Chapter 7: International Trade Flashcards
when will you choose to import and export
when importing lets you buy goods at a cheaper price
when exporting allows you to tell at a higher price
what drives international trade
comparative advantage
what are trade costs and what do they determine
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)
how do trade costs affect your decision to import or export
notice that trade costs determine what is traded and how much is traded
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)
true or false: global trade is rising because of declining trade costs
true
what is globalization
the increasing global integration of economies, cultures, politics etc
what are the three key factors that shape your comparative advantage
- 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)
- Exploit the benefits of mass production (invest in creating incredibly specialized producing lines that are mush more efficient)
true or false: countries can shape their advantages through strategic investments
true
true or false: the more your trading partners differ from you the larger the gains from trade will be
true
what is another term for mass production
economies of scale
describe the effects of imports on the domestic market
at the price of the world price…
- look at the supply line to find the quantity supplied by domestic producers
- look at the demand line to find the quantity demanded by domestic buyers
the difference between domestic demand and supply is the imports
when buyers import goods what 3 things occur
- price declines to the world price
- the lower price leads to a lower quantity supplied by domestic sellers, but a higher quantity demanded
- imports fill the gap between the quantity demanded and the quantity supplied
describe the effects of exports on the domestic market
at the price of the world price…
- look at the supply line to find the quantity supplied by domestic producers
- look at the demand line to find the quantity demanded by domestic buyers
the difference between domestic demand and supply is the exports
where is the area for the increased economic surplus if you are allowing imports
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
why is there an economic surplus if we allow imports
cheap imports raise consumer surplus, domestic producers lose producer surplus to foreign competition, but the benefits exceed the costs and raise economic surplus
when sellers export goods what 3 things occur
- 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
why is there an economic surplus if we allow exports
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
where is the area for the increased economic surplus if you are allowing exports
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
true or false: international trade increases economic surplus but not everyone wins. explain
true
import-competing business oppose international trade
exporters and import-dependent business support international trade
what are the arguments for limiting international trade
- protecting national security (can’t be too reliant on others, but sometime trade limitation will undermine national security as well)
- helping infant industry (but can’t guarantee the infant industry will be successful)
- Preventing unfair competition (anti-dumping, to ensure foreign companies cant flood market with cheap products and run domestic competitors out of business)
- 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)
- saving jobs (international trade will only have a temporary effect on unemployment)
what are tariffs and how do they impact the domestic supply and demand
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
true or false: taxing goods made in other countries reduces the total economic surplus of Canadians
true
how does red tape affect domestic supply and demand
it has the same effects as a tariff but the gov’t doesn’t make money.
how does an import quota affect domestic supply and demand
it has the same effects as a tariff but the gov’t doesn’t make money.
true or false: foreign gov’t can give their companies a leg up by manipulating their exchange rates
true
what is the world trade organization
it is a forum for global agreements to reduce trade barriers
