7) CH9 Application: International Trade

Question 1

What is the consumer surplus?

Answer 1

Satisfaction you get without paying the price, because you are not the only one to buy, so the price is lower.

Question 2

What is the producer surplus?

Answer 2

Surplus of money the producer gets because there is more D so the price is higher.

Question 3

Where are the consumer and producer surplus on a graph?

Answer 3

Question 4

What does measure th sum of consumer and producer surplus?

Answer 4

Total benefits that buyers and sellers receive from the market.

Question 5

What are the 2 trades policies?

Answer 5

Tariff and import quota.

Question 6

What is a tariff?

Answer 6

Tax on good produced abroad and sold domestically.

The price is raised above the world price thanks to the tax. So the consumer are encouraged to buy local products.

Question 7

What is an import quota?

Answer 7

Limlit on a quantty of a good that is produced abroad and sold domestically.

Mashallian approach to protect the market by the quantity.

Question 8

What is the world price?

Answer 8

Price of a good that prevails in the world market.

Question 9

How can you see the effect of free trade?

Answer 9

Compare the domestic price of a good without trade and the world price of that good.

Question 10

When will the country be an exporter?

Answer 10

Whe the domestic price is below the world price.

The country has a lower opportunity cost of production than other countries. Therefore, there is a comparative advantage.

Question 11

When will the country be an importer?

Answer 11

When the domestic price is above the wolrd price.

The country doesn’t have a comparative advantage.

Question 12

What are the 2 conclusions when the country is a exporter?

Answer 12

• Domestic producer are better off, domestic consumers are worse off
• Because of the gain of D, trade raises the economic well being of a nation as a whole.

The total surplus has raised of D.

Question 13

What are the 2 conclusions when the country is an importer?

Answer 13

• Domestic producer are worse off, domestic consumer are better off.
• Because of the the raise of the D, the well being being of the nations as a wole raises.

The total well-being has raised of D.

Question 14

In the free trade, what is the sign (+ or -) of the net change in total?

Answer 14

+ because the gains of he winners exceed the losses of the losers.

Question 15

What are the effects of a tariff?

Answer 15

It reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade.

The total surplus decreases by an amount: the deadweight loss.

Question 16

What are the effects of an import quota?

Answer 16

• Domestic buyers are wore off (price above the world price), so domestic producer are better off.
• Licence holders are better off cause they sell at a higher price than the world price.
• The total surplus decreases by the deadweight loss

Question 17

What are the effects of quotas and tariffs?

Answer 17

• Raise of domestic prices
• Reduction of the welfare of domestic consumers
• Increase of the welfare the domestic producers
• Causes deadweight losses.

Question 18

When are the results of tariffs and quotas identical?

Answer 18

If government sells import licences for full value, revenue that of an equivalent tariff.

Question 19

What are the benefits of international trade?

Answer 19

• Increasing variety of goods
• Lower costs through economies of scale & specialization
• Increased competition
• Enhanced flow of ideas (exchange of technology)
• Generate economic growth

Question 20

Why should we restrict trades?

Answer 20

• Jobs
• National security
• Infant industry
• Unfair competition (wage, technology steeling)
• Protection as a bargaining chip.

Question 21

What is a unilateral decision?

Answer 21

Country removes its trade restrictions on its own.

Question 22

What is a multilateral decision?

Answer 22

A country reduces its trade restrictions while other countries do the same.

Question 23

What is a custom union?

Answer 23

Group of countries that agree not to impose any restriction (tariff, quotas, quality…) at all on trades between their own economies, but impose the same restrictions on goods imported from outside the group.

Ex: EU, NAFTA….

Question 24

What is GATT?

Answer 24

General Agreement on Tariffs and Trade: series of negociations among many of the world’s countries, begun in 1947, with the goal of promoting free trade.

It is reinforced by the WTO in 1995.

Question 25

What is the role of WTO?

Answer 25

Administer trade agreements, organizes forum of negociations, handle disputes.

Question 26

Summary 1:

Answer 26

• The effects of free trade can be determined by comparing the domestic price without trade to the world price.
  
  • A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter.
  • A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.

Question 27

Summary 2:

Answer 27

• When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off.
• When a country allows trade and becomes an importer of a good, consumers of the good are better off, and producers are worse off.

Question 28

Summary 3:

Answer 28

• A tariff—a tax on imports—moves a market closer to the equilibrium than would exist without trade, and therefore reduces the gains from trade.
• Import quotas will have effects similar to those of tariffs.

Question 29

Summary 4:

Answer 29

• There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions.
• Economists, however, believe that free trade is usually the better policy.