ECON 2301: CH. 19 Study Guide

Which items represent the United States' main service exports?

Main Service Exports: - education services In 2017, the attendance of foreign students at American universities contributed more than $43 billion toward U.S. service exports. - financial services New York is one of the world's main centers of financial activity. - travel services When tourists visit the United States and spend their foreign money on lodging and transportation, that economic activity contributes to U.S. service exports. Not Main Service Exports: - construction services A construction firm paid to build a facility in another country is exporting a service. However, that kind of activity is not a big part of U.S. service exports. - legal services Although American lawyers sometimes represent foreign clients, that activity does not represent a large share of U.S. service exports.

When nations specialize their production processes and engage in international trade, firms in those economies often are able to enjoy lower per-unit costs as production expands.

True When a nation has a comparative advantage in some area of production, specializing in that area will enable the nation to manufacture more units than it needs domestically, and to trade the surplus for other goods. Large-volume production brings economies of scale for the firms involved.

To grow its way out of poverty, Nicaragua has established "free zones" where companies can produce goods for _____ and avoid the various corporate taxes that apply to goods produced for the _____ market. Several U.S. _____ companies have taken advantage of the opportunity to manufacture goods in an environment with reduced production costs. But while these businesses employ Nicaraguan _____, they do not produce goods available to Nicaraguan _____.

export, domestic, apparel, workers, consumers The real value of Nicaragua's exports almost tripled from 2007 to 2017. The taxes include sales taxes, value-added taxes, corporate profit taxes, and dividend taxes. U.S. companies with plants in Nicaragua's free zones include Levi's, Nike, and Under Armour. A substantial portion of Nicaragua's workforce is employed in free zones.

The increasing interdependence of national economies is the essence of _____. Between 1970 and 2017, world trade _____ as a percentage of world GDP. World trade equaled _____ of world GDP in 1970 and _____ by 2017.

globalization, doubled, 11%, 22%

If Mexico and the United States faced these opportunity costs, then to benefit from trade Mexico should specialize in producing _____. That is, _____ would use some of the oil it produces and export the rest to _____ in exchange for sugar. In order for the trade to be beneficial to both nations, the trade ratio must be between 2 and _____ tons of sugar per barrel of oil.

sugar, the United States, Mexico, 3

Which of these scenarios is the best example of dumping?

A Chinese company sells raw silk for $18 per kilogram domestically and for $5 per kilogram in India. Dumping involves a supplier charging a lower price in foreign countries than in its home country to try to gain a foothold in a foreign market. The country being dumped on will often respond with tariffs or quotas to protect its domestic industries.

Imagine a world with two countries, Amicia and Franconia, where people consume only cake and pie. Assume that an Amician worker takes 1.5 hours to make a cake and 1.5 hours to make a pie. Further, assume that a Franconian worker takes only 1 hour to make a cake but 2 hours to make a pie. Fill in the blanks to complete the table showing the opportunity cost of each production activity for each country. Output Opportunity Costs for Amicia and Franconia Cost of one cake | Cost of one pie Amicia _____ _____ Franconia _____ _____

Amicia~Cost of one cake: 1 pie In Amicia, each cake takes the same time that a pie would take. Amicia~Cost of one pie: 1 cake/pie In Amicia, each pie takes the same time that a cake would take. Franconia~Cost of one cake: 1/2 pie In Franconia, each cake takes half the time a pie would take. Franconia~Cost of one pie: 2 cakes/pie In Franconia, each pie takes twice the time a cake would take.

Identify two benefits of free trade due to increased competition.

Benefit(s) of Increased Competition: - Consumers have more options from which to choose. Consumers can still buy from domestic firms, but with free trade they have the option of buying from foreign firms instead. - Domestic firms become more innovative. Competition with foreign firms pushes domestic firms to find ways to compete in terms of price and quality. Not a Benefit of Increased Competition: - Government tax revenues increase Free trade means no tariffs, which are a source of tax revenue. - Workers at domestic firms earn higher wages. Domestic workers' wages may be lower due to free trade.

Considering only the nations in the figure below, the largest U.S. trade surplus for 2017 is with China.

False In the figure above, the only nations with which the United States does not have a trade deficit are Canada and the United Kingdom.

How does a country's business cycle generally affect the international trade balance?

The trade deficit tends to shrink during economic downturns. During recessions, a drop in exports tend to be accompanied by an even stronger drop in imports, resulting in a reduced trade deficit.

