ECON 101 - Chp 7 Flashcards
define imports
goods and services that we buy from other countries
define exports
goods + services that we sell to people in other countries
what drives international trade?
comparative advantage
define comparative advantage
situation in which a person can perform an activity or produce a good or service at a lower opportunity cost than anyone else
define national comparative advantage
as a situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation
what’s the effect on the equilibrium in a market with imports
in the assumption that the world price is lower than the previous equilibrium price, domestic quantity produced will decrease and domestic quantity demanded will increase. this shortage of quantity produced will be met by the quantity imported.
what’s the effect on the equilibrium in a market with exports
in the assumption that the world price is higher than the previous equilibrium price, quantity produced increases and quantity demanded decreases. This surplus of quantity produced is exported to the world market
how do we measure the gains + losses from imports and exports?
examining their effect on consumer surplus, producer surplus and total surplus
who are determined as the winners and losers in the importing country
winners = those whose surplus increases
losers = those whose surplus decreases
who are the winners and losers in a market with imports
as world price decreases:
consumer surplus increases with imports, as part of the gain in consumer surplus is the loss in producer surplus
producer surplus decreases with imports
total surplus increases with imports
who are the winners and losers in a market with exports
as world price increases:
consumer surplus decrease with exports
producer surplus increase with exports, as part of the gain of producer surplus is part of the loss in consumer surplus
total surplus increases with exports
what are the 4 sets of tools that governments use to influence international trade and protect domestic industries from foreign competition
- tariffs
- import quotas
- other import barriers
- export subsidies
define a tariff
a tax on a good that is imposed by the importing country when an imported good crosses its international boundary
what are the effects of a tariff on the market
the tariff sets the world price higher
(domestic) quantity produced increases
quantity demanded/bought decreases
the quantity imported is reduced due to tariffs.
there is a tariff revenue created
who are the winners, losers, and social loss from a tariff
- Canadian consumers of the good lose
- Canadian producers of the good gain
- Canadian consumers lose more than Canadian producers
- society loses: a deadweight loss arises
why do Canadian consumers lose more than Canadian producers gain? when there’s a tariff?
as the Canadian price rises, some consumer surplus is transferred to producers - higher price transfers surplus from consumers to producers
the loss of consumer surplus exceeds this gain in producer surplus bc some of the gains from free trade are lost. - domestic producers have higher costs than foreign producers
some consumer surplus is transferred to the government as tariff revenue
some consumer surplus is lost because imports decrease
why does a deadweight loss arise from a tariff
the increase in production cost and the loss from decreases imports is transferred to no one - social loss deadweight loss
define import quota
restriction that limits he quantity of a good that may be imported in a given period
why do governments enable import quotas?
they enable the government to satisfy the self-interest of the people who earn their incomes in the import-competing industries
what are the effects of an import quota
price rises, quantity bought decreases, and domestic quantity produced increases
supply curve shifts leftward
who are the winners, losers, and social loss form an import quota
- Canadian consumers of the good lose
- canadian producers of the good gain
- importers of the good gain
- society loses: deadweight loss arises
why do consumers lose more than producers gain in import quota
- some consumer surplus is transferred to producers
- some consumer surplus is lost bc domestic cost of production is higher than the world price
- some consumer surplus is transferred to importers who buy goods at the world price than sell them at the domestic price to make a profit
- some consumer surplus is lost bc imports decrease, which also creates a social loss (deadweight loss)
what’s the difference between tariff and quota
tariff brings in revenue for government while a quota brings a profit for the importers
what are 2 sets of policies that influence imports
- health, safety, and regulation barriers
- voluntary export restraints
what is a voluntary export restraint - is this common?
a quota allocated to a foreign exporter of a good - not common
define an export subsidy? is this illegal? if so, why?
export subsidy: payment by the government to the producer of an exported good
it’s illegal under a number of international trade agreements as it increases domestic production + makes it harder of producers in other countries to compete in a global market
are export subsidies efficient?
