Chapter 4

Question 1

Trade

Answer 1

Occurs when goods, services, or resources are exchanged, sometimes using money as a medium of exchange.

Question 2

Barter

Answer 2

Trade without money.

Question 3

Comparative Advantage

Answer 3

An individual has a ‘Comparative Advantage’ at producing a good if he or she has a lower opportunity cost of producing the good, in terms of other goods sacrificed.

Question 4

Transactions Costs

Answer 4

Costs that arise due to the sacrifice that must be made to search out, negotiate, and complete an exchange.

Question 5

Balance of Payments

Answer 5

The dollar value of exported goods and services minus the dollar value of imported goods and services. ‘They think that nations become wealthy by having the highest possible positive balance.’

Question 6

Trade Surplus

Answer 6

A positive balance of payments.

Question 7

Trade deficit

Answer 7

A negative balance of payments.

Question 8

The Current Account

Answer 8

Measures the monetary value of the flow of goods and services.

Question 9

The Capital Account

Answer 9

(Also known as the financial account) is one of two primary components of the balance of payments, the other being the current account. (A national account that shows the net change in asset ownership for a nation)

Question 10

Exchange Rate

Answer 10

The price of one country’s currency in terms of another country’s currency. ( The exchange rate depends on the supply and demand for the currency )

Question 11

Dollar has Appreciated

Answer 11

Gained value - compared to the peso

Question 12

Protectionists

Answer 12

Modern day Mercantilists

Question 13

Tariffs

Answer 13

Taxes on imports, sometimes more than 100% of the imports price.

Question 14

Quotas

Answer 14

Restrictions on the quantity of imports that citizens can purchase.

Question 15

Subsidies

Answer 15

Paying domestic firms to produce, unless foreign governments retaliate, foreign industries can’t compete.

Question 16

Export Subsidies

Answer 16

Paying domestic firms for each unit they export.

Question 17

Domestic Content Restrictions

Answer 17

Laws that say a product made in the country must be primarily made using resources from the country.

Question 18

Anti-competitive manufacturing Specifications

Answer 18

Requiring that a particular imported product be manufactured with inputs that are difficult to acquire except in the importing country.

Question 19

The Economic Problem

Answer 19

Allocating society’s scarce resources to their best uses.

Question 20

The Incentive to Trade comes from what (3) Motivations?

>Based on the idea of spontaneous order.

Answer 20

People differ in tastes, people differ in abilities, and more highly populated markets give rise to better use of resources through specialization (expansion of the extent of the market).

Question 21

Because we trade resources…?

Answer 21

Both Consumers and Producers benefit.

Question 22

As time passes, more trade is possible because?

Answer 22

It makes more sense to specialize as the population expands.

Question 23

If a US company uses cheaper, lower quality labor from abroad…?

Answer 23

It frees up higher quality, expensive labor at home.

Question 24

People who work in the US oil refining Industry, which depends on foreign imports prefer?

Answer 24

???

Question 25

To counter Mr. Protectionists argument, Bastiat says?

Answer 25

Money spent on foreign iron returns to the home country and money saved on foreign….

Question 26

Adam Smith – limitations on specializations of labor – what did he say?

Answer 26

The division of labor is limited by the extent of the market.

Question 27

T/F/E: As populations grew, labor and capital was used more efficiently which put many people out of work and lowered overall well being.

Answer 27

(FALSE) As labor and capital was used more efficiently, labor was freed up to produce other goods, which increased overall well being.

Question 28

Trade is Advantageous if the external cost_____

Answer 28

Is lower than the internal cost of producing the good.

Question 29

What must happen for there to be (NO) trade possibilities?

Answer 29

The Opportunity Cost would have to be Perfectly balanced. (Equal across the board)

Question 30

T/F/E: Since trade can be beneficial…..

Answer 30

???

Question 31

T/F/E: Only US consumers, not US producers gain from importing into the US?

Answer 31

???

Question 32

How big is the Current Account compared to the Capital Account?

Answer 32

They are Equal.

Question 33

What determines the supply of dollars?

Answer 33

(The Federal Reserve) How many of others good, services, and financial instruments people who hold dollars want. Whether people expect the dollar to gain or lose value.