Economics chapter 9

"Trade among nations is ultimately based on __________"

"Trade among nations is ultimately based on comparative advantage."

Effects of a tariff 8

1. Increase the domestic price of the protected good 2. Increase domestic production of the good 3. Decrease consumption of the good 4. Decrease consumer surplus 5. Increase producer surplus 6. Tariff revenue 7. Production inefficiency 8. Welfare loss

Can a government always gain revenue from imposing a tariff?

: No, a tariff may be so high that it effectively prevents any of the good from being imported, hence, there will be no tariff revenue collected.

If Country A allows trade and becomes an importer of clothing from Country B, which group or groups in each country are better off, and which are worse off?

: Producers of clothing in Country A are worse off and producers of clothing in Country B are better off. Consumers of clothing in Country A are better off, and consumers of clothing in Country B are worse off

Flip and draw graph and then answer a. What is the equilibrium price of lamps before trade? b. What is the equilibrium quantity of lamps before trade? c. What is the price of lamps after trade is allowed? in total surplus because of trade?

: a. $35 b. 60 c. $45

What is the effect on the economic well-being of a nation if a tariff is imposed? Why?

A tariff reduces the economic well-being of a nation by reducing the quantity of imports and moving the domestic market closer to equilibrium without trade. As a result, the gains from trade are reduced and there is a deadweight loss.

Tariff

A tax on imported goods

Define the two approaches a nation can take to achieve free trade. Does one approach have an advantage over the other?

A unilateral approach is when a country removes its trade restrictions on its own. A multilateral approach is when a country removes its trade restrictions while other countries do the same. A multilateral approach has two advantages. The first is that it has the potential to result in freer trade because it can reduce trade restrictions abroad as well as at home. If international negotiations fail, however, the result could be more restricted trade than under a unilateral approach. Also, the multilateral approach may have a political advantage and can sometimes win political support when a unilateral reduction cannot.

Flipp to look at graph and then answer questions a. Consumer surplus before trade would be _______________. b. Consumer surplus after trade would be _______________. c. Producer surplus before trade would be _______________. d. Producer surplus after trade would be _______________. e. Total surplus before trade would be ______________. f. Total surplus after trade would be ______________.

ANSWER: a. A + B b. A c. C d. C + B + D e. A + B + C f. A + B + C + D

Flip and draw graph and then answer a. Consumer surplus before trade would be _______________. b. Consumer surplus after trade would be_______________. c. Producer surplus before trade would be _______________. d. Producer surplus after trade would be _______________. e. Total surplus before trade would be ______________. f. Total surplus after trade would be _____________

ANSWER: a. A b. A + B + D c. B + C d. C e. A + B + C f. A + B + C + D

What are the arugments mentioned in the text?

Arguments mentioned in the text include the jobs argument, the national-security argument, the infant-industry argument, the unfair-competition argument, and the protectionas-a-bargaining-chip argument

Comparative advantage is determined by looking at _________ If the ______________ the country has a comparative advantage and should _______ the product. If ___________ the country does not have a comparative advantage and should _______ the product.

Comparative advantage is determined by looking at the domestic price relative to the world price. If the domestic price is lower than the world price, the country has a comparative advantage and should export the product. If the domestic price is higher than the world price, the country does not have a comparative advantage and should import the product.

Comparing the world price to the domestic price reveals if there is ___________

Comparing the world price to the domestic price reveals if there is a comparative advantage.

The before-trade domestic price of honey in the United States is $6 per gallon. The world price of honey is $5 per gallon. The U.S. is a price-taker in the honey market. Given this information, answer the following questions. c. Who will benefit from free trade in this case?

Consumers in the U.S. will benefit because of a lower price for honey

Opponents of free trade often argue that trade must be restricted in order to save domestic jobs. As a free-trader, how would you counter this argument?

Even though free trade causes job losses in industries which do not have a comparative advantage, it creates jobs in industries which enjoy a comparative advantage. The short run hardship on some workers is more than balanced by the increased standard of living available to citizens as a whole. In the long run, workers displaced by trade will find employment in those industries which enjoy a comparative advantage and grow because of trade.

Import quotas are another method for governments to _______

Import quotas are another method for governments to restrict trade

In both the export/import scenarios the overall impact of trade is _________

In both the export/import scenarios the overall impact of trade is increased well-being in that the gains of the winners exceeds the losses of the losers.

economic benefits of international trade: 4

Increased variety of goods (e.g. German beer is different from American beer). Lower costs through economies of scale. For example: a firm in a small country cannot take advantage of economies of scale if it can only operate in a small domestic market. Free trade gives firms access to large, global markets. Increased competition. Free trade fosters competition which allows the free market to work its magic. Enhanced flow of ideas. Trade is a tremendous force for knowledge transfer and universal advancement. For instance, a poor nation can purchase high-tech components from a more developed nation to learn about the technology (rather than start from scratch).