From the graphs above, it is evident that the United States imports about 50% more in _____ than it exports, but exports about 50% more in _____ than it imports. It is also evident, from a comparison of the vertical scales, that the United States imports about _____ as much in goods as in services and that it exports about _____ as much in goods as in services.

goods, services, four times, twice

The citizens of Sealand like both fish and cookies. So do the citizens of Molossia. Each country can produce both goods, but the countries can also trade with each other. If Molossia has a _____ opportunity cost of producing fish than Sealand does, then Molossai has a _____ advantage in producing cookies. Molossia should produce _____, and it should trade for _____.

higher, comparative, cookies, fish Molossia should specialize in cookies.

How many nations were signatories to the agreement that established the World Trade Organization (WTO)?

123 The agreement is called the General Agreement on Tariffs and Trade. It was signed in 1995.

One argument for trade barriers is that domestic industries sometimes need trade protection _____ develop the capacity to compete internationally. Unfortunately, however, for _____ reasons, trade barriers are harder to _____ than they are to _____.

while they, political, remove, establish Once a trade barrier is in place, industry lobbyists work to ensure that it stays in place even after the industry becomes firmly established. The U.S. cotton and peanut industries both benefit from import barriers put in place more than a century ago.

The figure below depicts the impact of a quota in the market for tablet computers. Assume that a nation initially participates in free trade and enjoys a world price of PW = $160 per pair of tablet computer, but then an import quota equal to 5,000 - 3,000 = 2,000 is imposed, consequently reducing the welfare of domestic consumers by the total of areas A, B, PS, and F, which comes to $330,000. How much of that domestic consumer welfare will be captured by domestic producers?

$150,000 This corresponds to area PS. This area is calculated as the area of a rectangle with height PQ−PW and width 3,000, minus area A: rectangle = ($220 - $160) × 3,000 = $180,000 A =『1╱2』× (3,000 - 2,000) × ($220 - $160) = $30,000 $180,000 - $30,000 = $150,000 The correct answer is found by calculating the area of one of the colored regions (A, B, PS, or F).

If the tiny nation of Lorland devotes all its resources to strawberries, it can produce 16 strawberries per day. If it devotes all its resources to balloons, it can produce 80 balloons per day. These are the only goods that Lorland can produce. What is the opportunity cost of 1 balloon in Lorland?

0.2 strawberries/balloon More balloons means fewer strawberries. Since the opportunity cost of 80 balloons is 16 strawberries, on a per-balloon basis the opportunity cost is 16 strawberries/80 balloons = 0.2 strawberries/balloon

The United States signed the North American Free Trade Agreement (NAFTA) in _____. This agreement eliminated nearly all _____ among the United States, Mexico, and _____. Since its signing, real U.S. imports and exports with both nations have _____.

1992, trade restrictions, Canada, double The United States-Mexico-Canada Agreement (USMCA) of 2018 slightly altered the terms of the agreement but ensured that the trade relationship would continue.

Given that the production possibilities frontiers (PPFs) for Mexico and the United States are as shown, which of the options given is Mexico's best possible consumption outcome, assuming that it can trade with the United States using a 1:1 food-clothing ratio?

400 units of clothing and 500 tons of food Mexico can achieve this outcome by producing 900 units of clothing and trading 500 of them for food.

Mexico and the United States each produce both food and clothing, in the quantities shown. Mexico could produce 150 additional tons of food at the cost of _____ units of clothing, so its opportunity cost of 1 ton of food is _____ units of clothing. The United States could produce as many as _____ additional tons of food at the cost of _____ units of clothing, so its opportunity cost of 1 ton of food is _____ unit of clothing.

450, 3, 600, 300, .5 Because Mexico has a lower opportunity cost of producing clothing than the United States does, it would make sense for Mexico to specialize in clothing while the United States specializes in food.

Which of these are reasons for the intense increase in international trade that has occurred over the last 75 years?

Reason(s): - increased specialization among nations Differences between capital intensive production and labor intensive production provide incentives for greater specialization. - lower shipping costs Shipping costs have fallen significantly in the past century. - reduced trade barriers Not a Reason: - higher tariffs Higher tariffs reduce trade. - increased use of quotas Quotas tend to reduce trade. Increased trade and deeper interdependence of world economies are important aspects of globalization. Total world exports of goods and services are now about one-fourth the size of world GDP.

