Econ 101: Chapter 8

What are the effects of a tariff?

Before the tariff was imposed, imports led to a decrease in price (domestic -> world price), and this created an increase in domestic demand, and a decrease in domestic supply, and this was because of the change in price (it dropped). The imports filled this gap (since the domestic supply was lower than the domestic demand). however with the tariff, the domestic price is raised from the world price (due to imports was the new domestic price) to the world price + the amount of the tariff leads to higher prices (shift from domestic to world price + tariff) increased domestic production decreased domestic consumption Imports shrink after the tariff is imposed prevents mutually beneficial trades from occurring tariffs generate dead weight loss because they create inefficiency

What is "surplus"?

A surplus often occurs in a budget, when expenses are less than the income taken in, or in inventory when fewer supplies are used than were retained

What is free trade?

An economy has free trade when the government does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand

Why are the pauper fallacy and the sweatshop labor fallacy "wrong" (what do they miss)?

Both fallacies miss the nature of the gains from trade: it's to the advantage of a comparative advantage of both countries if the poorer; lower-wage country exports goods in which it has a comparative advantage, even if its cost advantage in these goods depends on low wages. That is both countries are able to achieve a higher standard of living through trade

What are the effects of opening a country to imports?

Consumers gain, producers lose, but the gain of the consumers is greater than the loss of the producers This results in an increase in the total surplus in the economy as a whole There is a net gain in total surplus Consumers gain (they gain additional surplus) Domestic producers lose (they loose surplus)

What are the effects of exports to a foreign country?

When a country is opened to exports, some of the domestic supply is exported The domestic price rises to the world price As price rises domestic quantity demanded falls, and the domestic quantity supplied rises The portion of domestic production that is not consumed is exported Exports lead to an overall gain in total surplus for the exporting country Producers gain additional surplus while consumers loose surplus Because there is a gain to producers that is greater than the loss of the consumers, there is an increase in the total surplus of the economy as a whole

What is the Heckscher-Ohlin Model?

a country has a good comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country Ex: a country that has a lot of capital will have an advantage in capital intensive labor, while a country that has a lot of labor will have a comparative advantage in labor intensive industries Shows how comparative advantage can arise from differences in factor endowments: goods differ in factor intensity, and countries tend to export goods that are intensive in the factors they have in abundance

What is the European Union (EU)?

a customs union among 27 European nations

What is a tariff, and what does it do?

a tax levied on imports It raises the domestic price above the world price, leading to a fall in trade and domestic consumption, and a rise in domestic production It hurts consumers, and benefits domestic producers, and generates government revenue As a result of a tariff, total surplus falls Leads to deadweight loss

What is NAFTA?

a trade agreement between the US, Canada, and Mexico

What is the Ricardian model of international trade?

analyzes international trade under the assumption that opportunity costs are constant It assumes that opportunity costs are constant Shows that trade between two countries makes both countries better off than they would be if they were in autarky-that is, there are gains from international trade

What are the effects of an import quota

has same effect on sales tax except the money that would go to the government now goes to the government now goes to license holders Has the same effect a a tariff

What are the two most common protectionist policies?

Tariffs Import quotas In rare instances, governments subsidize(support) exporting industries

What is the domestic supply curve?

shows how the quantity of a good supplied at a given price by domestic producers depends on the price of that good reflects the supply of producers in that country

What is offshore outsourcing?

takes place when businesses hire people in another country to perform various tasks

What is Globalization?

the phenomenon of growing economic linkages among countries The growth of international trade and other international linkages

What are International trade agreements?

treaties in which a country promises to engage in less trade protection against the exports of other countries in return for a promise by other countries to do the same for its own exports Countries engage in international trade agreements to further trade liberalization

What is international trade driven by / how does it arise?

It is driven and arises from comparative advantage The opportunity cost of producing an additional unit of a good is lower in some countries than other countries, which then causes them to specialize

What does international trade lead to an expansion of?

It leads to an expansion in exporting industries and contraction in import-competing industries This raises the domestic demand for abundant factors of production, reduces the demand for scare factors, and so affects factor prices, such as wages

What are the gains from an import quota?

Limits imports Will raise domestic price the amount as the tariff, and raise the price from the world price to the domestic price Decrease domestic demand decrease consumer surplus increase producer surplus

What are the three major justifications for trade protection?

National security Job creation Protection of infant industries

What is trade protection?

Policies that limit imports (simply known as protection) Many governments engage in trade protection of import-competing industries even though most economists advocate for free trade

What has caused a resistance to globalization to emerge?

Resistance to globalization has emerged in response to a surge in imports from relatively poor countries and the offshore outsourcing of many jobs that had been considered safe from foreign countries

What is the Domestic demand curve?

Shows the quantity demanded of a good at a given price reflects the demand of consumers in that country

What does the World Trade Organization (WTO) seek to do?

