Chapter 4

Question 1

Trade

Answer 1

occurs when goods, services, or resources are exchanges, sometimes using money as a medium of exchange

Question 2

Barter

Answer 2

trade without money

Question 3

An individual has a comparative advantage if

Answer 3

he or she has a lower opportunity cost of producing the good, in terms of other goods sacrificed

Question 4

Three motivations for trade?

Answer 4

1. people differ in tastes
2. people differ in abilities
3. the expansion of the extent of the market

Question 5

A trade is advantageous if

Answer 5

the external cost of trading for a good is lower than the internal cost of producing the good

Question 6

Transaction costs

Answer 6

the sacrifices that must be made in order to search out, negotiate, and complete an exchange

Question 7

Balance of trade

Answer 7

the dollar value of exported goods- the dollar value of imported goods

Question 8

Trade surplus

Answer 8

positive balance of trade

Question 9

Trade deficit

Answer 9

negative balance of trade

Question 10

The current account

Answer 10

the monetary value of the flow of goods and services

Question 11

The capital account

Answer 11

the monetary value of the flow of stocks and bonds of the government

Question 12

Balance of payments

Answer 12

the sum of the current and capital accounts; ALWAYS ZERO

Question 13

Exchange rate

Answer 13

the price of one country’s currency in terms of another country’s currency

Question 14

The demand for dollars is determined by:

Answer 14

1. How many goods, services, and financial instruments the rest of the world wants
2. Whether people expect the dollar to gain or lose value in the future- in terms of other currencies

Question 15

The supply of dollars is determined by:

Answer 15

1. how many of the world’s goods, services, and financial instruments that people holding dollars wish to have
2. Whether people expect the dollar to gain or lose value,- in terms of other currencies
3. The central bank- the US Federal Reserve Bank (the Fed) creating or destroying money

Question 16

An appreciation of the dollar…

Answer 16

makes it less profitable to export and more profitable to import

Question 17

Tariffs

Answer 17

taxes on imported goods

Question 18

Quotas

Answer 18

restrictions on the quantity of imports that citizens can purchase

Question 19

Subsidies

Answer 19

paying domestic firms to compete (unless foreign governments retaliate, foreign industries can’t compete)

Question 20

Export subsidies

Answer 20

paying domestic firms for each unit they export

Question 21

Domestic content restrictions

Answer 21

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

Question 22

Anti-competitive manufacturing specifications

Answer 22

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

Question 23

Mercantilists

Answer 23

want to keep as much money in the country as possible (Export more than we import)

Question 24

What effect does the value of a dollar have on gas price in the US?

Answer 24

A strong dollar causes gas prices to fall because a strong dollar can buy lots of imported oil

Question 25

If people suddenly greatly desire another country’s goods, what happens to restore a balance?

Answer 25

people want that country’s currency to buy those goods, increasing demand for the currency, which increases the value of the currency, which causes prices of the good to rise

Question 26

How would our government try to influence the natural flow of goods and services by manipulating money?

Answer 26

The Fed sometimes tries to increase exports by increasing the supply of dollars, lowering its value, making our goods cheaper to foreigners, which boosts exports

Question 27

Who is Mr. Protectionist’s enemy? Why?

Answer 27

French businessmen who use iron; because if they stop buying iron abroad his problems would end

Question 28

How does Mr. Protectionist say his law will benefit the nation?

Answer 28

more mining will employ more workers, who will buy more

Question 29

What happens if Mr. Protectionist’s law is passed?

Answer 29

They post guards at the borders

Question 30

Whom does Bastiat’s protectionist law help or hurt?

Answer 30

Before, James paid 15 and got iron and a book. Now James gets only iron, and Mr. P gets 5 francs in profit. Looking at French industry before, a hat maker made 10 and a publisher made 5. Now all 15 go to iron.

Question 31

What are the ways the state restrains trade?

Answer 31

Tariffs, quotas, subsidies, export subsidies, domestic content restrictions, anti-competitive manufacturing specifications

Question 32

In what ways does the consumer lose from import quotas?

Answer 32

competition increases and prices rise

Question 33

What must happen for there to be no trade possibilities?

Answer 33

the relative costs of producing the different goods would have to be perfectly balanced

Question 34

T/F Since trade is beneficial, we need the government to encourage it.

Answer 34

False; trade is beneficial so it will happen naturally

Question 35

Bastiat observed the effects of a shipwreck on the balance of payments. What is the effect?

Answer 35

The shipwreck results in an export that won’t give rise to an import, which increases the balance of payments