Suppose Mexico's opportunity cost for producing 1 unit of food is 3 units of clothing and the United States' opportunity cost for producing 1 unit of food is 0.5 units of clothing. Trade at a ratio of 1:1 is beneficial to both countries. How beneficial would it be for Mexico if the trading ratio were 1 unit of clothing for every 2 units of food?

This is even better than 1:1. Mexico, which specializes in clothing production, would get more food in return for each unit of clothing. It would get 2 units instead of the current 1 unit.

If the United States imposes new tariffs on foreign car imports, domestic manufacturers will sell more cars.

True However, when the tariff is imposed car prices will rise.

Fill in the labels so that the graph describes supply, price, and quantity in an economy completely closed to imports, an economy with free trade, and an economy with tariffs on imports.

Y-Axis Top box: P domestic only Mid box: Pwiₜₕ ₜₐriff Pwiₜₕ ₜₐriff equals Pfrₑₑ ₜrₐdₑ plus the amount of the tariff. Last box: P free trade X-Axis Top box: S domestic only Mid box: S with tariff Last box: S free trade The PS region represents the increase in producer surplus enjoyed by domestic producers when a tariff is imposed. The T region represents the government's revenue from tariffs. The A and B regions represent deadweight loss.

Suppose that a small island nation, Runau, had the imports and exports shown in the table for 2018 and 2019. By how much did its trade deficit change? Give your answer as a negative number if the trade deficit decreased. 2018 | 2019 Imports | $275 million | $276 million Exports | $222 million | $228 million

-5 million dollars This nation saw a decrease in its trade deficit, as exports grew faster than imports. First find the 2018 and 2019 deficits, then find the difference between them. Be sure to use the correct sign: a decrease is a negative change.

The figure shows the 2017 export and import totals (in billions of dollars) for trade between the United States and selected other nations. Calculate the U.S. trade balance with Mexico. For a surplus, enter a positive number; for a deficit, enter a negative number.

-69 billion dollars Since imports exceed exports, there is a trade deficit, meaning the trade balance is negative. Since imports from Mexico exceed exports to Mexico, the calculated trade balance should be negative. The trade balance is: total exports - total imports.

The graph below depicts the impact of a tariff in the market for shoes. If a nation initially participates in free trade and enjoys a price of $100 per pair of shoes, then a 20% shoe tariff would reduce the welfare of domestic consumers by the total of areas A, B, PS, and T. Of these areas representing a loss to domestic consumers, click on the area(s) that would become a gain to foreign producers if the tariff were replaced with a quota for the same quantity of imports.

Click on Green Box with the letter "T" If the tariff is replaced with the proposed quota, the price and quantity of imports remain unchanged, but foreign producers keep the revenue they were previously paying as a tax. Notice that either form of trade restriction involves a decrease in social welfare, due to deadweight loss.

The graph below depicts the impact of a tariff in the market for shoes. If a nation initially participates in free trade and enjoys a price of $100 per pair of shoes, then a 20% shoe tariff would reduce the welfare of domestic consumers by the total of areas A, B, PS, and T. Of these areas representing a loss to domestic consumers, click on the area(s) that do not represent a gain to any other group.

Click on the yellow triangle labeled "A" and the green triangle labeled "B". Area A represents deadweight loss due to higher costs of producing (QD2 - QD1) shoes via domestic firms rather than more-efficient foreign firms. Area B represents deadweight loss due to the (QW - QT) shoes that will no longer be produced. Any consequence of a policy that reduces the welfare of some without increasing the welfare of others is known as a deadweight loss. In this scenario, areas A and B represent unrealized gains from trade.

Two isolated nations, Alphaland and Betaton, are considering opening their borders to trade with each other. Both nations consume only two goods: salt and pepper. Alphaland can produce either 80 tons of salt per day or 5 tons of pepper per day, while Betaton can produce either 3 tons of salt per day or 1 ton of pepper per day. Which trade ratios would make both nations better off?

Correct Answer(s): - 5 tons of salt for 1 ton of pepper Betaton's opportunity cost of 1 ton of pepper is only 3 tons of salt, so it's happy to give 1 ton of pepper and get 5 tons of salt. Alphaland's opportunity cost of pepper is 16 tons of salt, so it's happy to give merely 5 tons of salt and get 1 ton of pepper. - 10 tons of salt for 1 ton of pepper Betaton's opportunity cost of 1 ton of pepper is only 3 tons of salt, so it's happy to give 1 ton of pepper and get 10 tons of salt. Alphaland's opportunity cost of pepper is 16 tons of salt, so it's happy to give merely 5 tons of salt and get 1 ton of pepper. Incorrect Answer(s): - 2 tons of salt for 1 ton of pepper Each nation's opportunity cost of pepper is greater than 2 tons of salt; therefore, neither nation is willing to give up 1 ton of pepper for merely 2 tons of salt. - 20 tons of salt for 1 ton of pepper Each nation's opportunity cost of pepper is less than 20 tons of salt; therefore, neither nation is willing to give up 20 tons of salt for only 1 ton of pepper. Notice that all mutually beneficial trade ratios lie in-between the nations' opportunity costs.