they are inefficient as it results in inefficient overproduction domestically and underproduction abroad and create deadweight loss
what are the 7 agruements for trade restrictions
- helps an infant industry grow
- counteracts dumping
- saves domestic jobs
- allows us to compete with cheap foreign labour
- penalizes lax environmental standards
- prevents rich countries from exploiting developing countries
- reduces offshore outsourcing that sends good Canadian jobs to other countries
define learning-by-doing in econ
comparative advantages change with on the job experience
why are trade restrictions to help an infant industry frow seen not very helpful
firms anticipate and benefit from learning-by-doing without protection from foreign competition
define dumping (in econ)
occurs when a foreign firm sells its exports at a lower price than its cost of production
why might firms want to use dumping?
to gain a global monopoly - driving out domestic firms out of businesses then charging a higher price for its product once it’s in a monopoly position
what are temporary tariffs called?
countervailing duties
why is it impossible to detect dumping?
hard to determine a firm’s cost
what’s the test used to determine dumping?
whether a firm’s export price is below it’s domestic price
why is the test used to determine weak?
it’s rational for a firm to charge a low price in a market in which the quantity demanded is highly sensitive to price and a higher price in a market where demand is less price sensitive
how does free trade affect the job market?
destroys some jobs and create other jobs - brings global rationalization of labour and allocated labour resources to their highest-valued activities
what’s the cost of protection on saving jobs
has a high cost
how do imports create jobs
create jobs for retailers that sell imported goods and for firms that service those goods.
imports create jobs by creating income in the rest of the world, some of which is spent on canadian-made imported goods + services
the higher the worker’s productivity the higher is the worker’s wage rate
why is the argument that protection penalizes lax environmental standards weak
- poor countries cannot afford to be as concerned about its environmental standards as rich country can
- poor country might have a comparative advantage at doing “dirty” work, which helps it to raise its income and enables the global economy to achieve higher environmental standards than would other wise
what is the justification against protection preventing rich countries from exploiting developing countries
when demand for labour in developing countries increases, the wage rate rises, trade can improve their opportunities + increase their incomes
define offshore outsourcing
buying goods, components, or services from firms in other countires
why do people think that the offshore outsourcing brings cost that eat up the gains and what are the arguments against it?
- seems to send good canadian jobs to other countries - however, more jobs are created in call-centre services, etc
- gains from trade do not bring gains for every single person - canada gains from offshore outsourcing but some people lose - loser are those who have invested in human capital to do a specific job that has now gone offshore –> creates unemployment (can be temporary or permanent depending on the resources + opportunities to bounce back in to the job market)
what’s a counterargument to the argument that protectionism avoids trade was
protection invites retaliation and can trigger a trade war
define a trade war
a contest in which when 1 country raises its import tariffs, other countries retaliate with increases of their own which trigger further increases from the first country
why is trade restricted?
- tariff revenue
- rent seeking
why is tariff revenue a convenient source of revenue in (developing) countries that have a difficult time colleting taxes from their citizens
developing countries have lots of economic activity take place in an informal economy with few financial records
the 1 area where economic transaction are well recorded is international trade
define rent seeking
lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others
with free trade, is everyone a winner? when free trade increases consumption possibilities on average
no, not everyone shares the gain and some people lose - free trade brings benefits to some and imposes cost on others
in free trade does the total benefit exceed total cost?
total benefits exceed total costs
what is the principal obstacle to achieving more liberal international trade
the uneven distribution of costs and benefits
define transaction costs
Transaction costs are costs incurred that don’t accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market.
why is the gain per person small from free trade?
the number of winners from free trade is large, the gains are spread thinly over a large number of people
why is the loss per person large in free trade
the number of losers from free trade is small
are people who lose in free trade willing to incur considerable expense to lobby against free trade?
yes, due to a large loss per person
what compensation is available to the losers of free trade
- fund to support and retrain workers who lost their jobs as a result of the new trade agreements
- unemployment compensation arrangements
why is full compensation not attempted for the losers of free trade
- due to large costs of identifying all the losers and estimating the values of their losses
- not clear whether a person who has fallen on hard times is suffering because of free trade or for other reasons
- people who are loser at 1 point in time might end up gaining
