Chapter 13 | Globalization and Trade Policy

Question 1

Gains From Trade

Answer 1

Opportunity cost and comparative advantage are key to understanding why specializing and trading makes us all better off

Question 2

With voluntary trade

Answer 2

each person (or country) feels that what they get is of greater value than what they give up

Question 3

Canada is a trading nation

Answer 3

30+ percent of Canadian GDP is from selling exports to the rest of the world

Question 4

Absolute advantage

Answer 4

ability to produce at a lower absolute cost

Question 5

Comparative advantage

Answer 5

ability to produce at a lower opportunity cost

Question 6

Opportunity Cost

Answer 6

= Give up / Get

Question 7

Comparative advantage key to

Answer 7

mutually beneficial gains from trade

Question 8

Trade makes individuals (or countries) better off when each

Answer 8

Specializes in products and services with comparative advantage (lower opportunity cost)

Trades for other products and services

Question 9

Even if one individual has absolute advantage in producing everything, differences in comparative advantage allow mutually beneficial gains from specializing and trading

Question 10

Terms of trade

Answer 10

quantity of exports required to pay for one unit of imports

• Must be between each trader’s local opportunity costs
• Different terms of trade will split gains differently

Question 11

Protectionism and Trade

Answer 11

Freer trade creates winners and losers from the competitive process of creative destruction. Concentrated losses in import-competing industries create political pressure for protectionism despite overall gains.

Question 12

Freer trade increases competition, creating opponents to freer trade

Answer 12

Connections to new markets bring new competitors

Question 13

With creative destruction

Answer 13

gains from specialization, trade, competition, and innovation destroy higher-cost, and less popular products and businesses

Gains are increased productivity and higher living standards

Question 14

Losses are structural unemployment

Answer 14

technological change or international competition make some worker’s skills obsolete

Question 15

Trade opening new international markets creates winners and losers in Canada

Answer 15

Winners - Canadian consumers, Canadian exporters and workers in exporting industries

Losers - Canadian businesses and works in import-competing industries

Question 16

Government responses to protect losers from freer trade include

Answer 16

Tariffs - tax on imports, raising price of products to consumers

Import quotas - limits on the quantity that can be imported

Subsidies to domestic producers - government payment to domestic producers of products or services

Question 17

Tariffs

Answer 17

tax on imports, raising price of products to consumers

Question 18

Import quotas

Answer 18

limits on the quantity that can be imported

Question 19

Subsidies to domestic producers

Answer 19

government payment to domestic producers of products or services

Question 20

Unequal distribution of gains and losses produces

Answer 20

political pressure for protectionism to help the losers

Many consumers gain from free trade, but gain for each is small
Few businesses and workers in import-competing industries lose from free trade, but loss for each is large

Question 21

Protectionism leaves Canadians as a whole worse off

Answer 21

Protectionism leaves Canadians as a whole worse off

Question 22

Freer trade could benefit more people than it harms, but political pressure form import-competing industries slows international trade negotiations

Answer 22

Freer trade could benefit more people than it harms, but political pressure form import-competing industries slows international trade negotiations

Question 23

Why do people argue for protectionism?

Answer 23

limited arguments BUT
- Cultural Identity
- National Security

Question 24

Protectionism creates risk of

Answer 24

retaliation, triggering trade wars that make all countries worse off

Question 25

Cites research by economists (Dani Rodrik and others) showing

Answer 25

Industries more exposed to Chinese import competition since 2000 — the year China joined the World Trade Organization — were hit hard and have not recovered. Workers in these industries don’t go to better jobs, or even similar jobs in different industries. They shuffle between low-paid jobs, never recovering the prosperity they had before Chinese competition.

Question 26

Globalization and Sweatshops

Answer 26

While anti-globalization critics view sweatshops as the outcome of globalization and free-market policies, economists ask whether workers are better off or worse off with international trade.

Question 27

Economic globalization

Answer 27

integration of economic activities, across borders, through markets

Speeding up due to falling transportation and communication costs, elimination of government barriers to trade

Question 28

Anti-globalization groups view

Answer 28

international trade as causing problems in developing countries and target World Bank and International Monetary Fund (IMF)

Question 29

World Bank and IMF, during 1990s, attached

Answer 29

“free market” hands-off conditions to assistance to developing countries

Question 30

Sweatshops

Answer 30

historical consequence of globalization going back 200 years – provide low-wage jobs, often under poor working conditions

• Anti-globalization critics view sweatshops as exploitation for corporate profits
• Economists ask the opportunity cost question – are workers’ lives better off, or worse off, compared to a situation without globalization, trade, and factory jobs?
• In each sweatshop country, history of rising wages over time and movement of production elsewhere

Question 31

Governments and Global Markets

Answer 31

On the role of government in global markets, the hands-off position views government failure as worse than market failure; the hands-on position views market failure as worse than government failure.

Question 32

Joseph Stiglitz and hands-on economists support

Answer 32

a limited role for government
Want social safety net to support those left behind by trade and markets

Question 33

The Economist magazine and hands-off economists worry

Answer 33

that allowing governments in will result in protectionist policies

Argue that the harm poor countries suffer from globalization is caused by government protectionist policies, not by market forces

Question 34

In trade negotiations at the World Trade Organization, power struggles over tariffs and subsidies between rich and poor countries affect ____

Answer 34

terms of trade

Question 35

terms of trade

Answer 35

how gains are divided

Question 36

Hands-Off position -

Answer 36

Leave markets alone to produce economic growth that eventually benefits all

Risk is losers in import-competing industries get no assistance in adjusting

Believe government failure worse than market failure