ECON 101 - Chp 7

Question 1

define imports

Answer 1

goods and services that we buy from other countries

Question 2

define exports

Answer 2

goods + services that we sell to people in other countries

Question 3

what drives international trade?

Answer 3

comparative advantage

Question 4

define comparative advantage

Answer 4

situation in which a person can perform an activity or produce a good or service at a lower opportunity cost than anyone else

Question 5

define national comparative advantage

Answer 5

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

Question 6

what’s the effect on the equilibrium in a market with imports

Answer 6

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.

Question 7

what’s the effect on the equilibrium in a market with exports

Answer 7

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

Question 8

how do we measure the gains + losses from imports and exports?

Answer 8

examining their effect on consumer surplus, producer surplus and total surplus

Question 9

who are determined as the winners and losers in the importing country

Answer 9

winners = those whose surplus increases
losers = those whose surplus decreases

Question 10

who are the winners and losers in a market with imports

Answer 10

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

Question 11

who are the winners and losers in a market with exports

Answer 11

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

Question 12

what are the 4 sets of tools that governments use to influence international trade and protect domestic industries from foreign competition

Answer 12

1. tariffs
2. import quotas
3. other import barriers
4. export subsidies

Question 13

define a tariff

Answer 13

a tax on a good that is imposed by the importing country when an imported good crosses its international boundary

Question 14

what are the effects of a tariff on the market

Answer 14

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

Question 15

who are the winners, losers, and social loss from a tariff

Answer 15

1. Canadian consumers of the good lose
2. Canadian producers of the good gain
3. Canadian consumers lose more than Canadian producers
4. society loses: a deadweight loss arises

Question 16

why do Canadian consumers lose more than Canadian producers gain? when there’s a tariff?

Answer 16

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

Question 17

why does a deadweight loss arise from a tariff

Answer 17

the increase in production cost and the loss from decreases imports is transferred to no one - social loss deadweight loss

Question 18

define import quota

Answer 18

restriction that limits he quantity of a good that may be imported in a given period

Question 19

why do governments enable import quotas?

Answer 19

they enable the government to satisfy the self-interest of the people who earn their incomes in the import-competing industries

Question 20

what are the effects of an import quota

Answer 20

price rises, quantity bought decreases, and domestic quantity produced increases

supply curve shifts leftward

Question 21

who are the winners, losers, and social loss form an import quota

Answer 21

1. Canadian consumers of the good lose
2. canadian producers of the good gain
3. importers of the good gain
4. society loses: deadweight loss arises

Question 22

why do consumers lose more than producers gain in import quota

Answer 22

1. some consumer surplus is transferred to producers
2. some consumer surplus is lost bc domestic cost of production is higher than the world price
3. 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
4. some consumer surplus is lost bc imports decrease, which also creates a social loss (deadweight loss)

Question 23

what’s the difference between tariff and quota

Answer 23

tariff brings in revenue for government while a quota brings a profit for the importers

Question 24

what are 2 sets of policies that influence imports

Answer 24

1. health, safety, and regulation barriers
2. voluntary export restraints

Question 25

what is a voluntary export restraint - is this common?

Answer 25

a quota allocated to a foreign exporter of a good - not common

Question 26

define an export subsidy? is this illegal? if so, why?

Answer 26

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

Question 27

are export subsidies efficient?

Answer 27

they are inefficient as it results in inefficient overproduction domestically and underproduction abroad and create deadweight loss

Question 28

what are the 7 agruements for trade restrictions

Answer 28

1. helps an infant industry grow
2. counteracts dumping
3. saves domestic jobs
4. allows us to compete with cheap foreign labour
5. penalizes lax environmental standards
6. prevents rich countries from exploiting developing countries
7. reduces offshore outsourcing that sends good Canadian jobs to other countries

Question 29

define learning-by-doing in econ

Answer 29

comparative advantages change with on the job experience

Question 30

why are trade restrictions to help an infant industry frow seen not very helpful

Answer 30

firms anticipate and benefit from learning-by-doing without protection from foreign competition

Question 31

define dumping (in econ)

Answer 31

occurs when a foreign firm sells its exports at a lower price than its cost of production

Question 32

why might firms want to use dumping?

Answer 32

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

Question 33

what are temporary tariffs called?

Answer 33

countervailing duties

Question 34

why is it impossible to detect dumping?

Answer 34

hard to determine a firm’s cost

Question 35

what’s the test used to determine dumping?

Answer 35

whether a firm’s export price is below it’s domestic price

Question 36

why is the test used to determine weak?

Answer 36

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

Question 37

how does free trade affect the job market?

Answer 37

destroys some jobs and create other jobs - brings global rationalization of labour and allocated labour resources to their highest-valued activities

Question 38

what’s the cost of protection on saving jobs

Answer 38

has a high cost

Question 39

how do imports create jobs

Answer 39

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

Question 40

the higher the worker’s productivity the higher is the worker’s wage rate

Question 41

why is the argument that protection penalizes lax environmental standards weak

Answer 41

1. poor countries cannot afford to be as concerned about its environmental standards as rich country can
2. 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

Question 42

what is the justification against protection preventing rich countries from exploiting developing countries

Answer 42

when demand for labour in developing countries increases, the wage rate rises, trade can improve their opportunities + increase their incomes

Question 43

define offshore outsourcing

Answer 43

buying goods, components, or services from firms in other countires

Question 44

why do people think that the offshore outsourcing brings cost that eat up the gains and what are the arguments against it?

Answer 44

1. seems to send good canadian jobs to other countries - however, more jobs are created in call-centre services, etc
2. 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)

Question 45

what’s a counterargument to the argument that protectionism avoids trade was

Answer 45

protection invites retaliation and can trigger a trade war

Question 46

define a trade war

Answer 46

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

Question 47

why is trade restricted?

Answer 47

1. tariff revenue
2. rent seeking

Question 48

why is tariff revenue a convenient source of revenue in (developing) countries that have a difficult time colleting taxes from their citizens

Answer 48

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

Question 49

define rent seeking

Answer 49

lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others

Question 50

with free trade, is everyone a winner? when free trade increases consumption possibilities on average

Answer 50

no, not everyone shares the gain and some people lose - free trade brings benefits to some and imposes cost on others

Question 51

in free trade does the total benefit exceed total cost?

Answer 51

total benefits exceed total costs

Question 52

what is the principal obstacle to achieving more liberal international trade

Answer 52

the uneven distribution of costs and benefits

Question 53

define transaction costs

Answer 53

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.

Question 54

why is the gain per person small from free trade?

Answer 54

the number of winners from free trade is large, the gains are spread thinly over a large number of people

Question 55

why is the loss per person large in free trade

Answer 55

the number of losers from free trade is small

Question 56

are people who lose in free trade willing to incur considerable expense to lobby against free trade?

Answer 56

yes, due to a large loss per person

Question 57

what compensation is available to the losers of free trade

Answer 57

1. fund to support and retrain workers who lost their jobs as a result of the new trade agreements
2. unemployment compensation arrangements

Question 58

why is full compensation not attempted for the losers of free trade

Answer 58

1. due to large costs of identifying all the losers and estimating the values of their losses
2. not clear whether a person who has fallen on hard times is suffering because of free trade or for other reasons
3. people who are loser at 1 point in time might end up gaining