Chapter 8: International Taxes

Question 1

KEY TERM:
Imports

Answer 1

goods and services purchased from other countries.

Question 2

KEY TERM:
Exports

Answer 2

goods and services sold to other countries

Question 3

KEY TERM:
Globalization

Answer 3

the phenomenon of growing economic linkages among countries.

Question 4

KEY TERM:
Hyper-globalization

Answer 4

the phenomenon of extremely high levels of international trade.

Question 5

KEY TERM:
Reshoring

Answer 5

bringing production closer to markets.

Question 6

KEY TERM:
Ricardian model of international trade

Answer 6

a model that analyzes international trade under the assumption that opportunity costs are constant.

Question 7

KEY TERM:
Heckscher-Ohlin model

Answer 7

a model of international trade in which a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country.

Question 8

KEY TERM:
Factor abundance

Answer 8

how large a country’s supply of a factor is relative to its supply of other factors.

Question 9

KEY TERM:
Factor intensity

Answer 9

a measure of which factor is used in relatively greater quantities than other factors in production. For example, oil refining is capital-intensive compared to auto seat production because oil refiners use a higher ratio of capital to labor than do producers of auto seats.

Question 10

KEY TERM:
Domestic demand curve

Answer 10

a demand curve that shows how the quantity of a good demanded by domestic consumers depends on the price of that good.

Question 11

KEY TERM:
Domestic supply curve

Answer 11

a supply curve that shows how the quantity of a good supplied by domestic producers depends on the price of that good.

Question 12

KEY TERM:
World price

Answer 12

the price at which that good can be bought or sold abroad.

Question 13

KEY TERM:
Factor price

Answer 13

the price employers have to pay for the services of a factor of production.

Question 14

KEY TERM:
Exporting industries

Answer 14

industries that produce goods and services that are sold abroad.

Question 15

KEY TERM:
Import-competing industries

Answer 15

industries that produce goods and services that are also imported.

Question 16

KEY TERM:
Free trade

Answer 16

occurs in an economy when the government does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand.

Question 17

KEY TERM:
Trade protection

Answer 17

policies that limits imports.

Question 18

KEY TERM:
Tariff

Answer 18

a tax levied on imports.

Question 19

KEY TERM:
Import quota

Answer 19

a legal limit on the quantity of a good that be imported.

Question 20

KEY TERM:
International Trade Agreements

Answer 20

treaties in which a country promises to engage in less trade protection against the exports of other countries in return for a promise by other countries to do the same for its own exports.

Question 21

KEY TERM:
Trade wars

Answer 21

occurs when countries deliberately try to impose pain on their trading partners, as a way to extract policy concessions.

Question 22

KEY TERM:
Offshore outsourcing

Answer 22

the practice in which businesses hire people in another country to perform various tasks.

Question 23

Cause of rise of international trade?

Answer 23

There is an upward trend in the relationship between the ratio of world trade to world production. (globalization)

The key to this mutual gain is the fact that trade liberates both countries from self-sufficiency — from the need to produce the same mixes of goods they consume. Total world production rises, making a higher standard of living possible in both nations.

Question 24

Two common misconceptions about comparative advantage

Answer 24

Pauper labor fallacy - political argument in international trade which claims that foreign competition based on low wages harms the domestic economy.
Sweatshop labor fallacy - argument against trade because laborers are paid extremely low wages in the poor exporting nations.

Both fallacies miss the nature of gains from trade: it’s to the advantage of both countries if the poorer, lower-wage country exports goods in which it has a comparative advantage, even if its cost advantage in these goods depends on low wages. That is, both countries are able to achieve a higher standard of living through trade.

Question 25

4 sources of comparative advantage?

Answer 25

Climate (tropical areas, access to water, temperature, variety in seasons, hemispheres)
Factor endowment
Technology (causes of the differences are mysterious – sometimes knowledge accumulation, or chain of innovations. But they are often)
Increasing returns to scale (larger industries = more efficient)

Question 26

Factor endowment explored further…

Answer 26

Hecksher-Ohlin model - comparative advantage in factors used intensely and found in abundance.
OC for a factor (or its value for alternative uses) is low when that factor is abundant.
Differences in factor endowment also explain countries incompletely specialising and maintaining some domestic production.

Question 27

How does an import work and what is the net gain?

