Chapter 21: International trade

Question 1

Comparative Advantage

Answer 1

The advantage a country has when it can produce a good at lower opportunity cost than any other country can.

Question 2

Tariff

Answer 2

A tax on imports

Question 3

Quota

Answer 3

A legal limit imposed on the amount of a good that may be imported.

Question 4

Dumping

Answer 4

The sale of goods abroad at a price below their cost and below the price charged in the domestic market.

Question 5

Tariffs’ effect on surpluses (Consumer & Producer)

Answer 5

Tariffs lead to a decrease in consumers’ surplus, an increase in producers’ surplus and tariff revenue for the government.
Consumers lose more through tariffs than producers and government gain.

Question 6

Quotas’ effect on surpluses

Answer 6

Quotas lead to a decrease in consumers’ surplus, an increase in producers’ surplus, and additional revenue for the importers who sell the amount specified by the quote. Consumers lose more through quotas than producers and importers gain.

Question 7

Arguments for trade restrictions

Answer 7

• National defense
• Infant industry
• Antidumpting
• Foreign export subsidies
• Low foreign wages
• Saving domestic jobs

Question 8

National defence argument for trade restrictions

Answer 8

States that certain goods are necessary to the national defense and should be produced domestically whether the country has a comparative advantage in their production or not.

Question 9

Infant industry argument for trade restrictions

Answer 9

States that infant, or new, industries should be protected from free trade so that they have time to develop and compete on an equal basis with older, more established foreign industries.

Question 10

Antidumping argument for trade restrictions

Answer 10

States that domestic producers should not have to compete (on and unequal basis) with foreign producers that sell products below cost and below the prices they charge in their domestic markets.

Question 11

Foreign export subsidies argument for trade restrictions

Answer 11

States that domestic producers should not have to compete (on an unequal basis) with foreign producers that have been subsidized by their governments.

Question 12

Low foreign wages argument for trade restrictions

Answer 12

States that domestic producers cannot compete with foreign producers that pay low wages to their employees when domestic producers pay high wages.

Question 13

Saving domestic jobs argument for trade restrictions

Answer 13

States that through low foreign wages or government subsidies (or dumping and similar practices), foreign producers will be able to outcompete domestic producers and that therefore domestic jobs will be lost. For domestic firms to survive and domestic jobs not to be lost, limits on free trade are proposed.