The World Trade Organization (WTO), seeks to negotiate global trade agreements and referee trade disputes between members It also oversees trade negotiations

What is the world price?

The World price of a good is the price at which that good can be bought or sold abroad When a market is open to international trade, the domestic price is driven to equal the world price

What is Factor intensity?

The factor intensity of production of a good is a measure of which factor is used in relatively greater quantities than other factors in production Goods differ in their factor intensity and countries tend to export goods that are intensive in the factors that they have in abundance Ex: oil refining is capital intensive because it requires a lot more capital than labor Auto-seat production is labor intensive because it requires a lot more labor than capital

What are some of the concerns that have been raised in response to globalization?

The increase in income inequality due to the surge in imports from relatively poor countries in the past 20 years Increase in offshore outsourcing, as many jobs that were once considered safe from foreign countries have been moved abroad

What determines the domestic price of a good?

The intersection of the domestic demand curve, and the domestic supply curve

What is a condition when two countries trade?

The relative price must satisfy that no country pays a relative price greater than the opportunity cost of obtaining / producing the good in autarky Ex: Us and mexico produce airplanes and auto parts The opp cost of producing 1 bundle of auto parts in the Us is 2 airplanes while the opp cost of producing 1 airplane in mexico is 2 bundles of auto parts. This means that the Us is not going to trade more than 2 airplanes for one bundle of auto parts (opp cost of auto parts is 1/2 plane), because that would mean that they are paying more than the opportunity cost of producing it in autarky. Similarly, mexico is not going to trade more than 2 bundles of auto parts for 1 airplane (opp cost of auto parts is 1/2 plane), because that would mean they are paying more than the opp cost of producing it in autarky When this is satisfied the actual price is determined by supply and demand

What does trade lead to an expansion of?

Trade leads to an expansion of exporting industries, which increases demand for a country's abundant factors, and a contraction of import-competing industries, which decreases demand for its scare factors

What happens if the world price is higher than the autarky price?

Trade leads to exports and the domestic price rises to the world price This leads to a fall in consumer surplus, a gain in producer surplus, and a gain in total surplus There are overall gains from international trade because the gain in producer surplus exceeds the loss in consumer surplus Moreover, there are gains from international trade because each country can specialize in the good that they have a comparative advantage in, and trade for goods they don't have a comparative advantage in, this allows them to consume more of each good

What happens if the world price is lower than the autarky price?

Trade leads to imports and the domestic price falls to the world price This leads to a gain in consumer surplus, a fall in producer surplus, and a gain in total surplus There are overall gains from international trade because the gain in consumer surplus exceeds the loss in producer surplus

Why are import protections often imposed?

Despite deadweight losses, import protections are often imposed because groups representing import-competing industries are more influential than groups of consumers

What are Imports?

Goods and services purchased from other countries

What are Exports?

Goods and services sold to other countries

What are the gains from a tariff?

Higher domestic price = producer surplus Higher domestic price = reduction in consumer surplus Tariff yields revenue to the government which is equal to the difference in the world and domestic price x (quantity demanded after the tariff - quantity supplied after the tariff) producers gain consumers loose government gains leads to a net reduction in total surplus

What is true about trade protection?

Import-competing industries are well organized and well informed about about how they gain from trade protection, while consumers are unaware of the costs they pay

What happens to the domestic demand and domestic supply curves when a market is open to international trade (allows imports and exports)?

Imports enter the domestic market, and the domestic price falls from its autarky price (price without trade, equilibrium price), to the world price Imports will continue to come in until the domestic price equals the world price As price falls , the domestic quantity demanded rises, while the domestic quantity supplied falls The difference between the domestic quantity demanded and the domestic quantity supplied is filled by imports

What are the differences in gains to producers / consumers from imports and exports?

Imports- ->consumers-increase consumers surplus due to decrease in price ->producers-hurt producer surplus due to fall in price from the domestic to world price Exports- ->consumers-decrease in consumer surplus due to rise in price from domestic price to world price ->producers-increase in consumer surplus due to rise in price from domestic price to world price

What is equilibrium in autarky?

In autarky with no international trade, the equilibrium is the the intersection of the domestic demand curve and the domestic supply curve

What are the main sources of comparative advantage?

International differences in climate Factor endowments Technology

What is an import quota, and what does it do?

is a legal limit on the quantity of a good that can be imported Has the same effects as a tariff(hurts consumers, benefits domestic producers), except that revenues-the quota rents-accrue to the license-holder, not the domestic government

What is a Autarky?

is a situation in which a country does not trade with other countries

What is the World Trade Organization (WTO)?

oversees international trade agreements and rules over disputes between countries over those agreements It account for a much larger number of countries, accounting for the bulk of world trade

What are Importing competing industries?

produce goods and services that are also imported

What are Exporting industries?

produce goods and services that are sold abroad