Chapter 18

Question 1

Define “terms of trade”

Answer 1

rate at which units of one product can be exchanged for units of another product

Question 2

Define consumption possibilities curve

Answer 2

curve showing the combinations of two goods that can be consumed when a nation specializes in a particular good and trades with another nation

Question 3

How does free trade affect employment?

Answer 3

generally, it will hurt whatever the trading partner’s specialization is in the domestic economy

Question 4

what are the four import-restriction policies?

Answer 4

outright ban on imports, an import quota, voluntary export restraints, and a tariff.

Question 5

import quota

Answer 5

a government-imposed limit on the quantity of a good that can be imported

Question 6

voluntary export restraint (VER)

Answer 6

a scheme under which an exporting country voluntarily decreases its exports

Question 7

import licenses

Answer 7

rights, issued by a government, to import a good

Question 8

tariff

Answer 8

tax on imported goods

Question 9

what are the 3 rationales for protectionist policies?

Answer 9

to shield workers from foreign competition, to nurture infant industries until they mature, and to help domestic firms establish monopolies in world markets

Question 10

learning by doing

Answer 10

knowledge and skills workers gain during production that increase productivity and lower cost

Question 11

infant industries

Answer 11

industries that are at an early stage of development

Question 12

GATT

Answer 12

General Agreement on Tariffs and Trade - international agreement established in 1947 that has lowered trade barriers between the US and other nations

Question 13

World Trade Organization

Answer 13

an organization established in 1995 that oversees GATT and other international trade agreements, resolves trade disputes, and holds forums for further rounds of trade negotiations

Question 14

what are some of the most prominent regional trade agreements?

Answer 14

NAFTA (between Canada, America, and Mexico); eliminated tariffs and other trade barriers
EU (removed all trade barriers to create a single market in Europe)
APEC (Asian Pacific Economic Cooperation); nonbinding, 18 Asian nations, reduce trade barriers between them
DR-CAFTA (Dominican Republic-Central America Free Trade Agreement) - promote trade liberalization between US, DR, and 5 Central American countries.

Question 15

dumping

Answer 15

never legal in international trade agreements
situation in which price a firm charges in a foreign market is lower than either the price it charges in its home market or the production cost

Question 16

price discrimination

Answer 16

the practice of selling a good at different prices to different consumers

Question 17

predatory pricing

Answer 17

a firm sells a product at a price below its production cost to drive a rival out of business and then increases the price

Question 18

Are environmental policies good for economic well-being and free trade?

Answer 18

generally no

Question 19

What is the relationship between trade and income inequality?

Answer 19

trade theory suggests that free trade does promote income inequality as a result of specialization

Question 20

outsourcing

Answer 20

firms producing components of their goods and services in other countries