Chapter 17

Explain the concept of absolute advantage.

Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity that good or service. An absolute advantage implies that one is the best at something, while comparative advantage relates more to the costs of producing goods and /or services.

Explain the law of comparative advantage and the role of opportunity cost.

The law of comparative advantage is that a nation is better off when it produces goods and services for which it has a comparative advantage. The "opportunity cost" determines which products will give a nation a comparative advantage over another country in producing a particular product.

Explain the concept of comparative advantage.

Comparative advantage is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

Explain the purpose of a foreign exchange market.

A foreign exchange market assists in the buying and selling of foreign currencies.

Explain the following terms: Balance of Trade, Balance of Payments, Trade Surplus, and Trade Deficit.

Balance of trade is the relationship between a nation's imports and exports during a specified period of time. The balance of payments is a record of all transactions made between one particular country and all other countries during a specified period of time. The balance of payments compares the dollar difference of the amount of exports and imports. A trade surplus is when a nation exports more than it imports. A trade deficit is when a nation imports more than it exports.

Identify and explain the following international trade agreements: WTO, GATT, EU, NAFTA, ASEAN, MERCOSUR, CARICOM, and APEC.

Examples of international trade agreements include: WTO - World Trade Organization was founded to insure compliance with GATT (GATT - General Agreement on Tariffs and Trade was established to reduce tariffs and expand world trade) and to negotiate new trade agreements and resolve trade disputes. EU - European Union abolished tariffs and trade restrictions among member nations. NAFTA - North American Free Trade Agreement eliminated tariffs and trade restrictions between the U.S., Canada and Mexico. ASEAN - Association of Southeast Asian Nations. MERCOSUR - The Southern Common market includes Brazil, Argentina, Paraguay and Uruguay. CARICOM is The Caribbean Community Common Market and includes countries from South America and the Caribbean. APEC - is the Asia-Pacific Economic Cooperation and includes countries that lie along the Pacific Rim.

Define free trade and identify the benefits of trade to nations and consumers.

Free trade is the unrestricted trade among nations with no government barriers on imports. Free trade allows countries to pursue comparative advantages, raise general living standards and further international peace. Consumers have a greater number of choices among goods and services at lowers costs.

What is an international trade agreement?

International free trade agreements result from at least two countries working together to reduce trade barriers and encourage trade.

What are multinational corporations and provide examples?

Multinational corporations are large corporations that sell goods and services throughout the world. Examples include Ford, Honda and BP.

Explain protectionism and explain the arguments in favor of it.

Protectionism is the use of trade barriers to protect industries from foreign competition. Arguments for protectionism include protecting jobs, protecting infant industries, and safeguarding national security.

What are foreign exchange rates and explain how exchange rates are used?

The value of a foreign nation's currency in relation to another nation's currency is called the foreign exchange rate. An exchange rate enables you to convert prices in one currency to prices in another currency.

Identify and explain the negative effects of trade barriers.

Trade barriers can lead to trade wars, increasing consumers cost, limiting choices and an overall reduction in trade for both countries. Consumers have fewer choices for goods and services and typically pay higher costs.

Define trade barrier and explain the various types of trade barriers to include a trade embargo, import quotas, voluntary export restraints, tariffs or taxes (custom duty).

Trade barriers or restrictions are a means of preventing a foreign product or service from freely entering a nation's territory. Barriers to trade between nations include a trade embargo, import quotas, voluntary export restraints, tariffs or tax (customs duty). Be able to explain each.

Identify and explain the three other trade requirements that could be used as trade restrictions.

Trade restrictions between countries could involve the requirement to obtain a license, and/or comply with a variety of health and safety regulations.