistics. For example, it is difficult to measure the potential advantages to consumers of having a variety of products available and a greater degree of competition among producers. Perhaps the most important unmeasured factor is that trade between countries, especially when firms are splitting up the value chain of production, often involves a transfer of knowledge that can involve skills in production, technology, management, finance, and law.

You learned that trade based on comparative advantage will maximize an individual's or a nation's income, but that there will be winners and losers to trade.

For example, employees and owners of a firm that loses business to foreign imports are worse off, even though their loss is less than the gain to consumers.

The question each country or company should be asking when it trades is this: "What do we give up to produce this good?"

For example, if Zambia produces copper, the resources it uses cannot be used to produce other goods such as corn

The precursor to the World Trade Organization (WTO) was the ________.

General Agreement on Tariffs and Trade (GATT) (The GATT transformed into the WTO in 1995.)

International trade and finance are often confused as being synonymous with globalization. Indeed, trade and international finance have contributed to globalization but they are not the same.

Globalization is a process that widens, deepens and speeds-up interconnectedness between people, institutions, markets and nations. Trade and finance are two arteries through which the process of globalization flows.

What happens to the possibilities for trade if one country has an absolute advantage in everything? This is typical for high-income countries that often have well-educated workers, technologically advanced equipment, and the most up-to-date production processes. These high-income countries can produce all products with fewer resources than a low-income country. If the high-income country is more productive across the board, will there still be gains from trade?

Good students of Ricardo understand that trade is about mutually beneficial exchange. Even when one country has an absolute advantage in all products, trade can still benefit both sides. This is because gains from trade come from specializing in one's comparative advantage.

These three reasons apply from the individual and community level right up to the international level.

If it makes sense to you that interpersonal, intercommunity, and interstate trade offer economic gains, it should make sense that international trade offers gains, too.

The current round of negotiations is called the Doha Round because it was officially launched in Doha, the capital city of Qatar, in November 2001.

In 2009, economists from the World Bank summarized recent research and found that the Doha round of negotiations would increase the size of the world economy by $160 billion to $385 billion per year, depending on the precise deal that ended up being negotiated.

Specialization in the world economy can be very finely split.

In fact, recent years have seen a trend in international trade called splitting up the value chain.

Few would suggest holding back on improvements in medical technology because they might cause companies selling leeches and snake oil to lose money.

In short, most people view disruptions due to technological change as a necessary cost that is worth bearing.

There is concern among economists who favor free trade that some of these regional agreements may promise free trade, but actually act as a way for the countries within the regional agreement to try to limit trade from anywhere else.

In some cases, the regional trade agreements may even conflict with the broader agreements of the World Trade Organization.

Low-income countries benefit more from trade than high-income countries do.

In some ways, the giant U.S. economy has less need for international trade, because it can already take advantage of internal trade within its economy. However, many smaller national economies around the world, in regions like Latin America, Africa, the Middle East, and Asia, have much more limited possibilities for trade inside their countries or their immediate regions.

The best known of these regional trading agreements is the European Union.

In the years after World War II, leaders of several European nations reasoned that if they could tie their economies together more closely, they might be more likely to avoid another devastating war. Their efforts began with a free trade association, evolved into a common market, and then transformed into what is nearly a full economic union, known as the European Union.

The challenge for policymakers is how to compensate the losers while capturing the gains from trade. Similarly, protectionism benefits some workers and businesses at the expense of other workers and businesses and at the expense of consumers.

In this case, the losses to the latter groups are larger than the gains to the former groups. In that sense, protectionism makes a country worse off.

In intra-industry trade, the level of worker productivity is not determined by climate or geography. It is not even determined by the general level of education or skill. Instead, the level of worker productivity is determined by how firms engage in specific learning about specialized products, including taking advantage of economies of scale.

In this vision, comparative advantage can be dynamic—that is, it can evolve and change over time as new skills are developed and as the value chain is split up in new ways. This line of thinking also suggests that countries are not destined to have the same comparative advantage forever, but must instead be flexible in response to ongoing changes in comparative advantage.

