MacroEcon-Ch. 20

How do nations benefit from international trade?

- they can specialize their production - they can acquire more goods and services - they can enhance their resource productivity

Workers who are displaced due to foreign imports are eligible for what kinds of benefits under the Trade Adjustment Assistance Act?

-Reimbursement for relocation expenses -Refundable tax credits for health insurance -Cash assistance for up to 78 weeks

What is the European Union (EU)?

A regional free-trade zone

Which of the following statements is false?

As a percentage of GDP, U.S. exports are the highest among the industrially advanced nations

Which of the following is an example of a capital-intensive commodity?

chemicals

Studies show that

costs of trade barriers exceed their benefits, creating an efficiency loss for society.

In a hypothetical situation, the United States and Mexico have labor forces of the same size. The production possibilities curves in the figure show that the United States has an absolute advantage over Mexico in vegetables and beef. This means that if both countries use the same amount of resources on those products, ______.

the United States can produce more of both goods

Which of the following was not one of the principles on which the General Agreement on Tariffs and Trade (GATT) was established?

the formation of international trade contracts to alleviate global poverty

A quota that results in the same level of imports as a tariff is more detrimental to an economy because

the government loses tax revenue

What is the main economic difference between a tariff and a quota?

A tariff generates revenue for the domestic government.

What argument says that domestic firms and workers must be shielded from competition from countries where wages are low?

Cheap foreign labor argument

Which country has an abundant labor force suited to produce labor-intensive goods?

China

Domestic producers: Price will _______ and quantity will ___.

Increase; increase

What is the equilibrium world price?

The price that equates the quantities supplied and demanded globally through international trade

What was the European Union called when it was initiated in 1958?

common market

Because of trade wars and other factors, more nations have been moving toward ______.

free trade

What is the exchange ratio at which two countries trade their products?

terms of trade

What are the three basic principles of the General Agreement on Tariffs and Trade (GATT)?

- Equal, nondiscriminatory treatment of members. - Reduce tariffs, using multilateral negotiations. - Eliminate import quotas.

How does free trade tend to benefit society?

- It reduces animosity among nations that trade with each other. - It encourages businesses to use low-cost production techniques. - It spurs economic growth by encouraging business to innovate.

Since the passage of NAFTA in 1993, what economic events have happened among the member nations?

- The standard of living generally improved in all three nations. - Trade increased among all three nations.

Which statements about tariffs and quotas are true?

-A quota does not generate revenue for the government. -A tariff generates revenue for the domestic government. -A quota transfers revenue to foreign producers.

According to the diversification-for-stability argument, why should some nations impose protective tariffs and import quotas?

-Their economies are highly specialized and depend on international trade for their income. -Their economies are unusually disrupted by fluctuations in world supply and demand. -Diversification of their industries would increase domestic stability.

In the accompanying diagrams, solid lines are production possibilities curves, and the dashed lines are trading possibilities curves. The trading possibilities curves suggest that the terms of trade are

1 beer for 1.5 pizzas

U.S. exports of goods and services (on a national income account basis) are about

12 percent of U.S. GDP.

When was GATT originally signed?

1947

Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡ 1W in Switzerland but 1C ≡ 4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other?

1C=3W; 1/2C=1W

Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, Big Country needs to give up

3/4 units of Y for 1 unit of X and should produce good X. Small Nation needs to give up 1 unit of X for 1 unit Y and should produce good Y

When the world price for a product is below the Canadian price, what will Canada experience?

A domestic shortage More imports

Dumping occurs in which of the following situations?

A firm charges a price to a foreign market that is lower than its production costs. A firm charges a lower price to a foreign market than what it would charge in its home market.

What is a tariff?

A tax on imported goods

What type of graphic shows the amounts of two products a nation can obtain by specializing in one product and trading for the other?

