Chapter 5 International Trade

Outsourcing

a company hires another company to perform some task

European Union

a customs union among 27 European nations

Import quota

a legal limit on the quantity of a good that can be imported

What does opening a market to imports lead to?

a net gain in total surplus

Autarky

a situation in which a country doesn't trade with other countries

National security argument

based on the proposition that overseas sources of goods are vulnerable to disruption in times of international conflict; therefore a country should protect domestic suppliers

The sweatshop labor fallacy

belief that trade must be bad for workers in poor exporting countries because those workers are paid very low wages by our standards

The pauper labor fallacy

belief that when a country with high wages imports goods produced by workers who are paid low wages, this much hurt the standard of living of workers in the importing country

Off-shore outsourcing

businesses hire people in another country to perform various tasks i.e. call centers

What are the two key concepts of the Heckscher-Ohlin Model?

factor abundance and factor intensity

Tariff

form of excise tax, one that is levied only on sales of imported goods

Domestic Supply Curve

shows how the quantity of a good supplied by producers inside our own country depends on the price of that good

Customs union

tariffs are levied at the same rate on goods from outside the EU entering the union

What happens if international trade increases/decreases the demand for a factor of production?

that factor's price will rise/fall

International trade agreements

treaties in which a country promises to engage in less trade protection against the exports of another country in return for a promise by the other country to do the same for its own exports

Producer surplus

Either individual or total producer surplus

What is the main reason that trade protection is so limited?

Because economists have convinced governments of the virtues of free trade.

Why aren't the effects of trade limited to just those industries that export or compete with imports?

Because factors of production can often move between industries

When a country engages in trade protection what two groups does it hurt?

Domestic consumers and foreign export industries

What do gains from trade depend on?

comparative advantage

Domestic Demand Curve

shows how the quantity of a good demanded by residents of a country depends on the price of that good

Total surplus

sum of producer and consumer surplus

Globalization

the phenomenon of growing economic linkages among countries

Individual consumer surplus

net gain to an individual buyer from the purchase of a good

World Trade Organization

oversees international trade agreements and rules on disputes between countries over those agreements; plays two roles

What are three common arguments for trade protection?

1) National security 2) Job creation 3) Infant industry argument

What are the two roles of the WTO?

1) Provides the framework for the massively complex negotiations involved in a major international trade agreement 2) the WTO resolves disputes between its members

What are the two ways that tariffs create inefficiencies?

1) Some mutually beneficial trades go unexploited 2) The economy's resources are wasted on inefficient production

What are two common misperceptions about trade between low productivity/wage rate countries and high productivity/wage rate countries?

1) The Pauper labor fallacy 2) The sweatshop labor fallacy

What two concerns reflect the second thoughts about globalization?

1) Worries about the effects of globalization on inequality 2) Worries that new development are increasing economic insecurity

What does international trade indirectly do?

1) increases the demand for the factors used by exporting industries 2) decreases demand for factors used by import-competing industries

What are the three sources of comparative advantage?

1) international differences in climate 2) differences in factor endowments 3) differences in technology

What are the effects of surplus caused by tariffs?

1) the higher domestic price increases producer surplus 2) the higher domestic price reduces consumer surplus 3) the tariff yields revenue to the government

The infant industry argument

Holds that new industries require a temporary period of trade protection to get established

The job creation argument

Points to the additional jobs created in import-competing industries as a result of trade protection

According to the Heckscher-Ohlin Model, which country will have a comparative advantage in goods?

The country that has an abundant supply of a factor of production

How do differences in technology affect comparative advantage?

Those who have more advanced technology are able to produce more of a certain good at a lower opportunity cost

When is it profitable for exporters to buy things domestically and sell them overseas?

When the world price is above the domestic price

How do differences in factor endowments affect comparative advantage?

i.e. Canada has more forested areas and is able to produce more lumber

How do differences in climate affect comparative advantage?

i.e. Tropical products come from tropical countries so they have a comparative advantage in producing those

Cost

lowest price at which he or she is willing to sell a good

Willingness to pay

max price at which he or she would buy a good

Factor intensity

measure of which factor is used in relatively greater quantities than other factors in production

Trade Protection

policies that limit imports

World price

price at which that good can be bought or sold abroad

Import-competing industries

produce goods an services that are also imported from abroad

Exporting industries

produce goods and services that are sold abroad

Consumer surplus

refer to both individual and total consumer surplus

Factor abundance

refers to how large a country's supply of a factor is relative to its supply of other factors

Heckscher-Ohlin Model

relationship between comparative advantage and factor availability

Total consumer surplus

the sum of the individual consumer surpluses achieved by all the buyers of a good

What motivates the anti-globalization movement?

the sweatshop labor fallacy

Individual producer surplus

the total net gain to all sellers in the market

Total producer surplus

the total net gain to all sellers in the market

What are tariffs used for?

to discourage imports and protect import competing domestic producers

North American Free Trade Agreement

trade agreements between the U.S., Canada, and Mexico

Free trade

when the government doesn't attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand

When is it profitable for imports to buy abroad and resell domestically?

when the world price is below the domestic price

Globalization and inequality

when wealthy countries like the US export skill intensive products while importing labor intensive products, they can expect to see the wage gap between more educated and less educated domestic workers widen