We have seen that international trades raises the standard of living for participating countries.

Indeed, free trade maximizes the gains from international trade. While each country is better off through international trade (or more precisely, the average resident is better off), that doesn't mean that all individuals are better off.

Through all the controversy, the general trend for most of the last 60 years is clearly toward lower barriers to trade. The average level of tariffs on imported products charged by industrialized countries was 40% in 1946. By 1990, after decades of GATT negotiations, it was down to less than 5%.

Indeed, one of the reasons that GATT negotiations shifted from focusing on tariff reduction in the early rounds to a broader agenda was that tariffs had been reduced so dramatically there was not much more to do in that area.

Most people find it easy to believe that they, personally, would not be better off if they tried to grow and process all of their own food, to make all of their own clothes, to build their own cars and houses from scratch, and so on.

Instead, we all benefit from living in economies where people and firms can specialize and trade with each other.

Absolute advantage simply compares the productivity of a worker between countries.

It answers the question, "How many inputs do I need to produce shoes in Mexico?"

The large business Paddle Anywhere, Inc. is in the process of creating, with intra-industry trade, better economies of scale for its folding kayak and paddle business. What do you expect better economies of scale in this company could create for its consumers?

It could increase product options and decrease prices of Paddle Anywhere's products. (Cost efficiencies from economies of scale, and increased product options, are likely to result in lower prices for Paddle Anywhere's products.)

This agreement has since been superseded by the World Trade Organization (WTO), whose membership includes about 150 nations and most of the world's economies.

It is the primary international mechanism through which nations negotiate their trade rules—including rules about tariffs, quotas, and nontariff barriers.

For countries participating in a regional trading agreement, what makes this type of agreement significant to the countries involved?

Its purpose is to eliminate barriers to the movement of labor, goods, and capital across those countries involved in it. (Regional trade agreements reduce tariffs, import quotas, and non-tariff barriers, in order to promote free trade among its members.)

Using its available resources, the country of Zanzibarus can produce 12 million pounds of beef or 6 million pounds of pork. The neighboring country of Kenyatta can produce 9 million pounds of beef or 3 million pounds of pork. Based on these figures, ________ has a (n) ________ in beef production.

Kenyatta; comparative advantage (Kenyatta has the ability to produce beef at a lower opportunity cost than pork. They have to give up less pork in order to produce more beef.)

The economic gains from expanding international trade are measured in hundreds of billions of dollars, and the gains from international trade as a whole probably reach well into the trillions of dollars. The potential for gains from trade may be especially high among the smaller and lower-income countries of the world.

Like the GATT before it, the WTO is not a world government, with power to impose its decisions on others. The total staff of the WTO in 2013 is 629 people and its annual budget (as of 2012) is $196 million, which makes it smaller in size than many large universities.

________ allows a country to buy imports from other countries which have easier production and lower cost of certain goods in its marketplace.

Lower opportunity costs (Countries can benefit from trade by taking advantage of lower cost imports, while specializing in the production of goods they can produce at a lower cost.)

Without international trade, they may have little ability to benefit from comparative advantage, slicing up the value chain, or economies of scale.

Moreover, smaller economies often have fewer competitive firms making goods within their economy, and thus firms have less pressure from other firms to provide the goods and prices that consumers want.

An example of a regional trade agreements is ________.

NAFTA (The North American Free Trade Agreement eliminates all tariffs and trade barriers between the U.S., Mexico, and Canada.)

Which regional trade agreement includes Canada, Mexico, and the United States?

NAFTA (The North American Free Trade Agreement is the best known regional trade agreement and has been in effect since 1994.)

What is one of the reasons nations trade with each other?

No country can create or produce everything its citizens desire. (It is not possible for one country to produce everything consumers want. Countries must trade in order to increase the variety of goods available to consumers..)

Why would a country pass laws or negotiate agreements to shut out certain foreign products, like sugar or textiles, while simultaneously negotiating to reduce trade barriers in general?