A trading possibilities line

C. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. What is the total gain in apparel and chemical output that would result from such specialization? Apparel: ___ Chemicals: ____

Apparel: Chemicals:

B. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. If so, what product should each produce? China should produce ____.

China should produce apparel The United States should produce chemicals

E. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. Suppose that the actual terms of trade are 1,000 units of apparel for 1½ tons of chemicals and that 32,000 units of apparel are exchanged for 48 tons of chemicals. What are the gains from specialization and trade for each nation? _____ has a gain of ______ units of apparel. _____ has a gain of ______ ton(s) of chemicals.

China; United States;

True or false: The diversification for stability argument for protection is a valid one for the U.S.

False Reason: The U.S. is not highly dependent on the exports of one type of good and therefore this argument is not applicable for the U.S.

b. What are the price-quantity effects of this tariff on the following? (Assume the country imposing the tariff is a small part of the world market.) Domestic consumers: Price will ____ and quantity will ___.

Increase; increase

Which argument against free trade becomes particularly popular when the economy goes into a recession?

Increased domestic employment

Dumping of goods abroad

Is simply comparative advantage at work

Why do economists generally support the Trade Adjustment Assistance Act?

It helps create political support for international free trade.

In addition to the benefits of human and geographical specialization, what are some side benefits to free trade?

It promotes competition. It encourages innovation.

What is the main effect of increasing opportunity costs?

Less-than-complete specialization

In recent years, what has been the general worldwide trend regarding tariffs?

Lower tariffs

What do critics say is a flaw in the military self-sufficiency argument for protective tariffs to encourage domestic production of goods needed for national security?

Many industries can claim they make contributions to national security and deserve protection.

Which problems did critics fear that NAFTA would cause?

Massive loss of jobs in the United States Massive migration of U.S. firms to Mexico Competition from other nations building plants in Mexico

Foreign exporters: Price will _______ and quantity will ___.

Not change; decrease

Which of the following best describes economists' general assessment of the impacts of offshoring?

Offshoring benefits the U.S. economy by promoting greater specialization and exchange of goods and services based on comparative advantage.

If the domestic price in Canada is $0.75 and the domestic price in the United States is $1.00, what will Canadian companies do?

Produce more than Canadian customers will buy, and sell the surplus to the United States

In a model compiled to show the economic relationship between two nations, what can be used to determine whether each country has an absolute advantage or comparative advantage?

Production possibilities curves

What impact do foreign imports have on domestic price and quantity? Imports ___ the domestic price, ___ consumption and ___ domestic production.

Reduce; increasing; decreasing

Why is arguing for a tariff to save U.S. jobs popular during a recession?

Reduced spending on imports can be diverted to domestic spending and increase domestic employment.

According to various studies, how do trade protections, such as tariffs and quotas, tend to affect domestic society?

Some trade protections increase government revenues. The cost to consumers and society exceeds the gains to producers and the government.

What tends to happen to a nation that increases its participation in an open economy with an international sector?

The country produces more of its most profitable goods.

What are the purposes of the World Trade Organization?

To rule on trade disputes among member nations To oversee trade agreements among member nations To provide forums for trade negotiations

According to the infant industry argument, why is import protection needed?

Trade barriers allow protected industries the time to become efficient and competitive.

Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. What will happen if the world price of corn exceeds $1.00?

U.S. firms will produce more than 100 tons of corn and export the excess, selling it at the world price.

The production possibilities curves suggest that

West Mudville should specialize in, and export, baseball bats.

What institution is in charge of overseeing trade agreements and ruling on disputes relating to them?

World Trade Organization

A. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. Are comparative-cost conditions such that the two countries should specialize?

Yes

A tariff imposed on Chinese imports into the United States tends to ______.

benefit U.S. producers and penalize Chinese producers

Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. The limits of the terms of trade between these two countries will be

between 1 unit of good X for a unit of good Y and 4/3 a unit of X for a unit of good Y

The use of artificial trade barriers, such as tariffs and import quotas,

can increase domestic output and employment in the short term, but that is not likely to last for the long term.

