Chapter 1 Extended

During the last century, the relative importance of international trade for the U.S. has:

significantly increased

Changes in international trade can affect worker's lives in many different ways. Which of the following best describes how international trade has changed Tim's life?

A change in international trade has affected the value of the good or service that Time produces.

Economic Interdependence

All aspects of a nation's economy are linked to the economies of its trading partners.

Why is the fallacy: trade results in a zero-sum game false?

Both partners can benefit in trade

The largest amount of trade with the United States in recent years has been conducted by:

Canada

A main advantage of specialization results from:

Economies of large-scale production

What does globalization consist of?

It consists of the increased interaction of product and resource markets across nations via trade, immigration, and foreign investment - Political, Technological, Cultural and Economic

The United States is generally considered a __________ economy

Open

T/F Increasing trade allows production resources such as labor and capital to be used more efficiently, which increases total productivity.

T

T/F When trading partners use more of their time and resources producing things they can produce best, they are able to produce a larger joint output that provides the source for mutual gain.

T

Law of Comparative Advantage

When each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increases; thus, all countries can realize welfare gains.

Why is the fallacy: imports = unemployment & exports = economic growth and more jobs false?

- The relationship between imports and exports - As one industry gets taken down another one emerges

What are some common fallacies of international trade?

- Trade results in a zero-sum game - imports result in unemployment and burden the economy - exports enhance economic growth and jobs for workers - tariffs, quotas and other import restrictions result in more jobs for domestic workers

What is a downside of globalization that became apparent by the 2000s?

- Wealthy nation workers are pitted against poorly paid ones in developing nations

Economists have generally found that economic growth rates have a close relation to

- openness to trade - education - communications infrastructure

Second Wave of Globalization

1945-1980 - Falling transportation costs = increased trade - Decrease in trade barriers - Introduced Agglomeration economies - Firms clustered together - Developing countries were left behind

Increased foreign competition tends to increase profits of domestic import-competing companies.

False

T/F Although labor mobility has risen for the United States in recent decades, the country has not become increasingly tied to the rest of the world through capital (investment) flows.

False

What workers do not gain from international trade?

- Domestic imported good industries suffer due to increased competition with foreign imported goods

By how much did the exports as a share of world income and how per capita income increase during the first wave of globalization?

- Doubled to 8% - Risen by 1.3% per year

What does international trade result in?

- Gains from competitive process - Weakens monopolies - Larger joint output (mutual gain) - Prices for products can decrease - More firm turnover

Time is an Arabic translator. For a long time, he has trouble finding more than a few hours of work per week. But in recent years, as many Middle Eastern countries have opened their borders to more trade, Time has fielded many requests from businesses looking for a translator to help him meet new clients. Because there aren't very many Arabic translators in Tim's town, he has even been able to raise his rates and still keep a busy schedule. International trade has _______ Tim.

Helped

A sudden shift from important tariffs to free trade may induce short-term unemployment in:

Import-competing industries

How was the shift of developing countries into manufacturing trade possible?

- Tariff cuts that developed countries have made on imports of manufactured goods - Liberalized barriers to foreign investment (Ford Motor Company) - Tech adv. in transportation and communications

What are the factors that have increased the openness in the US economy?

- Tech improvements in transportation and communication

What forces are driving globalization?

- Technological change - Liberalization of trade and investment (development of international financial markets)

What is typically true regarding exporting firms?

- Wages are higher - Employ more highly educated workforce

What is the openness equation?

Openness = (Exports + Imports) / GDP

A primary reason why nations conduct international trade is because:

Resources are not equally distributed among all trading nations

Globalization

The process of greater interdependence among countries and their citizens.

Openness

The ratio of a nation's exports and imports as a percentage of its gross domestic product (GDP).

Although free trade provides benefits for consumers, it is often argued that important protection should be provided to domestic producers of strategic goods and materials vital to the nation's security.

True

T/F Specialization is no longer founded on the comparative advantage of countries in producing a final good, but on the comparative advantage of tasks that these countries complete at a specific step along the global value chain.

True

Open economies have more:

all of these: new firms entering the market, firm turnover, and competition

Economists have generally found that economic growth rates have a close relation to:

all of these: openness to trade, education and communications infrastructure

Protectionism

attempt to enact tariffs on imports to shift demand into their domestic markets, thus promoting sales for domestic companies and jobs for domestic workers

As an economy opens up to international trade, domestic prices:

become more aligned with international prices

International trade in goods and services is sometimes used as a substitute for all of the following except:

domestic production of different goods and services

Competition is essential to both _______________ and efficient ________________.

innovation & production

As nations become more interdependent ___________ and _____________ should move more freely across nations.

labor & capital

Following World War II, the U.S.:

negotiated reductions in trade barriers with other countries

Free traders maintain that an open economy is advantageous in that it provides all of the following except:

relatively high wage levels for all domestic workers

International trade is based on the idea that:

resources are less mobile internationally than are goods

A closed economy is one in which:

the home economy is isolated from foreign trade

Who are the British economists that are the roots of the idea that globalization is a good thing?

