Microeconomics Ch. 9

main sources of comparative advantage

1. Climate and natural resources 2. Relative abundance of labor and capital. Some countries have many highly skilled workers and a great deal of machinery. Other countries have many unskilled workers and relatively little machinery. As a​ result, the nation with the skilled workers has a comparative advantage in the production of goods that require highly skilled workers or sophisticated machinery to​ manufacture, such as​ aircraft, semiconductors, and computer software. The nations with an abundance of​ low-skilled workers have a comparative advantage in the production of goods that require unskilled workers and small amounts of simple​ machinery, such as​ children's toys. 3. Technology. Broadly​ defined, technology is the process firms use to turn inputs into goods and services. At any given​ time, firms in different countries do not all have access to the same technologies. In​ part, this difference is the result of past investments countries have made in supporting higher education or in providing support for research and development. 4. External economies. Once an industry becomes established in an​ area, firms that locate in that area gain advantages over firms located elsewhere. The advantages include the availability of skilled​ workers, the opportunity to interact with other firms in the same​ industry, and being close to suppliers.

Autarky

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

Why do some people oppose the World Trade Organization​ (WTO)?

Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. Some opponents desire to erect trade barriers to protect domestic firms from foreign competition. Some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the​ high-income countries at the expense of the​ low-income countries.

Who is harmed when individual nations move from autarky to free​ trade?

The owners of the firms that went out of business.

Terms of trade

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

quota

a numeric limit on the quantity of a good that can be​ imported, and it has an effect similar to a tariff. A quota is imposed by the government of the importing country.

Tariff

a tax imposed by a government on imports of a good into a country.

voluntary export restraint​ (VER)

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

Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.

false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas.

Imports

goods and services bought domestically but produced in other countries.

Exports

goods and services produced domestically but sold to other countries.

By​ trading, countries are able to consume more than they could without trade. This outcome is possible because

inefficiencies in resource allocation are reduced, shifting production to the more efficient country—the one with the comparative advantage—increases total production and world production of both goods increases after trade.

One effect of tariffs and quotas

is to cost jobs outside the industries immediately affected.

We do not see complete specialization in the real world because

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

The World Trade Organization​ (WTO)

replaced the General Agreement on Tariffs and Trade​ (GATT) in January 1995. generally aids in negotiating trade agreements that include not only goods but also services and intellectual property. is an international organization that oversees international trade agreements.

Protectionism is usually justified on the basis of one of the following​ arguments

saving​ jobs, protecting high​ wages, protecting infant​ industries, and protecting national security.

Dumping

selling a product for a price below its cost of production.

Comparative advantage

the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Absolute advantage

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

Protectionism

the use of trade barriers to shield domestic firms from foreign competition. For as long as international trade has​ existed, governments have attempted to restrict it to protect domestic firms.

Free trade​

trade between countries that is without government​ restrictions, makes consumers better off.