Imagine that the government of France imposes a tariff on imported wineglasses. (You may assume there was no tariff on wineglasses previously.) Which of these consequences would you expect to result from the new tariff?

Correct Answer(s): - French consumers will buy fewer wineglasses. Since the equilibrium price in France increases, quantity demanded falls. - French government revenue will increase. Before the tariff, the French government received no direct revenue from imports of wineglasses. - The price of wineglasses in France will increase. The equilibrium price increases by the size of the tariff (assuming that imports do not shrink to zero). Incorrect Answer(s): - French producers will sell fewer wineglasses. Since only foreign goods are taxed, more consumers will now find it cheaper to buy domestic varieties. - Total welfare in France will increase. The gain to French producers is outweighed by the loss to French consumers; that is, tariffs result in a deadweight loss. A quota would have similar effects on domestic prices and consumption, but the government would not see a change in revenue.

Suppose that Japan is considering placing trade restrictions on imports of U.S. pharmaceuticals. It could choose either a tariff or a quota, which would be designed to reduce imports by the same quantity. Which of these groups would be indifferent between the tariff and the quota?

Correct Answer(s): - Japanese buyers of pharmaceuticals If both policies result in the same quantity imported, then the price paid by Japanese buyers is identical as well. Therefore, the buyer's welfare is the same in both cases. - Japanese producers of pharmaceuticals If both policies result in the same quantity imported, then Japanese producers should be indifferent to which trade restriction is selected. Japanese sellers produce the same amount under either policy. Incorrect Answer(s): - Japanese government The Japanese government receives tax revenue from a tariff but no tax revenue from a quota. - U.S. producers of pharmaceuticals U.S. producers will export the same quantity under either restriction. However, revenue is lower for U.S. sellers under a tariff. A quota does not transfer any revenue to the import-nation's government.

Match each good to its status in U.S. trade with Canada and Mexico. Each good will be matched more than once. I. a major export to Canada II. a major export to Mexico III. a major import from Mexico IV. a major import from Canada

I. agricultural products II. meat III. gold, meat IV. natural gas, meat With Canada's geographic size and low population density, it is not surprising that it would be a major exporter of extracted resources like oil and natural gas. Because of the size of the United States' domestic livestock industries, there is no need for large-scale meat imports. Because of the size of the United States' domestic livestock industries, there is no need for large-scale meat imports. There is also a substantial trade in automobiles and auto parts between the United States and both of its neighbors.

Match each of the following motivations for trade restrictions to the argument against that reason. I. In practice, tariffs are often used to limit imports from friendly nations. II. Well-established industries are able to lobby for trade restrictions to stay in place. III. Regardless of how many producers benefit from trade restrictions, even more consumers will be hurt because of higher prices.

I. national security interests For instance, the U.S. steel industry enjoys tariff-based protections. Although steel may be vital to national security, the United States imports most of its steel from allies like Canada and Brazil. II. protecting infant industries The ability of well-established industries to lobby for keeping tariffs makes removal of tariffs politically difficult even when there is no longer an economic rationale for them. III. favors to special interests The difference between the gain to domestic producers and the loss to domestic consumers is the deadweight loss of a trade restriction.

The tiny isolationist nations of Lorland and Zhangia are considering opening their borders to trade with each other. Both nations produce only two goods: smoothies and sandals. Currently, a worker in Lorland can produce 2 smoothies per day or 8 sandals per day, while a worker in Zhangia can produce 1 smoothie per day or 5 sandals per day. Using this information, please match each nation and good to the most accurate description. I. the good that Lorland will export to Zhangia after trading begins II. the nation that will specialize in producing sandals once trading begins III. the nation that will specialize in producing smoothies once trading begins IV. the good that Lorland will import from Zhangia after trading begins

I. smoothies Since Lorland has a comparative advantage in producing smoothies, we can expect it to export smoothies under trade. II. Zhangia Since Zhangia has a comparative advantage in producing sandals, we can expect it to specialize in sandals under trade. III. Lorland Since Lorland has a comparative advantage in producing smoothies, we can expect it to specialize in smoothies under trade. IV. sandals Since Zhangia has a comparative advantage in producing sandals, we can expect it to export sandals under trade. When nations trade, we expect them to specialize in those goods and services for which each has a comparative advantage. They will export those goods and services in which they've specialized while importing other goods and services for which they are a high-opportunity-cost producer.