- Adam Smith - David Ricardo

Why is the fallacy: import restrictions result in more jobs for domestic workers false?

- Decrease in imports does not take place in isolation: we also lose the ability of foreigners to export to us and we reduce foreigner's ability to obtain the dollars required to import from us

How did the Great Depression affect the United State's openness?

- Decreased it; - US decreased their dependence on trade for national security reasons and to protect their home industries from import competition

Latest Wave of Globalization

- Developing counties (China, India, Brazil) broke into world markets for manufacturers. - Other developing countries (inc. marginizalized) = decr incomes & inc. poverty - International capital movements was significant - Foreign outsourcing

What have technological innovations led to?

- Higher productivity - Lower transportation costs

Which of the following are examples of a change in the world due to the liberalization of investment? Check all that apply.

-Interest rates stabilized and remained at lower levels as capital moved more freely -China's infrastructure grew rapidly once the government allowed foreign investment -The establishment of the euro led to lower transaction costs, spurring additional investment between European countries

For traditional economists, globalization is a pathway to ____________________. a) failure b) prosperity c) unemployment d) increased labor

Prosperity

T/F International trade provides both an opportunity and a threat for firms and workers

True

_____ is the ability of a firm/industry, under free and fair market conditions, to design, produce, and market goods and services that are better and/or cheaper than those of other firms/industries.

competitiveness

If a nation has an open economy, it means that the nation:

conducts trade with other countries

With globalization and import competition, U.S. prices have generally:

decreased

The movement to free international trade is most likely to generate short-term unemployment in which industries?

import-competing industries

Increased foreign competition tends to:

place constraints on the wages of domestic workers

Current trade rules permit countries to enact measures to protect the health and safety of their citizens as long as all goods are treated equally, the tobacco companies argue.

true

T/F The rise of the Internet has not been a major factor in falling communication costs and increased trade

F

What are some of the major arguments for and against an open trading system?

Proponents of an open trading system maintain that free trade leads to lower prices, the development of more efficient production methods, and a greater range of consumption choices. Free trade permits resources to move from their lowest productivity to their highest productivity. Critics of an open trading system maintain that import competition may displace domestic firms and workers. It is also argued that during periods of national emergency, it is in the best interests of a nation to protect strategic industries.

In the long run, competitiveness depends on an industry's natural resources, its stock of machinery and equipment, and the skill of its workers in creating goods that people want to buy.

True

Opening the economy to international trade tends to lessen inflationary pressures at home.

True

T/F American producers of manufactured products are more affected by foreign competition than they were a hundred years ago.

True

T/F By the late 1980s, the United States was consuming more than it produced and became a net borrower from the rest of the world to pay for the difference.

True

T/F For developed countries, the slashing of trade barriers between them greatly increased the exchange of manufactured goods, thus helping to raise the incomes of developed countries relative to the rest.

True

T/F For manufactured goods, developing countries faced sizable barriers.

True

T/F The information-technology revolution resulted in the foreign outsourcing of white-collar work. (Accountants, Engineers, etc)

True

T/F dramatic increase in manufactured exports from developing countries has contributed to protectionist policies in developed countries.

True

The benefits of international trade accrue in the forms of lower domestic prices, development of more efficient methods and new products, and a greater range of consumption choices.

True

Small countries tend to have higher measures of openness than larger countries because:

they are more reliant on international trade

How does economic interdependence occur?

through trade, labor migration, and capital (investment) flows such as corporation stocks and government securities.

Which of the following is a fallacy of international trade?

trade is a zero-sum activity

What did Adam Smith and David Ricardo agree on in regards to globalization?

trade is the basis for wealth because it makes countries more efficient by allowing each to specialize at what its workers do best.

What did the Great Recession of 2007-2009 result in?

- Global trade Decline - Immigration received public backlash - Nationalist policies increased

Rapid developments in computer information and communications technology have done what?

- Shrunk the influence of time and geography

What ended the first wave of globalization?

- World War 1

First Wave of Globalization

1870-1914 - Decreases in tariff barriers - Lower transportation costs (tech advancement) -Driven by Europeans & Americans

The United States was less open to international trade between:

1890 and 1950

Agglomeration Economies

A rich country specializes in manufacturing niches and gains productivity through groups of firms clustered together, some producing the same product and others connected by vertical linkages.

Identify some of the major challenges confronting the international trading system.

Among the challenges confronting the international trading system are maintaining fair standards for labor and promoting environmental quality.