One plausible answer is that international trade agreements offer a method for countries to restrain their own special interests. A member of Congress can say to an industry lobbying for tariffs or quotas on imports: "Sure would like to help you, but that pesky WTO agreement just won't let me."

In newspaper headlines, trade policy appears mostly as disputes and acrimony. Countries are almost constantly threatening to challenge the "unfair" trading practices of other nations. Cases are brought to the dispute settlement procedures of the WTO, the European Union, NAFTA, and other regional trading agreements.

Politicians in national legislatures, goaded on by lobbyists, often threaten to pass bills that will "establish a fair playing field" or "prevent unfair trade"—although most such bills seek to accomplish these high-sounding goals by placing more restrictions on trade. Protesters in the streets may object to specific trade rules or to the entire practice of international trade.

When a government legislates policies to reduce or block international trade it is engaging in protectionism.

Protectionist policies often seek to shield domestic producers and domestic workers from foreign competition.

When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. The production possibilities frontier is a useful tool to visualize this benefit.

Recall from earlier readings that the production possibilities frontier shows the maximum amount that each country can produce given its limited resources, in this case workers.

The General Agreement on Tariffs and Trade (GATT) evolved from the overuse of protections on over 20,000 goods being internationally traded under the ________.

Smoot-Hawley Bill (The GATT was created to scale back on tariff restricgtions across the world.)

Looking at historical trends, what would you say is a long term trend in trade policies?

Tariffs continue to be reduced over time. (Up until the recent tariffs imposed by the Trump Administration, the long term trend was reducing tariffs and promoting free trade.)

If Commerce determines that the import price is less than cost, they find that dumping has occurred.

The United States International Trade Commission—another government agency—determines whether domestic industries have been substantially injured by the dumping, and if so, the President can impose tariffs in the amount of the dumping margin to offset the unfairly low price.

For the United States, perhaps the best-known regional trading agreement is the North American Free Trade Agreement (NAFTA).

The United States also participates in some less-prominent regional trading agreements, like the Caribbean Basin Initiative, which offers reduced tariffs for imports from these countries, and a free trade agreement with Israel.

The World Trade Organization (WTO) was established in 1995, as the successor to the General Agreement on Tariffs and Trade (GATT), which was discussed in the last section.

The WTO is committed to lowering barriers to trade. The world's nations meet through the WTO to negotiate how they can reduce barriers to trade, such as tariffs. WTO negotiations happen in "rounds," where all countries negotiate one agreement to encourage trade, take a year or two off, and then start negotiating a new agreement.

A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale.

The concept of economies of scale means that as the scale of output goes up, average costs of production decline—at least up to a point.

Protectionism is an attempt to mitigate the harm done by international trade.

The most prominent argument for tariffs, quotas and other barriers to trade is to protect jobs and incomes that otherwise would be at risk from foreign imports.

Nations participate in global and regional trade agreements. They also develop their own national trade policies.

The purpose of these agreements is to define what constitutes fair trading practices in different contexts.

Thus, the last half-century has seen both a dramatic reduction in government-created barriers to trade, such as tariffs, import quotas, and nontariff barriers, and also a number of technological developments that have made international trade easier, like advances in transportation, communication, and information management.

The result has been the powerful surge of international trade.

Every country must adopt a policy on international trade. Free trade is one option, as is autarky (no international trade), and everything in between. Political pressures to protect special interests collide with those promoting the benefits of free trade.

The result is a country's trade policy, which is often a compromise between competing politics.

The sluggish pace of GATT negotiations led to an old joke that GATT really stood for Gentleman's Agreement to Talk and Talk.

The slow pace of international trade talks, however, is understandable, even sensible. Having dozens of nations agree to any treaty is a lengthy process. GATT often set up separate trading rules for certain industries, like agriculture, and separate trading rules for certain countries, like the low-income countries. There were rules, exceptions to rules, opportunities to opt out of rules, and precise wording to be fought over in every case.

Free trade is a policy and like every policy, there are winners and losers.

