CHAPTER 7: Global Markets in Action Flashcards
what is the difference between an import & an export?
Import - goods & services bought from other countries
Export - goods & services sold to other countries
What is the fundamental driving force in international trade?
Comparative advantage - situation in which a person can perform an activity or produce a good or service at a lower opportunity cost than anyone else
What is a national comparative advantage?
situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation
E.g. opportunity cost of producing t-shirts is lower in China than in Canada - China has comparative advantage
Why would Canada, who doesn’t have a comparative advantage in producing t-shirts, choose to import them?
Opportunity cost of producing t-shirts is lower in other nations (e.g. China) than in Canada
The rest of the world has a comparative advantage in producing t-shirts
How do we measure gains & loss from imports?
- examine their effect on consumer surplus, producer surplus & total surplus
- In the importing country, winners are those whose surplus increases & losers are those whose surplus decrease
Explain how surpluses change when Canadian markets open to imports
○ Price in Canada falls to the world price
○ Quantity bought increases to quantity demanded at the world price
○ Consumer surplus expands from A to the larger green area (A+B+D)
○ Quantity produced in Canada decreases to the quantity supplied at the world price
○ Producer surplus shrinks to the smaller blue area C
Explain changes in consumer & producer surplus when a good is exported.
○ Price rises to world price
○ Quantity bought decreases to quantity demanded at the world price
○ Consumer surplus shrink to green area A
○ Quantity produced increases to quantity supplied at the world price
○ Producer surplus expands to blue area B+C+D
International trade is a ______ game, where one countries exports is another nations imports
win-win
What is a tariff?
tax on a good that is imposed by the importing country when an imported good crosses its international boundary
E.g. Indian imports (buys) a $10 bottle of Ontario wine, he pays the Indian government a $10 import tariff
What 5 changes occur when a tariff is imposed? Use the example of if the Canadian government imposed a $2 tariff per shirt.
- Rise in price of t-shirt by $2 (world price $5 + tariff $2 = $7)
□ Pay full tariff because supply from the rest of the world is perfectly elastic - Decrease in purchases - Higher the price of a t-shirt, decrease in quantity demanded
□ E.g. decrease from 6 million shirts a year at $5 to 4.5 million a year at $7 a shirt - Increase in Domestic Production - Higher shirt price, increases quantity produced/supplied in Canada
- Decrease in Imports - Decrease in Canadian purchases due to increase in Canadian production
- Government collects tariff revenue
Describe the social (consumer) loss from a tariff imposed on an imported good. HINT: 3 loses occur
- Canadian consumers of the good lose
- Price of shirt rises, quantity demanded decreases
- High price + smaller quantity bought decreases consumer surplus - Canadian consumers lose more than Canadian producers gain
- As price rise, some consumer surplus is transferred to producers
- Loss of consumer surplus exceeds gain producer surplus - gain from free trade lost - Society Loses - deadweight loss arises
- Increase in production cost & loss from decreased imports is transferred to no one - deadweight loss
Canadian consumers lose more than Canadian producers gain. As a result, consumer surplus shrinks for what 4 reasons?
1) Higher price transfer surplus from consumer to producer
2) Domestic producers have higher costs than foreign producers
3) Some consumer surplus transferred to the government as tariff revenue
4) Canadians buy fewer imported t-shirts - consumer surplus lost, imports decrease
What is an import quota?
Restriction that limits the quantity of a good that may be imported in a given period
Enable government to satisfy the self-interest of the people who earn their incomes in the import-competing industries
What events occur when the government imposes an import quota?
1) Consumer surplus shrinks (consumer loss) & surplus transfers to producers
- Consumer surplus is lost bc the domestic cost of production is higher than the world price & bc imports decrease
2) Social (deadweight) loss - Loss of consumer surplus from higher production cost & decrease in imports
What are infant industries & why are they protected?
When a new industry or new product is born (infant industry) - it isn’t as productive as it will become w/ experience
Comparative advantage changes w/ on-the-job experience - learning by doing
protected from international competition until it can stand alone & compete
