chapter 5 Flashcards
Why do countries trade?
Factors of production inst evenly distributed among-st countries.
Self-sufficiency
The case of absolute advantage
They both produce two goods and exchange goods for goods (barter
economy).
- One worker in Australia can produce
- 100 kg wool OR 5 digital cameras
- One worker in Japan can produce
- 50 kg wool OR 10 digital cameras
Australia has an absolute advantage in wool and Japan has an
absolute advantage in digital cameras
The case of comparative advantage
Law of comparative advantage: Countries will benefit from trade if
the opportunity costs of production (relative prices) differ
Trade policies
Import tariffs
Duties or taxes imposed on products imported into a country.
Import quotas
Seek to control the physical level of imports and therefore a form of direct
intervention in the market mechanism.
Subsidies
Granted to home producers. Has a similar economic impact as taxes on
imported goods.
Trade policy
Non-tariff barriers
• Discriminatory administrative practices
• Exchange controls
• Limits the amount of foreign currency available for
purchases of imports
Exchange rate policy
• Movements in exchange rates change the relative price of imports and
domestically produced goods