The winners are consumers and workers, managers and owners of firms that produce goods whose demand increases through international trade. The losers are workers, managers and owners of firms whose demand decreases as a result of international trade; that is, firms who produce substitutes for imports.

Why do similar high-income economies engage in intra-industry trade? What can be the economic benefit of having workers of fairly similar skills making cars, computers, machinery and other products which are then shipped across the oceans to and from the United States, the European Union, and Japan?

There are two reasons: (1) The division of labor leads to learning, innovation, and unique skills; and (2) economies of scale.

What is the tradeoff for the average worker when it comes to international trade policies in specialization and comparative advantage?

There is the possibility that some workers could be laid off from their job. (If a country chooses to specialize in production of a particular good or service, that may result in more jobs for some workers and less jobs for other workers.)

At the beginning of the Great Depression in 1930, the U.S. Congress passed the Smoot-Hawley Tariff Act to protect American jobs and industries from foreign competition.

This act raised U.S. tariffs on dutiable imports to nearly 60%. U.S. trading partners retaliated by raising their own tariffs on U.S. exports, with the result that international trade between the [warring] nations declined by half. The consensus among economists is that the Smoot-Hawley tariffs contributed significantly to the depth and length of the Great Depression.

Thus, the average income in a country depends on its average labor productivity. Now consider comparative advantage. If a country specializes production in the product in which it has a comparative advantage, it raises its average labor productivity and raises its average income.

Thus, comparative advantage is more important than absolute advantage in understanding which country should trade which product in order to maximize the standard of living in both countries.

Guatemala produces an excess supply of coffee but has consumers demanding electronics. Mexico generates a large supply of electronics but its market demands more coffee. What would happen if both countries traded?

Trade would assist both countries in reducing excess supply and satisfying market demand. (Guatemala can benefit by trading coffee to Mexico, and Mexico can benefit by trading electronics to Guatemala. Trade will allow both countries to sell their excess supply. and purchase goods in high demand.)

As you know, tariffs are taxes that governments place on imported goods for a variety of reasons. Some of these reasons include protecting sensitive industries, for humanitarian reasons, and protecting against dumping.

Traditionally, tariffs were often used as a political tool to protect certain vested economic, social, and cultural interests.

Westfalia is a country with a conservative population that bases its culture around traditional values and long cultural traditions. This year Westfalia began to have an increase of electronic media, movies and literature from a neighboring country, Dogoni. Dogoni's culture is broadly different from Westfalia being more liberal and explicit in its media. Westfalia's parliament is now passing new protectionist policies to restrict or ban electronic media, movies and literature from Dogoni. What reason would most rationally support Westfalia's government actions?

Westfalia needs to protect its culture. (It appears that Westfalia's government is more interested in protecting its culture and traditions from Dogoni's liberal and explicit media, and less interested in promoting its own mixed media industry.)

Low-income countries benefit more from trade than high-income countries do. In some ways, the giant U.S. economy has less need for international trade, because it can already take advantage of internal trade within its economy. However, many smaller national economies around the world, in regions like Latin America, Africa, the Middle East, and Asia, have much more limited possibilities for trade inside their countries or their immediate regions.

Without international trade, they may have little ability to benefit from comparative advantage, slicing up the value chain, or economies of scale.

The General Agreement on Tariffs and Trade (GATT) was started following ________ in order to help nations come together to negotiate tariffs and international trade.

World War II (The GATT was started October 30, 1947 to provide a forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade.)

Zenobia can manufacture 4 ships or 20 computers in a week. Meanwhile, in the neighboring country of Azarmidok, 10 ships or 12 computers are produced per week. Which country has the largest opportunity cost to produce a ship and what is the opportunity cost to that country?

Zenobia; 5 computers (Azarmidok's opportunity cost of producing another ship is 1.2 computers.)

The value chain describes how

a good is produced in stages.

An example of a tariff would be ________.

a tax on an imported good (Tariffs are taxes on imported goods.)

tariff:

a tax on imports, designed to protect domestic industry

If a country can produce a good with fewer resources than another country, the first country is said to have a/an ________.

absolute advantage (A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good.)

