Chapter 26. International Trade

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.

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

What are the four direct effects of a tariff?

A decline in consumption A decline in imports Increased domestic production Tariff revenue

What is a tariff?

A tax on imported goods

The outcomes of international specialization and trade are equivalent to which of the following?

An improvement in the quality of resources The discovery of improved production techniques An increase in the quantity of resources

What resources are important for a country to produce capital-intensive goods?

An industrially advanced economy Large amounts of capital

What do economists call it when government provides money to producers of exports in an effort to make the domestic producer more competitive in world markets?

Export subsidy

Which of these are nontariff barriers?

Extremely difficult, complex licensing requirements Virtually unattainable standards for imports Unnecessary bureaucratic paperwork or policies used to restrict imports

What happens when government trade barriers prevent nations from trading freely?

Gains from specialization are reduced or eliminated. Nations must dedicate more resources to high-cost uses.

What is it called when two countries each specialize in a product, exchange them, and end up obtaining more of both products than they would have accomplished on their own?

Gains from trade

What type of trade barrier completely prohibits imports once a certain limit has been reached?

Import quota

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

It promotes competition. It encourages innovation.

How does a world market encourage countries to make the most economical use of their resources?

Countries with the lowest domestic opportunity cost for each product have a comparative advantage. Countries with a high opportunity cost for a product are more likely to concentrate on producing other types of goods instead.

Suppose two countries, A and B, both produce automobiles with the same amount of labor, raw materials and other necessary inputs. However, country A simply cannot produce as many units of output as country B. Which of the following must be true?

Country B has an absolute advantage in producing automobiles.

Suppose the opportunity cost of 1 ton of vegetables is 0.5 tons of beef in Mexico, and the opportunity cost of 1 ton of vegetables is 1 ton of beef in the United States. In regard to producing vegetables, what would be the most economical use of the world's resources?

Mexico is the low-cost producer. It should produce vegetables.

If we assume that, given the same amount of resources, Mexico can produce more avocados than any other country, why would that be considered an absolute advantage instead of a comparative advantage?

Mexico would be the most efficient producer of avocados.

What factors are characteristic of an absolute advantage but not of a comparative advantage?

More efficient production Producing more finished goods and using fewer resources

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

More imports A domestic shortage

What are the basic reasons why nations trade with each other?

Nations do not have the same resources to develop. Some people prefer to buy imported merchandise. Expertise varies among the nations.

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

Suppose that in the United States, the opportunity cost of 1 ton of beef is 1 ton of vegetables, and in Mexico the opportunity cost of 1 ton of beef is 2 tons of vegetables. What would this mean?

The United States has a comparative advantage in beef and therefore should specialize in beef.

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

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

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.

Which of the following statements are true about the economic basis of trade?

The distribution of natural, human, and capital resources among nations is uneven. Products are differentiated as to quality and other nonprice attributes. Efficient production of various goods requires different technologies or combinations of resources.

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

The terms of trade

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

labor

When a large amount of land is required for the affordable production of something, that product is said to be ______.

land-intensive

The principle of comparative advantage says that total output will be greatest when each good is produced by the country that has the ______ for that good.

lowest domestic opportunity cost

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

lowest; comparative

A licensing requirement that specifies unreasonable standards pertaining to product quality and safety is called a(n) ______.

nontariff barrier

A(n) ______ is designed to shield domestic producers from foreign competition.

protective tariff

Government trade barriers ______ gains from specialization.

reduce

A(n) ______ is a tax on imports, with the primary purpose of raising money for the federal government.

revenue tariff

A trade __________ occurs when exports exceed imports.

surplus

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

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

In the absence of ______, the domestic prices in a closed economy may or may not equal the world equilibrium prices.

trade

When does a trade surplus occur?

when exports exceed imports

When does a trade deficit occur?

when imports exceed exports

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

world price

How do import quotas affect sales of a product?

The price of imports increases. Sales of domestic goods increase. The price of domestically produced goods rises.

What is the equilibrium world price?

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

What principle says that total output will be greatest when each good is produced by the country that has the lowest domestic opportunity cost for that good?

The principle of comparative advantage

-intensive goods are products requiring relatively large amounts of natural resources to produce.

Blank 1: Land

The principle of comparative advantage says that total output will be greatest when each good is produced by the country that has the lowest domestic for that good. (Enter only one word per blank.)

Blank 1: opportunity or implicit Blank 2: cost

How can a nation expand its production possibilities boundary (curve)?

By developing more resources By improving technology

What type of products are most often made in countries that have industrially advanced economies and large amounts of capital?

Capital-intensive goods

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

China

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

Comparative advantage

How do trade barriers tend to affect the price, sales, and availability of a product?

Quotas increase the price of imported products.

What type of tariff is applied to an import, with the purpose of raising money for the federal government?

Revenue tariff

How do export subsidies affect international trade?

They enable domestic producers to charge a lower price, becoming more competitive. They enable domestic businesses to sell more goods globally. They reduce production costs for the domestic producer.

Why do nations sometimes agree to voluntary export restrictions?

To avoid more restrictive trade policies

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

benefit U.S. producers and penalize Chinese producers

Specialization on the basis of ______ leads to more efficient allocation of world resources.

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

When economies are opened for international trade, differences in ______ encourage exports or imports.

domestic and international prices

Although protective tariffs are usually not high enough to stop the importation of foreign goods, they put ______ producers at a competitive disadvantage in domestic markets.

foreign

A voluntary export restriction (VER) is a trade policy by which a nation agrees to limit ______.

how much of a specific good that it will export to a particular country

A limit on the amount of a good that can be imported into a country is known as a(n) ______.

import quota