Book 1_Econ_INTERNATIONAL TRADE

Question 1

Free trade among countries

Answer 1

increases overall economic welfare
- one country can specialize in the production of an export good
- benefit from economies of scale
- greater product variety, more competition, and a more efficient allocation of resources.

Question 2

Costs of free trade

Answer 2

• losses to those in domestic industries that lose business to foreign competition
• unemployment may increase over the period in which workers are retrained for jobs in the expanding industries.
• greater income inequality may result

Question 3

Types of trade restrictions

Answer 3

Tariffs
Quotas.
Minimum domestic content
Voluntary export restraints.

Question 4

Tariffs

Answer 4

These are taxes on imported goods collected by the government

Question 5

Quotas

Answer 5

These are limits on the amount of imports allowed over some period.

Question 6

Minimum domestic content

Answer 6

some percentage of product content must be from the domestic country

Question 7

Voluntary export restraints

Answer 7

A country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading partners.

Question 8

Effects of restrictions

Answer 8

Increase prices of imports and decrease quantities of imports
Increase demand for and quantity supplied of domestically produced goods
Increase producer’s surplus and decrease consumer surplus

Question 9

Export subsidies

Answer 9

decrease export prices and benefit importing countries at the expense of the government of the exporting country.

Question 10

Restrictions on the flow of financial capital

Answer 10

• Outright Prohibition of investment in the domestic country by foreigners
• Prohibition of or taxes on the income earned on foreign investments by domestic citizens
• Prohibition of foreign investments in certain domestic industries
• Restrictions on repatriation of earnings of foreign entities operating in a country

Question 11

Trade agreements - trading blocs

Answer 11

increase economic welfare by facilitating trade among member countries

Question 12

Free trade area - level 1

Answer 12

All barriers to the import and export of goods and services among member countries are removed

Question 13

Customs union - level 2

Answer 13

Member countries also adopt a common set of trade restrictions with nonmembers

Question 14

Common market - level 3

Answer 14

Member countries also remove all barriers to the movement of labor and capital goods among members.

Question 15

Economic union - level 4

Answer 15

Member countries also establish common institutions and economic policy for the union.

Question 16

Monetary union - level 5

Answer 16

Member countries also adopt a single currency to reduce the cost of cross-border trade.