What is the key determinant in whether a country can gain from specialization in international trade?

comparative advantage

Tariffs and/or quotas tend to impose ______ on domestic consumers, and ______ to the producers of the protected goods in the importing economy.

costs; gains

The four direct effects of tariffs are: a decline in consumption, increased domestic production, tariff revenue, and a(n) ______.

decline in imports

A trade ______ occurs when imports exceed exports.

deficit

An export supply curve is

difference between quantity supplied and quantity demanded in the domestic market for a price above the domestic equilibrium price

If a firm charges a foreign market a lower price than it charges the domestic market, that firm is said to be ______ its product.

dumping

Suppose the United States eliminates high tariffs on German bicycles. As a result, we would expect

employment to decrease in the U.S. bicycle industry.

Tariffs and import quotas can reduce unemployment in a U.S. import industry, but

foreign countries could impose nontariff barriers on U.S. goods, reducing jobs in an export industry.

In a two-nation model, international equilibrium is determined by the ______ of one country and the ______ of the other country.

import demand, export supply

Country A limits other nation's exports to Country A to 1,000 tons of coal annually. This is an example of a(n

import quota

The primary effect of ______ opportunity costs is less-than-complete specialization.

increasing

The ______ argument calls for the trade protection of newly developing industries.

infant industry

The intersection of one nation's import demand curve and another nation's export supply curve represents ______.

international equilibrium

The equilibrium world price of a tradable good is determined by the

intersection of the world supply and demand schedules

Economists who criticize trade adjustment assistance argue that

it only benefits a small fraction of all unemployed workers.

Because China has abundant low-wage workers, it can efficiently produce ______-intensive goods.

labor

The cheap foreign ______ argument says that trade protection is required to ensure that cheap imports do not flood U.S. markets, dragging down prices of goods and U.S. wages

labor

Economizing requires that any particular good be produced by the nation having the ______ domestic opportunity cost, or the ______ advantage for that good.

lowest; comparative

The idea that protective tariffs are needed to preserve industries that produce the materials essential for national defense is called the ______ argument.

military self-sufficiency

Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. If the world price of corn exceeds $1.00, then U.S. producers will produce ______ than 100 tons of corn, creating a ______ that will be ______.

more; surplus; exported

In the real world, specialization is rarely complete because

nations normally experience increasing opportunity costs in producing more of the product in which they are specializing.

The net outcome of either tariffs or quotas for the world economy is

negative, since the costs to consumers substantially exceed the gains to producers and government.

Shifting work that was previously done by American workers to workers abroad is called what?

offshoring

What business activity shifts work previously done by American workers to workers located in other countries?

offshoring

Trade Adjustment Assistance

provides cash assistance for workers displaced by imports or plant relocations abroad.

Refer to the diagram, which shows the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $0.50, this nation will experience a domestic

shortage of 160 units, which it will meet with 160 units of imports.

A nation's import demand curve for a specific product:

shows the amount of the product it will import at prices below its domestic price.

A trading possibilities line reveals the amounts of two products a nation can obtain by ______.

specializing in one product and trading for the other

A tax on an imported good is known as a(n) ______.

tariff

The exchange ratio at which two countries trade their products is called the ______ of trade.

terms

An import demand curve is

the difference between quantity supplied and quantity demanded in the domestic market for a price below the domestic equilibrium price

Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary?

the diversification-for-stability argument

If two nations have straight-line production possibilities curves,

there will be a basis for mutually advantageous trade provided the slopes differ.

Export supply curves are __________________; import demand curves are ___________________.

upsloping; downsloping

When does a trade deficit occur?

when imports exceed exports

The interaction of world supply and demand determines the equilibrium ______.

world price

Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a PcPt per-unit tariff, the quantities sold by foreign and domestic producers, respectively, will be

wy and w