Chapter 9 - International Trade

Question 1

International Trade in Canada’s economy?

Answer 1

Total trade, the sum of imports and exports, can be measured as a percentage of gross domestic product (GDP), which is a measure of total value of everything produced in a country.

Question 2

What is World Price?

Answer 2

The price of a good that prevails in the world market for that good.

Question 3

The world price and comparative advantage?

Answer 3

If the world price of textiles is higher than the domestic price, then Isoland would become an exporter of textiles once trade is permitted.

If the world price of textiles is lower than the domestic price, then Isoland would become an importer of textiles.

Question 4

An analysis of Winners and losers from Exporting?

Answer 4

1. When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off and domestic consumers of the good are worse off.
2. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.

Question 5

An analysis of Winners and Losers from Importing?

Answer 5

1. When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off.
2. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.

Question 6

What is a Tariff?

Answer 6

A tax on goods produced abroad and sold domestically.

Question 7

What are the effects of a tariff?

Answer 7

It distorts incentives and pushes the allocation of scarce resources away from the optimum.

A Tariff causes a deadweight loss because a tariff is a type of tax.

Raises domestic price of textiles above the world price.
Raises the price that domestic textile consumer have to pay; it encourages them to reduce consumption of textiles.

Question 8

What are Import quotas?

Answer 8

Like tariffs, import quotas are restrictions on international trade by putting how much of a good can be imported.

Import quotas can:

• Reduce the quantity of imports
• raise the domestic price of the good
• Decrease the welfare price of the good
• increase the welfare of domestic producers
• cause deadweight losses.

Question 9

What is the difference between a tariff and an Import Quota?

Answer 9

A tariff raises revenue for the government, whereas an import quota creates surplus for those who get the licences to import.