This figure depicts the growth of U.S. trade for services only between 1970 and 2017, as a percentage of U.S. GDP. Please label the "exports" and "imports" lines appropriately.

Top box (blue line): exports Since at least the mid-1980s, the United States has enjoyed a service trade surplus. For goods trade, however, U.S. imports exceed U.S. exports. Bottom box (orange line): imports For service trade, U.S. exports exceed U.S. imports. For total trade (goods and services combined), U.S. imports exceed U.S. exports.

Drag each nation to its correct position in the graph to show the total value of U.S. goods exported to and imported from that nation in 2017.

Top box (ex [$123] im [$110]): United Kingdom Pharmaceuticals were both a major export good and a major import good in trade with the United Kingdom. 2nd top box (ex [$115] im [$171]): Japan Imports from Japan included cars, auto parts, and industrial machines. 3rd box (ex [$342] im [$339]): Canada Motor vehicles made up a significant share of both imports and exports with Canada. 4th box (ex [$187] im [$52]): China Computers, household goods, and clothing constituted a large share of imports from China.

Which of these statements regarding U.S. trade were true as of 2017?

True: - The majority of U.S. goods imports come from fewer than ten nations. In fact, in 2017, nine nations accounted for fully 64% of U.S. goods imports. - The United States has an overall trade deficit. Total U.S. imports have exceeded total U.S. exports since the 1970s. Not True: - All U.S. trading partners contribute roughly the same amount to U.S. imports. In 2017, around 64% of U.S. goods imports came from just nine nations. - The largest U.S. trading partner in terms of goods imports is also its largest trading partner in terms of goods exports. In 2017, the greatest value of U.S. goods imports came from China, but the greatest value of U.S. goods exports went to Canada. - The United States has a trade deficit with every single nation it trades with. The United States has an overall trade deficit, and it has a trade deficit with many individual nations (especially China), but in 2017 the United States had a positive trade balance with Canada and the United Kingdom. In 2017, the United States imported goods and services from 238 nations.

A quota, like a tariff, has the effect of _____ imports. However, a quota is different in that it imposes _____ cost on the supplier. For this reason, suppliers will sometimes accept "voluntary" _____ to avoid having their goods be subject to _____.

limiting, no, quotas, tariffs In the 1980s and 1990s, Japan agreed to quotas on cars shipped to the United States. On the other hand, the government of the country into which the goods are flowing may prefer tariffs, which are a source of revenue. By creating scarcity in the import market, a quota drives prices on the good higher. This has the effect of partly compensating the supplier for the limit on import quantity.

Since at least 1975, the United States has had a _____ balance of trade, also known as a _____. However, it is clear that this trend is driven primarily by only one of the components of U.S. trade. If the distinction is made between the trade of goods versus the trade of services, it turns out that the United States enjoys a trade surplus for _____, but a trade deficit for _____.

negative, trade deficit, services, goods

Trade barriers protect domestic _____ from foreign _____, but the protection comes at the expense of _____, who pay higher prices for the same goods. The effect is much the same as if a tax had been imposed to transfer money from _____ to _____ consisting of producers in a single industry.

producers, competition, consumers, consumers, a special interest group Domestic producers will generate a larger portion of the supply than they would without the barriers in place. Special interest groups have some economic interest in common and often hire professionals, such as lobbyists and marketing firms, to advance those interests. If the money transfer came in the form of a tax, voters would express their displeasure at the ballot box. Because the effects of quotas and tariffs are less direct and obvious, they tend not to elicit the same strong voter reactions.

Both tariffs and quotas tend to _____ social welfare. That is, they increase _____ for domestic consumers and decrease _____ of the restricted good. In some cases, such as the U.S. shoe market, tariffs on cheap goods hurt _____ consumers the most, making the tariff an example of a regressive tax.

reduce, prices, consumption, poor Tariffs and quotas can create additional problems if we consider the distorted incentives that come from restricting some goods and not others.