Chapter 8: Gains from trade

In the domestic economy when outsourcing​ exists, prices fall rise stay the same ​, social surplus decreases increases stays the same ​, and labor market welfare stays the same decreases increases . .

prices fall, social surplus increases, and labor worker welfare decreases because many people lose their jobs

The factors that contribute most to comparative advantage at the country level​ are:

1. Natural resources 2. Stocks of​ human-made resources 3. Technology 4.​ Education, work​ habits, and experience of the labor force 5. Relative abundance of labor and physical capital 6. Climate

The mercantilist economic doctrine was widely followed from the sixteenth to the eighteenth centuries in Europe. Mercantilists advocated the use of tariffs to restrict​ trade, as they believed that countries that export more than they import will increase wealth. What could be the problem with such an economic​ policy? A. Consumers pay a price that is higher than the world​ price, reducing consumer surplus. B. Domestic producers are​ harmed, reducing producer surplus. C. Consumers pay a price that is lower than the world​ price, increasing consumer surplus. D. Total surplus in the economy rises.

A. Consumers pay a price that is higher than the world​ price, reducing consumer surplus.

Consider the adjacent diagram. The discussion in the text implies that if this country imposes a​ tariff, social surplus will fall by the sum of area A and area B. Given this​ information, which of the following reasons explains the deadweight loss represented by areas A and B. A. The imposition of the tariff reduces consumer surplus to the area above the new price line and below the demand curve. B. The imposition of the tariff increases consumer surplus to the area above the new price line and below the demand curve. C. The imposition of the tariff increases producer surplus to the area above the new price line and below the supply curve. D. The imposition of the tariff reduces producer surplus to the area above the new price line and below the supply curve.

A. The imposition of the tariff reduces consumer surplus to the area above the new price line and below the demand curve.

If there are no​ "losers" in free​ trade, does it matter if wages and employment fall when a country engages in free​ trade? A. ​Yes, it is difficult to pinpoint who the losers are and how much each lost. B. ​No, because the winners are not responsible for the effects of their comparative advantage. C. ​No, because the losers can immediately go out and get new jobs. D. ​Yes, because free trade is not​ "fair trade."

A. ​Yes, it is difficult to pinpoint who the losers are and how much each lost.

One reason a country might seek to implement protectionist policies could be​ to: A. maintain its​ culture's uniqueness. B. increase imports to satisfy domestic demand. C. increase exports. D. participate in foreign trade and investment.

A. maintain its​ culture's uniqueness. Protectionism is often justified simply as a counter to globalization. Globalization is the shift toward more​ open, integrated economies that participate in foreign trade and investment. Some​ nations, however, want to maintain cultural uniqueness and therefore view globalization as a serious concern.

A production possibilities curve​ (PPC) ___________. A. shows the relationship between the maximum production of one good for a given level of production of another good. B. shows the​ trade-off between price and quantity of produced goods or services. C. determines the levels of imports and exports within a country. D. shows the combinations of inputs that can create a specific level of output.

A. shows the relationship between the maximum production of one good for a given level of production of another good.

How has the pattern of trade changed in the United States since​ 1960? A. Imports have grown faster than​ exports, and the United States has remained a net exporter. B. Imports have grown faster than​ exports, and the United States has become a net importer. C. Exports have grown faster than​ imports, and the United States has become a net importer. D. Exports have grown faster than​ imports, and the United States has remained a net exporter. E. Exports and imports have grown at the same​ rate, and the United States has remained a net exporter.

B. Imports have grown faster than​ exports, and the United States has become a net importer.

What are the types of goods that are causing the shift in the balance of imports and exports in the United​ States? A. Services have been the primary driver in the shift in the balance of imports and exports in the United States. B. Manufactured goods have played an important role in the​ shift, even though the number of manufactured goods has increased. C. The significant increase in oil exports has played an important role in the shift. D. Manufactured goods have played an important role in the​ shift, as the number of manufactured goods produced has declined

B. Manufactured goods have played an important role in the​ shift, even though the number of manufactured goods has increased.

Which of the following is not one of the common arguments against free​ trade? A. Allowing countries to specialize in the production of only one good may result in the creation of banana republics. B. Taxes decrease, depriving governments of needed revenues. C. The threat of homogenization to a culture's uniqueness. D. Countries with lax environmental policies allow for more pollution than those with strong environmental policies. E.

B. Taxes decrease, depriving governments of needed revenues.

All of the following are factors that contribute to a​ country's comparative advantage​ except: A. technology. B. aging population.. C. climate. D. natural resources.

B. aging population

According to the principle of comparative​ advantage, both parties will engage in a trade if the trading​ price: A. is lower than the​ buyer's cost to produce. B. lies between their opportunity costs. C. is below the market price. D. is higher than the​ seller's cost to produce.

B. lies between their opportunity costs.

Absolute advantage is the ability of an​ individual, firm, or country to​ produce: A. a certain good at a lower total cost than other producers. B. more of a certain good than other competing​ producers, given the same number of resources. C. a certain good at a lower opportunity cost than other producers. D. more of a certain good than other competing​ producers, given more resources.

