4.14.2 - Trade Flashcards
What is absolute advantage?
A country has an absolute advantage if it can produce more of a good than other countries can from the same amount of resources.
In an oversimplified model, how should countries produce goods?
They should only produce goods in which they have an absolute advantage and import the rest.
What is a comparative advantage?
The country with the least opportunity cost when producing a good possesses a comparative advantage in that good.
What did Ricardo think about international trade?
To reach full productive potential, each country should specialise in activities where it has a comparative advantage and then trade the output that is surplus to its needs in a world free of tariffs.
What are the assumptions underlying the principles of comparative advantage?
- Factors of production are fixed and immobile between countries
- There are constant returns to scale
- Demand and cost conditions are relatively stable
What are quotas?
Physical limits on the quantities of imported goods allowed into a country.
What are tariffs?
Taxes imposed on imports from other countries.
What are export subsidies?
Money given to domestic firms by the government to encourage firms to sell their products abroad.
Why have import controls been justified?
As the opposite is complete free-trade, one must argue against the assumptions made of free trade, being:
* Factors of production are fixed and immobile between countries
* There are constant returns to scale
* Demand and cost conditions are relatively stable
If any of these are not true, or are relaxed, then import controls can be justified.
Where have import controls been justified?
- Infant industries
- Sunset industries
- Strategic trade theory
- Agricultural efficiency
- Changes in demand or cost conditions
- Anti-dumping
- Self-sufficiency
- Employment
How have import controls been justified in the context of infant industries and sunset industries?
Developing countries may use protectionism to protect new industries from established international rivals. Once the new industries are set up, developed countries may use protectionism to protect sunset industries that are being phased out from the infant industries. This should ensure a smooth transition of jobs to minimise the social and economic cost of the adjustment process of job losses or geographical mobility of labour.
What is the strategic trade theory?
The theory that comparative and competitive advantage are not natural or ‘God-given’. Rather that governments try to create competitive advantage by specifically nurturing select industries or economic sectors.
How have import controls been justified in the context of strategic trade theory?
A country needs to protect those industries that they are building up to have competitive advantage, so they can use protectionism to do so.
How have import controls been justified in the context of unemployment?
To ensure that MNCs do not shift capital away from the country, import controls are necessary to ensure this does not happen.
They argue that it is more important to employ labour, however inefficiently, to prevent the greatest inefficiency that is mass unemployment. This is an example of second-best theory.
What are the consequences of allowing imports of a lower price into a country?
Due to the new price of PW, domestic demand of the good has risen to QD1, but domestic producers are only willing to produce QS1, meaning imports will make up the difference of QD1 to QS1.
In this example, there is a transfer of economic welfare from domestic producers to domestic consumers equal to the area B + C, being transferred from producers to consumers. There is also a net welfare gain of C.
ADD FIGURE 14.3 ON PAGE 510
What are the consequences of placing tariffs on imports of a lower price into a country?
Due to the new world price of PW, the government is pressured to add a tariff, so the price of imports actually equals PW + t. Domestic demand doesn’t rise as far to QD2, but domestic supply doesn’t fall as far to QS2, so imports only make up QD2 - QS2.
The higher prices increases producer surplus by area D. The government gets tariff revenue of area B. Consumer surplus falls by area D + B. There is also a net welfare loss of area A + C due to the tariff.
