Factors in International Trade

Question 1

Absolute Advantage

Answer 1

Absolute Advantage is the ability of a country, individual, company, or region to produce a good or service at a lower cost per unit than another entity that produces the same good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs or a more efficient process than another entity producing the same product or service. British economist Adam Smith first developed the theory for absolute advantage.

Question 2

Comparative Advantage

Answer 2

Comparative Advantage is an economic term that refers to an economy’s ability to produce goods and services at a lower opportunity cost than trade partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins. The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book “Principles of Political Economy and Taxation” in 1817, although it is likely that Ricardo’s mentor James Mill originated the analysis.

To know Opportunity Cost of Good A: # Good B / # of Good A = OC as Measured By Good B

Question 3

Absolute Advantage Vs. Comparative Advantage

Answer 3

The producer that requires a smaller quantity of inputs to produce a good is said to have an Absolute Advantage in producing that good. Comparative Advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another. Sometimes Entity #1 can have an Absolute Advantage in two goods compared to Entity #2, but Entity #2 can still have a better Comparative Advantage in one of the goods because of a lower opportunity cost.

Question 4

Comparative Advantage - Specialization and Exchange

Answer 4

The practice of producing only that which you have a Comparative Advantage in is called ‘specialization’ and allows for surpluses to be produced in the economy. Those surpluses, which would simply not exist if one focused on trying to do everything themselves, can then be exchanged, or traded, for other goods or for money. This assumption is at the core of modern economies.

Question 5

Comparative Advantage - Demand and Other Firms

Answer 5

While one firm may have the Comparative Advantage in making a given good over all of its competitors, other firms can still produce that good if demand is high enough to justify it and they possess a large enough Comparative Advantage over other competitors, other than the first producer.

Question 6

Economics - Gains from Trade and Comparative Advantage

Answer 6

In economics, the Gains from Trade are the net benefits to an agent from entering into voluntary trade. An agent can be a business, an individual, or a country. Trade can increase the welfare of all participants when countries specialize in producing the goods they can produce at the lowest cost relative to other participants. This concept is known as Comparative Advantage.

Question 7

Import

Answer 7

An import is a good or service brought into one country from another. The word “import” is derived from the word “port” since goods are often shipped via boat to foreign countries. Along with exports, imports form the backbone of international trade. If the value of a country’s imports exceeds the value of its exports, the country has a negative balance of trade.

Question 8

Export

Answer 8

A commodity conveyed from one country or region to another for purposes of trade.

Question 9

Protectionism

Answer 9

Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.

Question 10

Protectionism - Views For and Against

Answer 10

The merits of protectionism are the subject of fierce debate. Critics argue that over the long term, protectionism often hurts the people it is intended to protect by slowing economic growth and pushing up prices, making free trade a better alternative. Proponents of protectionism argue that the policies provide competitive advantages and create jobs. Protectionist policies can be implemented in four main ways: tariffs, import quotas, product standards, and government subsidies.

Question 11

Smoot-Hawley Tariff Act of 1930

Answer 11

The Smoot-Hawley Tariff Act, enacted in June 1930, implemented protectionist trade policies by increasing import duties by as much as 50% and raising U.S. tariffs on over 20,000 imported goods. It was the last legislation under which the U.S. Congress set tariff rates. See also: Reciprocal Tariff Act of 1934.

Question 12

Reciprocal Tariff Act of 1934

Answer 12

The Reciprocal Tariff Act of 1934 provided for the negotiation of tariff agreements between the United States and separate nations, particularly Latin American countries. The Act served as an institutional reform intended to authorize the president to negotiate with foreign nations to reduce tariffs in return for reciprocal reductions in tariffs in the United States. It resulted in a reduction of duties. See also: Smoot-Hawley Tariff Act of 1930.

Question 13

North American Free Trade Agreement (NAFTA)

Answer 13

The North American Free Trade Agreement, which eliminated most tariffs on trade between Mexico, Canada, and the United States, went into effect on Jan. 1, 1994. NAFTA’s purpose is to encourage economic activity between North America’s three major economic powers. Numerous tariffs, particularly those related to agriculture, textiles, and automobiles, were gradually phased out between Jan. 1, 1994 and Jan. 1, 2008.