For a nation to maximize its productivity in a global economy:

Both imports and exports are necessary

If a nation has an open economy, it means that the nation allows private ownership of capital.

False

In an open trading system, a country will import those commodities that it produces at relatively low cost while exporting commodities that can be produces at relatively high cost.

False

The United States exports a larger percentage of its gross domestic product than Japan, Germany, and Canada

False

What significance does growing economic interdependence have for a country like the United States?

For the United States, growing economic interdependence has resulted in exports and imports increasing as a share of national output. Profits of domestic firms and wages of domestic workers are increasingly being affected by foreign competition.

What factors explain why the world's trading nations have become increasingly interdependent, from an economic and political viewpoint, during the post-World War II era?

Interdependence among today's economies reflects the historical evolution of the world's economic and political order. Since World War II, Europe and Japan have re-industrialized. What is more, the formation of the European Community and the Organization of Petroleum Exporting Countries, as well as the rise of multinational corporations, has contributed to closer economic and political linkages.

Why is globalization important?

International business is important because of the increasing scale and scope of activities that occur across national borders. -Nations can specialize - Produce larger joint output - Higher standard of living

What is meant by international competitiveness? How does this concept apply to a firm, an industry, and a nation?

International competitiveness refers to the extent to which the goods of a firm or industry can compete in the marketplace; this competitiveness depends on the relative prices and qualities of product. No nation can be competitive in, and thus be a net exporter of everything. Because a nation's stock of resources is limited, the ideal is for these resources to be used in their most productive manner. Nations will benefit from specialization and trade by exporting products having a comparative advantage.

When is international trade an opportunity for workers? When is it a threat to workers?

International trade benefits most workers, especially those in exporting industries. In addition to providing them jobs and income, it allows them to shop for consumption goods that are cheapest and of the highest quality. However, workers in import-competing industries often feel threatened from competition of cheap foreign labor.

What do researchers have to say about the relation between a firm's productivity and exposure to global competition?

Researchers have found that global competitiveness is a bit like sports. You get better by playing against folks who are better than you. this means companies are exposed to intense global competition tend to be more productive than those who aren't.

Identify the major fallacies of international trade.

The chapter describes three fallacies of international trade. a. Trade is a zero sum activity b. Imports reduce employment and burden the economy c. Tariffs and quotas will save jobs and promote a higher level of employment

The first wave of globalization was brought to an end by

The first world war

What problems does terrorism pose for globalization?

The threat of international terrorism tends to slow the degree of globalization and also make it become costlier. With terrorism, companies must pay more to insure and provide security for overseas staff and property. Heightened border inspections could slow shipments of cargo, forcing companies to stock more inventory. Tighter immigration policies could reduce the liberal inflows of skilled and blue-collar laborers that permitted companies to expand while keeping wages in check. Moreover, a greater preoccupation with political risk has companies greatly narrowing their horizons when making new investments.

What factors influence the rate of growth in the volume of world trade?

The volume of international trade is governed by factors including the level of domestic economic activity (e.g., prosperity versus recession) and restrictions imposed by countries on their imports.

Multilateral Trade

Trade between two or more countries

Important trading partners of the United States include Canada, Mexico, Japan, and China.

True

Most of the world's population now lives in countries that are:

a&b: integrated into world markets and becoming integrated into work markets

Producing goods for export produces:

a&b: jobs and

Regarding the applicability of free trade to cigarettes, it is correct to say:

a&b: there are special rules applying to cigarettes world-wide and

Multilateral trade negotiations have led to

all of the above: continued trade liberalization, financial liberalization, and increased investment

International trade forces domestic firms to become more competitive in terms of:

all of the above: the introduction of new products, product price, product design and quality

Economic interdependence occurs through

all of these: capital flows, labor migratin and trade

Foreign ownership of U.S. financial assets

both a&b: has decreased since the 1960's and has made the U.S. a net borrower since the late 1980's

What does increasing protectionism during WW1 cause for the world economy?

caused exports as a share of national income to fall to about 5 percent, thereby undoing 80 years of technological progress in transportation.

Clustered firms

clusters produced the same product, and others were connected by vertical linkages.

What have lower trade barriers and financial liberalization allowed?

more companies to globalize production structures through investment abroad, which in turn has provided a further stimulus to trade.

Studies have shown that there is an inverse relationship between

level of trade barriers and economic growth

International trade benefits:

many workers

A firm's _____, relative to that of other firms, is generally regarded as the most important determination of competitiveness.

productivity

What was of major significance for the latest wave of globalization?

some developing countries succeeded for the first time in harnessing their labor abundance to provide them with a competitive advantage in labor-intensive manufacturing.

Human rights activists contend that this organization supports governments that permit sweatshops:

the international monetary fund