Chapter 34 - International Trade, Comparative Advantage, and Protectionism

Question 1

Corn Laws

Answer 1

The tariffs, subsidies, and restrictions enacted by the British Parliament in the early nineteenth century to discourage imports and encourage exports of grain.

Question 2

Theory of comparative advantage

Answer 2

Ricardo’s theory that specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers.

Question 3

absolute advantage

Answer 3

The advantage in the production of a good enjoyed by one country over another when it uses fewer resources to produce that good than the other country does.

Question 4

comparative advantage

Answer 4

The advantage in the production of a good enjoyed by one country over another when that good can be produced at lower cost in terms of other goods than it could be in the other country.

Question 5

Terms of trade

Answer 5

The ratio at which a country can trade domestic products for imported products.

Question 6

Exchange rate

Answer 6

The ratio at which two currencies are traded. The price of one currency in terms of another.

Question 7

Factor endowments

Answer 7

The quantity and quality of labor,

land, and natural resources of a country.

Question 8

Heckscher-Ohlin theorem

Answer 8

A theory that explains the existence of a country’s comparative advantage by its factor endowments: A country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.

Question 9

Protection

Answer 9

The practice of shielding a sector of the economy from foreign competition.

Question 10

tariff

Answer 10

A tax on imports.

Question 11

export subsidies

Answer 11

Government payments made to domestic firms to encourage exports.

Question 12

Dumping

Answer 12

A firm’s or an industry’s sale of products on the world market at prices below its own cost of production.

Question 13

Quota

Answer 13

A limit on the quantity of imports.

Question 14

Smoot-Hawley tariff

Answer 14

The U.S. tariff law of the 1930s,
which set the highest tariffs in U.S. history (60 percent). It set off an international trade war and caused the decline in trade that is often considered one of the causes of the worldwide depression of the 1930s.

Question 15

General Agreement on Tariffs and Trade (GATT)

Answer 15

An international agreement signed by the United States and

22 other countries in 1947 to promote the liberalization of foreign trade.

Question 16

World Trade Organization (WTO)

Answer 16

A negotiating forum dealing with rules of trade across nations.

Question 17

Doha Development Agenda

Answer 17

An initiative of the World Trade Organization focused on issues of trade and development.

Question 18

economic integration

Answer 18

Occurs when two or more nations join to form a free- trade zone.

Question 19

European Union (EU)

Answer 19

The European trading bloc composed of 27 countries (of the 27 countries in the EU, 16 have the same currency— the euro).

Question 20

U.S.-Canadian Free Trade Agreement

Answer 20

An agreement in which the United States and Canada agreed to eliminate all barriers to trade between the two countries by 1998.

Question 21

North American Free Trade Agreement (NAFTA)

Answer 21

An agreement signed by the United States, Mexico, and Canada in which the three countries agreed to establish all North America as a free- trade zone.

Question 22

Infant industry

Answer 22

A young industry that may need
temporary protection from competition from the established industries of other countries to develop an acquired comparative advantage.