ECON chapter 7

External economies

reductions in a firms cost that result from an increase in the size of an industry.

Increasing Consumption Through trade

*Without Trade* Production and consumption Canada : Tele -1500 Cell-1000 Korea : Tele -9000 cell-1500 *with trade & comparative adv. Production: Canada : Cell - 4000.... imports 1500- tele exports 1500- cell Korea : Tele- 12000 .... imports 1500 Cell, exports 1500 tele Consumption: Canada : Tele -1500 cell - 2500 Korea : Tele- 10,500 cell- 1500 Gains from Trade : increased consumption Canada - 1500 cell phones Korea - 1500 televisions

Why dont we observe complete specialization?

- not all goods and services are traded internationally -production of most goods and services involves increasing opportunity costs -tastes for products differ.

Where does comparative advantage come from?

-climate and natural resources eg. alberta and oil -relative abundance of labour and capital eg. Vietman and clothing -technology eg. U.S and the tablet computer -external economies eg. Toronto in providing banking services

Why does total Production of cell phones and televisions increase when Canadians specialize in producing cell phones and Koreans specialize in producing televisions?

A: If a company shifts production from an old factory to a more efficient factory, its, output will increase. Producing televisions in Canada and cell phones in Korea is inefficient. Shifting production to the more efficient country - the one whose people have a comparative advantage- increases total production. * people in different countries gain from specializing in producing goods in which they have a comparative advantage, and trading for goods in which people in other countries have a comparative advantage.

Does anyone lose as a result of international trade?

Expanding trade eliminates the jobs of workers employed at companies that are less efficient than foreign companies. Trade also creates new jobs at companies that exports to foreign markets

Imports

Goods and services bought domestically but produced in other countries

Exports

Goods and services produced domestically, but sold in other countries

Comparative advantage over time.

Once a country has lost its comparative advantage in producing a good, its people will have higher incomes and its economy will be more efficient if it switches from producing the good to importing it.

Understanding the difference between absolute advantage and comparative advantage in international trade

People trade for one reason : trade makes them better off -governments try to intervene to prevent international trade than trade between citizens. - We will see that the reasons for this are generally political, not economic.

Dumping

Selling a product for a price below its cost of production

Protectionism

The use of trade barriers to shield domestic firms from foreign competition - saving jobs -protecting high wages - protecting infant industries -protecting national security

Governments typically use one of the following justifications for implementing tariffs:

To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who produce that good domestically might lose their jobs. To protect infant industries. If a country wants to develop its own industry producing a particular good, it will use tariffs to make it more expensive for consumers to purchase the foreign version of that good. The hope is that they will buy the domestic version instead and help that industry grow. To retaliate against a trading partner. If one country doesn't play by the trade rules both countries previously agreed on, the country that feels jilted might impose tariffs on its partner's goods as a punishment. The higher price caused by the tariff should cause purchases to fall. To protect consumers. If a government thinks a foreign good might be harmful, it might implement a tariff to discourage consumers from buying it.

quota

a numerical limit a government imposes on the quantity of a good that can be imported into the country

Autarky

a situation in which a country does not trade with other countries.

Tariff

a tax imposed by a government on imports

Voluntary export restraint (VER)

an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country

World trade Organization (WTO)

an international organization that overseas international trade agreements

Gains from unilateral elimination of tariffs and quotas

canadians would gain from the elimination of tariffs and quotas even if the other countries did not reduce their tariffs and quotas

GATT

general agreement on tariffs and trade . After world war 2, allied governments were looking for ways to reduce tariffs and revive international trade. Gatt was set up in 1948 countries joining GATT agreed not to impose new tariffs or import quotas. after negotiations. countries agreed to reduce tariffs from the very high levels seen in the 1930's was then replaced with WTO in 1995

Opportunity cost

the highest valued alternative that must be given up to engage in an activity

Comparative advantage

the ability of an individual or firm, country to produce a good or service at a lower opportunity cost than its competitors. *Comparative advantage in international trade* eg. suppose Canada and south Korea produce cell phones and televisions. In one hour of work, Korean workers can make six times as many televisions and one and a half times as many cell phones as Canadian workers, South Korea has an Absolute advantage Korea also has a comparative advantage in producing televisions, as they produce them at a lower opportunity cost. Canada has a comparative advantage in producing cellphones.

Absolute advantage

the ability to produce more of a good or service than competitors when using the same amount of resources.

Globalization

the process of countries becoming more open to foreign trade and investment

Terms of trade

the ratio at which a country can trade its exports for imports from other countries

Free Trade

trade between countries that is without government restrictions.

What is the importance of trade to the Canadian economy?

we export and import a greater share of goods and services we produce and consume than we did in the past. Currently, about one third of what we produce is sold to other countries, and one third of what we spend our money on comes from other countries.