0015 International Trade and the American Economy (SMR 5.6) Flashcards
Give an example of how a PPF chart can show comparative advantages and the need for trade?
Quantity of Planes vs. Quantity of Shoes. There are only so many resources in the US, so there are only so many planes that can be made in a day and so many shoes that can be made in a day. For every plane made, it means that two tons of shoes can’t be made. If China is more efficient at producing shoes it means it has the comparative advantage over the US when it comes to shoes. If the US is more efficient in producing planes, the US has comparative advantage over China when it comes to planes. This is where international trade makes sense.
How does trade become mutually benefiicial for both parties?
If countries focus on producing products which they have comparative advantage of and trading for those which they don’t, then trade becomes mutually beneficial for both parties.
Most economists agree that _____ and _______ are key to economic development
Most economists agree that specialization and trade are key to economic development (evidenced in the case of Japan, India and China which improved b/c of trade vs. Venezuela, Zimbabwe, and Cuba who have either voluntarily or involuntarily been cut off from trade and have not improved)
What is Comparative Advantage?
The ability of one country to product goods and services at a lower opportunity cost than another country
Trade is born out of ___________.
Specialization
How does division of labor lead to trade?
Division of labor causes interdependence and specialization which leads to trade
How do we define trade?
Any act of buying and selling goods, can be regional, national or international
What are the two limitations to Comparative Advantage?
- Trade deficit: lower value of goods produced relative to what is purchased can cause a reduction in value of country’s currency (you want to export more than you import)
- Cost of transportation: “advantage” off set by distance, it might be a cheaper product but shipping costs make it not so
The goal of trade is to maintain _______.
balance
for example, fix deficit by limiting imports or increasing exports
If we’re importing more than we are exporting, we have a trade _________.
deficit
If we are exporting more than we are importing, we have a trade _______.
surplus
How has globalization impacted trade?
Globalization accelerated trade beginning in the 1980’s because there was more competition for domestic products, more access to international labor and access to new markets
How does government intervene in trade?
Through protective laws like import barriers (tariffs, quotas, and regulations) and by limiting movement through citizenship and immigration laws
What is Protectionism?
The government’s use of trade barriers to limit foreign imports
What are the pros of Protectionism (5)?
- Newer infant industries need gov protection from more established foreign competitors
- Trade barriers protect domestic jobs and wages of domestic workers
- Purchase of foreign goods support worker exploitation abroad
- Necessary to prevent “dumping”
- We shouldn’t become overly dependent on other countries for essential goods
What are the cons of Protectionism?
- Protecting infant industries encourages them to remain inefficient
- If the US enacts trade barriers, other nations will retaliate in turn, resulting in higher unemployment and lower wages for US workers
- Nations should produce and trade products for which they enjoy a comparative advantage, resulting in more efficient use of the nation’s resources
What are the effects of a trade deficit?
- Can change demand for low priced imported products
- Results in outflow of capital
- Can lead to loss of jobs, greater insecurity and failing wages
The US has been in a trade ______ since 1975.
Deficit
What was the Hawley Smoot Tariff?
A tariff on European imports set by Herbert Hoover in the 1930’s as a way to bring production back to America but resulted in Europe retaliating with high tariffs that ended up hurting the economy and causing more unemployment
What did the Federal Reserve try to do after the initial 1929 Stock Market Crash?
The Federal Reserve dropped interest rates to zero, output and prices fell and regular people started to expect further price declines.
Unemployment rose to 25% and the average family income dropped by around 40%
In recessions, central banks may try to use _______ monetary policy to speed up the economy. Does this work?
Expansionary (i.e. lowering interest rates to encourage spending)
Doesn’t usually work because people expect prices to keep falling and therefore won’t spend so the velocity of money declines which leads to a liquidity trap
What book was written during the Great Depression that offered a different approach to getting countries out of a depression?
John Maynard Keynes - 1936 book, A General Theory of Money, Interest, and Employment