If Country A allows trade and becomes an exporter of food to Country B, which group or groups in each country are better off, and which are worse off?

Producers of food in Country A are better off and producers of food in Country B are worse off. Consumers of food in Country A are worse off, and consumers of food in Country B are better off.

The before-trade domestic price of honey in the United States is $6 per gallon. The world price of honey is $5 per gallon. The U.S. is a price-taker in the honey market. Given this information, answer the following questions. d. Who will lose from free trade?

Producers will lose because they will have to take a lower price for their honey.

Suppose that Canada can produce every product at an absolutely lower cost than can Great Britain. Does it pay for Canada to trade with Great Britain? Explain.

Since international trade is based on comparative advantage, and comparative advantage depends on relative prices or opportunity cost, it is almost certain that Canada and Great Britain will each have comparative advantage in the production of some goods; hence, it will pay for them to trade with each other.

The before-trade domestic price of honey in the United States is $6 per gallon. The world price of honey is $5 per gallon. The U.S. is a price-taker in the honey market. Given this information, answer the following questions. a. Will the U.S. import or export honey?

The U.S. will import honey because the world price is below the domestic price

Suppose that a country that has been isolated from the rest of the world decides to open its borders to international trade. The country produces chickens and soccer balls. On what basis can the country decide which good to import and which good to export?

The country should export the good in which it has a comparative advantage. Comparative advantage is determined by looking at the domestic price relative to the world price. If the domestic price is lower than the world price, the country has a comparative advantage and should export the product. If the domestic price is higher than the world price, the country does not have a comparative advantage and should import the product.

The domestic price reflects the ___________ for one unit of the good or service.

The domestic price reflects the opportunity cost for one unit of the good or service.

The key difference is that a tariff ____________. A quota creates a surplus for those who obtain the license to import.

The key difference is that a tariff raises revenue for a government. A quota creates a surplus for those who obtain the license to import.

The before-trade domestic price of honey in the United States is $6 per gallon. The world price of honey is $5 per gallon. The U.S. is a price-taker in the honey market. Given this information, answer the following questions. b. What will the price of honey be in the U.S. if free trade is allowed?

The price of honey in the U.S. will now be $5, the same as the world price

The reality is that while trade expands the economic pie,____________

The reality is that while trade expands the economic pie, not all participants will benefit equally.

The world price is ______ than the domestic price, a nation will import the good. If the world price is _______ than the domestic price, a nation will export the good.

The world price is lower than the domestic price, a nation will import the good. If the world price is higher than the domestic price, a nation will export the good.

When a country become an importer of a good: Domestic price will _______ Domestic producers of the good are ________ Domestic consumers of the good are ______

When a country become an importer of a good: Domestic price will fall to equal the world price. Domestic producers of the good are worse off. Domestic consumers of the good are better off.

When a country becomes an exporter of a good: Domestic price will _________ Domestic producers of the good are ______ Domestic consumers of the good ___________

When a country becomes an exporter of a good: Domestic price will rise to equal the world price. Domestic producers of the good are better off. Domestic consumers of the good are worse off.

DRAW THE GRAPH THEN ANSWER c. What is the quantity of hammers imported after the tariff? d. What would be the amount of consumer surplus before the tariff? e. What would be the amount of consumer surplus after the tariff? f. What would be the amount of producer surplus before the tariff? g. What would be the amount of producer surplus after the tariff? h. What would be the amount of government revenue because of the tariff? i. What would be the total amount of deadweight loss due to the tariff?

a. $6, 84 b. 66 c. 44 d. $384 e. $294 f. $45 g. $80 h. $44 i. $11

. An import quota places an

artificial limit on the quantity of an imported good

Price takers

buyers and sellers must accept the price the market determines

Flip and draw graph and then answer . What is the quantity of lamps exported? e. What is the amount of consumer surplus before trade? f. What is the amount of consumer surplus after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? i. What is the change in total surplus because of trade?

d. 44 e. $750 f. $270 g. $900 h. $1600 i. 220

"Trade is beneficial because

it allows each nation to specialize in doing what it does best."

Import quotas...

restrict quantity of imports into a country

Price makers

sellers that can set the price of a good

world price

the world market price for a good at that time

"When an economy cannot trade in world markets, the price adjusts___________

to balance domestic supply and demand."