Chapter 7: International Trade

Question 1

when will you choose to import and export

Answer 1

when importing lets you buy goods at a cheaper price

when exporting allows you to tell at a higher price

Question 2

what drives international trade

Answer 2

comparative advantage

Question 3

what are trade costs and what do they determine

Answer 3

trade costs are the extra costs incurred as a result of buying or selling goods internationally (shipping costs, extra tax, language barriers, time zones etc)

Question 4

how do trade costs affect your decision to import or export

notice that trade costs determine what is traded and how much is traded

Answer 4

you should only trade internationally if the benefits exceed the cost.

import if the price is sufficiently far below the local price (to offset trade costs)

export if the price is sufficiently far above the local price (to offset trade costs)

Question 5

true or false: global trade is rising because of declining trade costs

Answer 5

true

Question 6

what is globalization

Answer 6

the increasing global integration of economies, cultures, politics etc

Question 7

what are the three key factors that shape your comparative advantage

Answer 7

1. abundant inputs, take advantage of what you have (natural resources, huge population, skilled population)

2.develop a specialized skill (unique skill or methods that give you the comparative advantage)

3. Exploit the benefits of mass production (invest in creating incredibly specialized producing lines that are mush more efficient)

Question 8

true or false: countries can shape their advantages through strategic investments

Answer 8

true

Question 9

true or false: the more your trading partners differ from you the larger the gains from trade will be

Answer 9

true

Question 10

what is another term for mass production

Answer 10

economies of scale

Question 11

describe the effects of imports on the domestic market

Answer 11

at the price of the world price…

1. look at the supply line to find the quantity supplied by domestic producers
2. look at the demand line to find the quantity demanded by domestic buyers

the difference between domestic demand and supply is the imports

Question 12

when buyers import goods what 3 things occur

Answer 12

1. price declines to the world price
2. the lower price leads to a lower quantity supplied by domestic sellers, but a higher quantity demanded
3. imports fill the gap between the quantity demanded and the quantity supplied

Question 13

describe the effects of exports on the domestic market

Answer 13

at the price of the world price…

1. look at the supply line to find the quantity supplied by domestic producers
2. look at the demand line to find the quantity demanded by domestic buyers

the difference between domestic demand and supply is the exports

Question 14

where is the area for the increased economic surplus if you are allowing imports

Answer 14

the line for the world price will be below the equilibrium. therefore the surplus will be the area between the supply and demand curve and above the world price

Question 15

why is there an economic surplus if we allow imports

Answer 15

cheap imports raise consumer surplus, domestic producers lose producer surplus to foreign competition, but the benefits exceed the costs and raise economic surplus

Question 16

when sellers export goods what 3 things occur

Answer 16

• prices rise to world price
• the higher price leads to higher quantity supplied by domestic sellers but lower quantity demanded by domestic buyers
• exports fill the gap between quantity supplies and quantity demanded

Question 17

why is there an economic surplus if we allow exports

Answer 17

more expensive export raises producer surplus

domestic consumers lose consumer surplus due to foreign competition (compete with buyers in other countries, so the price rises to the world price)

the benefits exceed the cost and exports raise economic surplus

Question 18

where is the area for the increased economic surplus if you are allowing exports

Answer 18

the line for the world price will be above the equilibrium. therefore the surplus will be the area between the supply and demand curve and below the world price

Question 19

true or false: international trade increases economic surplus but not everyone wins. explain

Answer 19

true

import-competing business oppose international trade

exporters and import-dependent business support international trade

Question 20

what are the arguments for limiting international trade

Answer 20

1. protecting national security (can’t be too reliant on others, but sometime trade limitation will undermine national security as well)
2. helping infant industry (but can’t guarantee the infant industry will be successful)
3. Preventing unfair competition (anti-dumping, to ensure foreign companies cant flood market with cheap products and run domestic competitors out of business)
4. enforcing minimum standards (no pollution, no child labour, but trade provides a way to get around these standards) (opposition: can’t hold our standards to the standards of other countries because they have different needs)
5. saving jobs (international trade will only have a temporary effect on unemployment)

Question 21

what are tariffs and how do they impact the domestic supply and demand

Answer 21

tariffs are taxes on imported goods, they increase their trade costs.

tariffs case a rise in prices, demand decreases and supply increases. This means there is are lower imports. There is a decrease in consumer surplus, a small increase in producer surplus, the gov’t also gains revenue.

tariffs ultimately reduce economic surplus

Question 22

true or false: taxing goods made in other countries reduces the total economic surplus of Canadians

Answer 22

true

Question 23

how does red tape affect domestic supply and demand

Answer 23

it has the same effects as a tariff but the gov’t doesn’t make money.

Question 24

how does an import quota affect domestic supply and demand

Answer 24

it has the same effects as a tariff but the gov’t doesn’t make money.

Question 25

true or false: foreign gov’t can give their companies a leg up by manipulating their exchange rates

Answer 25

true

Question 26

what is the world trade organization

Answer 26

it is a forum for global agreements to reduce trade barriers