Chapter 9 - International Trade

Question 1

World Price (Pw) and Domestic Price (Pd)

Answer 1

• if Pd Pw: country does not have comparative advantage and imports the good (under free trade)

Question 2

Small Economy

Answer 2

• a price-taker on the world market & actions have no effect on Pw
• with a small economy Pw is the only relevant price

Question 3

Benefits of International Trade

Answer 3

• Consumers enjoy increase variety of goods
• Producers sell to a larger market
• competition from abroad may reduce market power of domestic firms
• Trade enhances flow of ideas

Question 4

Tariff

Answer 4

• a tax on imports

Question 5

Import Quota

Answer 5

• a qualitative limit on the imports of a good
• raises prices, reduces quantity of imports
• reduces buyers welfare
• increases sellers welfare

Question 6

Arguments for Restricting Trade 1) the jobs argument

Answer 6

• trade destroys jobs

- but total unemployment does not increase with trade

Question 7

Arguments for Restricting Trade 2) The National Security Argument

Answer 7

• industry is vital to nat. security and should be protected from foreign competition
• as long as policy is based on realistic security needs

Question 8

Arguments for Restricting Trade 3) The Infant-Industry Argument

Answer 8

• new industry requires temp protection until it is mature and can compete
• if a firm will be profitable in the long run, it should be willing to incur costs in the long run

Question 9

Argument for Restricting Trade 4) The Unfair- Competition

Answer 9

• producers argue their competitors in another country have an unfair advantage
• gains to our consumers will exceed losses to our producers

Question 10

Argument for Restricting Trade 5) Protection-as-Bargaining-Chip Argument

Answer 10

• as a response to foreign trade restrictions

- only negative for consumers