Micro Ch 26 LearnSmart
What are the three basic principles of the General Agreement on Tariffs and Trade (GATT)?
-Equal, nondiscriminatory treatment of members. -Reduce tariffs, using multilateral negotiations. -Eliminate import quotas.
What are the four direct effects of a tariff?
-Increased domestic production -Tariff revenue -A decline in consumption -A decline in imports
In addition to the benefits of human and geographical specialization, what are some side benefits to free trade?
-It encourages innovation. -It promotes competition.
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.
Which problems did critics fear that NAFTA would cause?
-Massive loss of jobs in the United States -Massive migration of U.S. firms to Mexico -Competition from other nations building plants in Mexico
Workers who are displaced due to foreign imports are eligible for what kinds of benefits under the Trade Adjustment Assistance Act?
-Reimbursement for relocation expenses -Refundable tax credits for health insurance -Cash assistance for up to 78 weeks
According to various studies, how do trade protections, such as tariffs and quotas, tend to affect domestic society?
-Some trade protections increase government revenues. -The cost to consumers and society exceeds the gains to producers and the government.
What were some of the effects of the trade policy changes under GATT?
-Tariffs were reduced by 33% on average. -Tariffs replaced quotas on apparel and textiles. -Intellectual rights were given more protection.
Since the passage of NAFTA in 1993, what economic events have happened among the member nations?
-The standard of living generally improved in all three nations. -Trade increased among all three nations.
According to the diversification-for-stability argument, why should some nations impose protective tariffs and import quotas?
-Their economies are highly specialized and depend on international trade for their income. -Their economies are unusually disrupted by fluctuations in world supply and demand. -Diversification of their industries would increase domestic stability.
How do nations benefit from international trade?
-They can acquire more goods and services. -They can enhance their resource productivity. -They can specialize their production.
What are the purposes of the World Trade Organization?
-To oversee trade agreements among member nations -To provide forums for trade negotiations -To rule on trade disputes among member nations
What is the European Union (EU)?
A regional free-trade zone
What is the main economic difference between a tariff and a quota?
A tariff generates revenue for the domestic government.
What is a tariff?
A tax on an imported good
What type of graphic shows the amounts of two products a nation can obtain by specializing in one product and trading for the other?
A trading possibilities line
Which argument against free trade becomes particularly popular when the economy goes into a recession?
Increased domestic employment
In recent years, what has been the general worldwide trend regarding tariffs?
Lower tariffs
What do critics say is a flaw in the military self-sufficiency argument for protective tariffs to encourage domestic production of goods needed for national security?
Many industries can claim they make contributions to national security and deserve protection.
What is the basis of the diversification-for-stability argument for trade protection?
Nations that depend heavily on one main export should impose trade barriers to protect domestic production of other goods.
Shifting work that was previously done by American workers to workers abroad is called what?
Offshoring
What business activity shifts work previously done by American workers to workers located in other countries?
Offshoring
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
What was the European Union called when it was initiated in 1958?
The Common Market
What is the equilibrium world price?
The price that equates the quantities supplied and demanded globally through international trade
According to the infant industry argument, why is import protection needed?
Trade barriers allow protected industries the time to become efficient and competitive.
Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. What will happen if the world price of corn exceeds $1.00?
U.S. firms will produce more than 100 tons of corn and export the excess, selling it at the world price.
Because of trade wars and other factors, more nations have been moving toward ______.
free trade
The North American Free Trade Agreement (NAFTA) created a ______ zone among Mexico, the United States, and Canada in 1993.
free-trade
In a two-nation model, international equilibrium is determined by the ______ of one country and the ______ of the other country.
import demand, export supply
Tariffs and/or quotas tend to impose ______ on domestic consumers, and ______ to the producers of the protected goods in the importing economy.
costs; gains
Economizing requires that any particular good be produced by the nation having the ______ domestic opportunity cost, or the ______ advantage for that good.
lowest; comparative
The idea that protective tariffs are needed to preserve industries that produce the materials essential for national defense is called the ______ argument.
military self-sufficiency
Assume the domestic price of corn is $1.00 and the quantity of corn produced is 100 tons. If the world price of corn exceeds $1.00, then U.S. producers will produce ______ than 100 tons of corn, creating a ______ that will be ______.
more; surplus; exported
Because China has abundant low-wage workers, it can efficiently produce ______-intensive goods.
labor
The cheap foreign ______ argument says that trade protection is required to ensure that cheap imports do not flood U.S. markets, dragging down prices of goods and U.S. wages.
labor
A trading possibilities line reveals the amounts of two products a nation can obtain by ______.
specializing in one product and trading for the other
When the world price for a product is below the Canadian price, what will Canada experience?
-A domestic shortage -More imports
Dumping occurs in which of the following situations?
-A firm charges a lower price to a foreign market than what it would charge in its home market. -A firm charges a price to a foreign market that is lower than its production costs.
Which statements about tariffs and quotas are true?
-A quota does not generate revenue for the government. -A tariff generates revenue for the domestic government. -A quota transfers revenue to foreign producers.
What argument says that domestic firms and workers must be shielded from competition from countries where wages are low?
Cheap foreign labor argument
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
Why do economists generally support the Trade Adjustment Assistance Act?
It helps create political support for international free trade.
Why is arguing for a tariff to save U.S. jobs popular during a recession?
Reduced spending on imports can be diverted to domestic spending and increase domestic employment.
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.
What is the exchange ratio at which two countries trade their products?
The terms of trade
According to the infant industry argument, why should recently established domestic firms be protected from competition from imports?
They have not had time to become efficient enough to compete against mature foreign companies.
When does a trade deficit occur?
When imports exceed exports
What institution is in charge of overseeing trade agreements and ruling on disputes relating to them?
World Trade Organization
A tariff imposed on Chinese imports into the United States tends to ______.
benefit U.S. producers and penalize Chinese producers
A trade ______ occurs when imports exceed exports.
deficit
If a firm charges a foreign market a lower price than it charges the domestic market, that firm is said to be ______ its product.
dumping
The intersection of one nation's import demand curve and another nation's export supply curve represents ______.
international equilibrium
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
The interaction of world supply and demand determines the equilibrium ______.
world price