Answer 27

Assumption - unlimited quantities of product can be purchased from abroad at a fixed world price which is less than the price at domestic market in autarky. Goods will continue to be imported until the domestic price falls to a level equal to the world price.

Net gain in total surplus: gain to consumers exceed loss to producers. However, it does create some losers out of domestic producers.

Question 28

How does an export work and what is the net gain?

Answer 28

Assumption - unlimited quantities of product can be sold abroad at a fixed world price which is greater than the price at domestic market in autarky.
Product will continue to be exported until the domestic price rises to a level equal to the world price.

Net gain in total surplus: gain to producers exceed loss to consumers. However, it does create some losers out of domestic consumers.

Question 29

International trade and wages

Answer 29

According to Heckscher-Ohlin model, international trade tends to redistribute income toward a country’s abundant factors and away from its less abundant factors.

Compared to autarky, international trade tends to raise the prices of factors that are abundantly available and reduce the prices of factors that are scarce because of comparative advantage. This is because of international supply and demand models - the demand for a country’s abundant factor will rise because of the comparative advantage, thus raising price. This also means the price for import-competing industries fall.

Question 30

Does international trade have positive or negative effects on trade?

Answer 30

International trade has diverging effects on income inequality. It raises the wages of highly educated workers and lowers the wages of less educated worker or it reduces the income inequality between countries as poor countries improve their standard of living by exporting to rich countries.

Question 31

Economist’s view on free trade?

Answer 31

Free trade is efficient. An economist’s perspective is that free trade should occur, and losers should be compensated by redistributing the gains from trade. Protecting the losers is easy and takes no public budget, but transfers are hard and costly.

Question 31

Economist’s view on free trade?

Answer 31

Free trade is efficient. An economist’s perspective is that free trade should occur, and losers should be compensated by redistributing the gains from trade. Protecting the losers is easy and takes no public budget, but transfers are hard and costly.

Question 32

How do tariffs work and what is the net gain?

Answer 32

A tariff raises both the price received by domestic producers and the price paid by domestic consumers. Loss in total surplus since gain in PS + gain in government revenue < loss in CS + DWL.

A tariff creates DWL because it prevents mutually beneficial trades from occurring. 2 ways: domestic producers cost exceeding Pw are still producing even though additional quantity can be transacted at Pw and mutually beneficial trades go unexploited (consumers willing to pay Pw).

Question 33

How is a import quota similar/different to a import tariff?

Answer 33

Draw a price level where the difference between domestic supply and domestic equals import quota. demandMoney that would accrue to government revenue through tariffs changes to quota rents for the license-holder (usually foreigners). This can mean a greater loss in surplus.

Question 34

Arguments for trade protection?

Answer 34

National security – overseas goods are subject to disruption in times of international conflict or otherwise, hence, support domestic suppliers to be self-sufficient at all times.
Job creation - not supported by economists as they believe that lost jobs in import-competing industries are offset by jobs elsewhere. Doing job creation policies means you have greater opportunity cost since disregarding comparative advantage.
Infant industry - new industries require a temporary period of trade protection to get established.

Question 35

Who drives trade protection and what is the net gain?

Answer 35

Lobbying power belongs to political influence of import-competing producers. Loss in total surplus since gain of domestic import-competing industries < loss of consumer surplus + loss of foreign export + loss of gains of international trade.

Question 36

2 reasons why protectionism is not extensive?

Answer 36

Understood some virtues of free trade and international trade agreements as it can hurt export industries and domestic consumers.
To avoid trade wars.

Question 37

2 main roles of WTO?

Answer 37

Framework for complex negotiations of agreements
Resolves disputes between its members (even by imposing trade protectionist policies at times).

Question 38

Challenges to globalization?

Answer 38

Offshore outsourcing - modern telecommunications make it possible - hits higher-skilled workers who imagined their jobs were safe from foreign competition.
Inequality - previously, imports from poor countries were of raw materials depending on climate. But as imports shift to manufactured goods, it harms the low-skilled domestic producers increasing the wage gap domestically.

This has caused a decline in globalisation resulting in reshoring.

Question 39

Overall, is globalization good or bad for International trade? What can be done to diminish the losses?

Answer 39

Greater majority of economists argue that the gains of trade protection is greater than the losses. Also, to minimize the losses, government programs can be more widespread to distribute gains from trade and help cushion the few losers.