B. more of a certain good than other competing​ producers, given the same number of resources. Note: Abs ad compares number of goods produced while comparative ad compare OC

Complete specialization occurs when each​ individual, firm, or​ country: A. produces only what it is known for. B. produces only what it has a comparative advantage in. C. does not rely on trade for goods and services. D. consumes specialty goods instead of generic equivalents.

B. produces only what it has a comparative advantage in.

Why is free trade​ controversial? A. Only countries with an absolute advantage gain. B. Some individuals may lose. C. Companies always win at the expense of consumers. D. Deadweight loss increases.

B. Some individuals may lose. Free trade is controversial because it affects various groups in the economy in different ways. While both trading partners on the whole will gain from free​ trade, some individuals may lose. For​ example, opening up the economy to trade may allow consumers to buy goods at lower prices but could affect the profits of domestic producers.

National security concerns might cause a nation​ to: A. specialize in the production of one good. B. maintain a variety of agricultural industries. C. become reliant on its trading partners. D. increase imports of oil.

B. maintain a variety of agricultural industries. While specializing in the production of one good might be efficient​ economically, it may not be optimal in a​ defense-oriented world, where national security is an important consideration. A country will invest in steel production and defense technology and will maintain a variety of agricultural industries to preserve its integrity in times of war. Even in times of​ peace, a country might find itself too reliant on other countries. For​ example, because many modern economies depend on oil​ imports, many cite such reliance as a national security concern.

Which of the following is not a source of a​ country's comparative​ advantage? A. Technology. B. Natural resources. C. Exports. D. Stocks of man−made resources.

C. Exports.

All of the following shift the Production Possibilities Curve outward​ except: A. changes in productivity growth due to population growth. B. increases in natural resources. C. new competitors in the marketplace. D. increases in worker education.

C. new competitors in the marketplace.

If there are no​ "losers" in free​ trade, does it matter if wages and employment fall when a country engages in free​ trade? A. ​Yes, because free trade is not​ "fair trade." B. ​No, because the winners are not responsible for the effects of their comparative advantage. C. ​Yes, the government might not be able to effectively carry out such wealth transfers. D. ​No, because the losers can immediately go out and get new jobs.

C. ​Yes, the government might not be able to effectively carry out such wealth transfers.

What is the problem with the argument that infant industries need to be protected from foreign​ competition? A. Foreign companies may do a better job of providing the good or service. B. Because the world price will continue to​ drop, the domestic industry will never catch up in any case. C. Starting a company in isolation may deprive it of​ "technological spillovers" that its​ competitors, all located near one​ another, may enjoy. D. Changing a comparative advantage is nearly impossible and so the domestic industry will not likely survive anyway. E. Since the stock of deadweight losses builds up over​ time, the total lost surplus will never be made up.

C. Starting a company in isolation may deprive it of​ "technological spillovers" that its​ competitors, all located near one​ another, may enjoy. The​ "infant industries" argument states that governments must protect their fledgling domestic industries against more advanced foreign competitors. One of the problems with this argument is that starting a company in isolation may deprive it of​ "technological spillovers" that its​ competitors, all located near one​ another, may enjoy—the isolated company will be the last to learn of trade secrets.

Terms of trade is the​ ____________. A. time required to produce a good or service that is traded. B. benefit received from trade. C. exchange rate of goods for goods. D. legal document that trading partners sign.

C. exchange rate of goods for goods.

Which of the following is not a source of a​ country's comparative​ advantage? A. Stocks of man−made resources. B. Climate. C. Technology. D. Quotas.

D. Quotas.

Terms of trade are determined​ ____________. A. by sellers. B. by buyers. C. on the basis of absolute advantage. D. on the basis of opportunity costs.

D. on the basis of opportunity costs.

Which of the following is not one of the common arguments against free​ trade? A. The threat of homogenization to a culture's uniqueness. B. The stock of certain types of animals is endangered, threatening species extinction. C. Allowing countries to specialize in the production of only one good may result in the creation of banana republics. D. A company is too weak to withstand competition from other firms and requires government protection to survive. E. Deadweight loss increases, harming society as a whole.

E. Deadweight loss increases, harming society as a whole.

One reason economists in general do/do not favor protectionism is because it lowers/raises prices for consumers and lowers/raises social surplus.

One reason economists in general DO NOT favor protectionism is because it RAISES prices for consumers and LOWERS social surplus.

When a country engages in free​ trade, the​ "winners" can/ cannot/ should not compensate the​ "losers."

can

A linear PPC would show constant opportunity costs increasing opportunity costs decreasing opportunity costs ​, and a PPC that is curved away from the origin would show decreasing opportunity costs constant opportunity costs increasing opportunity costs .

constant opportunity costs- increasing opportunity costs

The economy as a whole benefits from outsourcing if the gain in social surplus is smaller/greater than/ equal to the losses in labor welfare.

greater than