Julia is an expert with lab experiments in her chemistry class. She is the fastest at reading and comprehending the experiment, setting up the equipment, conducting the experiment, writing notes, making observations, and in cleaning up an experiment. Julia has a(n) ________ in chemistry experiments.

absolute advantage (Julia is able to produce more with fewer inputs. She uses less time and produces more experiments compared to the rest of the class.)

Nontariff barriers are

all the other ways that a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products. A rule requiring certain safety standards can limit imports just as effectively as high tariffs or low import quotas, for instance.

Ghana produces cocoa for chocolate with less land and labor in comparison with all countries. If cocoa labor and cocoa land cost the same in every country, then Ghana has

an absolute advantage in cocoa production. (Ghana is able to produce cocoa with less resources (labor and land) than other countries. Producing with less resources is an absolute advantage.)

Moreover, smaller economies often have fewer competitive firms making goods within their economy,

and thus firms have less pressure from other firms to provide the goods and prices that consumers want.

The common belief among economists is that it is

better to embrace the gains from trade, and then deal with the costs and tradeoffs with other policy tools, for example, retraining workers who lose their jobs to imports, than it is to cut off trade to avoid the costs and tradeoffs.

Over time, the average person gains from international trade,

both as a worker who has greater productivity and higher wages because of the benefits of specialization and comparative advantage, and as a consumer who can benefit from shopping all over the world for a greater variety of quality products at attractive prices.

This numerical example illustrates the remarkable insight of comparative advantage: even when one country has an absolute advantage in all goods and another country has an absolute disadvantage in all goods,

both countries can still benefit from trade.

Once the economies of scale run out, larger plants ________ for the same homogenous product.

cannot typically produce more cheaply than a smaller plants (One the additional scale of production does not continue to reduce average costs of production this then puts the large and small plants at the same cost point)

splitting up the value chain:

conducting different stages of production of a good in different geographic locations

Tariffs have been greatly reduced over time by ________.

decades of GATT negotiations (Tariffs have dropped off and although meausures of import quotas and nontariff barriers are less exact than those for tariffs, they generally appear to be at lower levels, too.

The General Agreement on Tariffs and Trade (GATT) helps promote trade by

decreasing quotas (GATT has worked to lower or eliminate trade barriers like tariffs, quotas, and regulations for its member countries.)

Dumping is the act of selling a product for a price below its cost of production, but is hard to determine because ________.

determining actual costs is difficult (The Commerce Department must estimate a dumping "margin", that is, the difference between price and cost. If Commerce determines that the import price is less than cost, they find that dumping has occurred. The United States International Trade Commission-another government agency=determines whether domestic industries have been substantially injured by the dumping, and if so, the President can impose triffs in the amount of the dumping marking to offset the unfairly low price.)

The two advantages of intra-industry trade between countries are ________ and ________ while customers benefit by ________.

dicision of labor; economies of scale; more variety (The economic beenfit of participating in intra-industry trade include the division of labor that leads to learning, innovation, and unique skills, economies of scale that leads to increased output and average lower costs, and customer benefits include more variety and lower prices.)

An economic benefit to engaging in intra-industry trade between countries includes ________.

division of labor (This term describes how a good is produced in stages and is not necessarily a benefit of trade.)

free trade agreement:

economic agreement between countries to allow free trade between members

economic union:

economic agreement between countries to allow free trade between members, a common external trade policy, and coordinated monetary and fiscal policies

common market:

economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy

Intra-industry trade provides a way to combine the lower average production costs that come from ________ and still have competition and variety in the market.

economies of scale (Economies of scale allows large producers to produce at lower costs. Trade allows consumers to still have variety in a market where there are only a few producers.)

General Agreement on Tariffs and Trade (GATT):

forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade; the precursor to the World Trade Organization

protectionism:

government policies to reduce or block imports

Over time, the average consumer will be better off from reduced trade barriers by ________.

greater variety and lower prices (Free trade results in more variety of products, and competition leads to lower prices.)