Question 14

World Trade Organization (WTO)

Answer 14

The World Trade Organization is the only international institution that oversees the global trade rules between nations. Founded in 1995, the WTO is based on agreements signed by the majority of the world’s trading nations. The main function of the organization is to help producers of goods and services, exporters, and importers protect and manage their businesses. Proponents of the WTO, particularly multinational corporations, believe that the WTO is beneficial to business. Skeptics believe that the WTO undermines the principles of organic democracy and widens the international wealth gap. There are 164 member countries in the WTO and 23 ‘observer’ countries, according the official website of the organization.

Question 15

United Nations (UN)

Answer 15

The United Nations (UN) was formed in the wake of World War II (1945) as a way to reduce international tensions, promote human rights, and reduce the possibility of other large-scale conflicts. It is a successor to the League of Nations, a body devoted to international cooperation that was formed in 1920 but found itself unable to prevent the outbreak of war in Europe and Asia in the 1930s. The U.S. never joined the League of Nations. Almost every country in the world is represented in the UN, including the U.S., which provides around a fifth of the organization’s funding as of 2016. A few states lack membership despite exercising de facto sovereignty, either because most of the international community does not recognize them as independent (North Cyprus, Somaliland, Abkhazia), or because one or more powerful member states have blocked their admittance (Taiwan, Kosovo).

Question 16

Economics - Describe Trade Restrictions from the Great Depression to Today

Answer 16

During the Great Depression, America embraced a policy of protectionism, using trade restrictions to try and strengthen American products with legislation like the Smoot-Hawley Tariff Act of 1930. By 1934, we’d opened restrictions to select partners, giving us more economic options, through laws like the Reciprocal Tariff Act. After World War II and into the Cold War, American policy flipped and favored generally open trade, with specific restrictions against nations as a form of diplomacy and pressure. The embargo against Cuba is the most notable example. At the end of the Cold War, the United States continued to focus on international markets, opening free trade with Mexico and Canada in the North American Free Trade Agreement. Today, this issue is still hotly contested. Some think the recession demands a return of protectionism. Others feel that globalized free trade is our future.

Question 17

Four Ways in which Protectionist Policies can be Implemented

Answer 17

Protectionist policies can be implemented in four main ways: tariffs, import quotas, product standards, and government subsidies.

Question 18

Protectionism - Tariff

Answer 18

A Tariff is a schedule of duties imposed by a government on imported or in some countries exported goods. It directly relates to the Harmonized Tariff System codes (HTS) which imported/exported products are classified under. HTS codes let U.S. Customs know what tariff rate should be charged to specific products, this mainly applies to imports over exports. Let’s say I’m an importer of ‘knotted carpets and textile floor coverings’. I classify my product under the HTS code 5701.10.9000, the corresponding U.S. tariff would be the taxed percentage, which in this case is 4.5%. There are three types of tariffs, also referred to as import duties, that can be implemented for protective measures: Scientific tariffs, peril point tariffs, and retaliatory tariffs. All forms of tariff are charged and collected by governments to raise the price of imports to equal or exceed local prices.

Protectionist policies can also be implemented in three other main ways: Import quotas, product standards, and government subsidies.

Question 19

Protectionism - Duty

Answer 19

A Duty is the actual amount of money paid on the tariffed imported/exported product. Although, the actual tax reference is the same thing as the corresponding tariff (for example 4.5%), the import duty paid on ‘knotted carpets and textile floor coverings’ depends on the quantity imported. For example, if I imported $200,000 worth of the product to the United States last month, my duties would then be $9,000.

Question 20

Protectionism - Tariff - Scientific Tariff (Made-to-measure tariff)

Answer 20

Scientific tariffs (or made-to-measure tariffs) are used to raise the price of an imported good to the level of the domestic price, so as to leave domestic producers unaffected.

Question 21

Protectionism - Tariff - Peril Point Tariff

Answer 21

Peril point tariffs are implemented when less-efficient industries are in jeopardy of closure due to an inability to compete on pricing.

Question 22

Protectionism - Tariff - Retaliatory Tariffs

Answer 22

Retaliatory Tariffs can be used as a response to excessive tariffs being charged by trading partners.

Question 23

United States Customs and Border Protection (CBP)

Answer 23

United States Customs and Border Protection (CBP) is the largest federal law enforcement agency of the United States Department of Homeland Security, and is the country’s primary border control organization. It is charged with regulating and facilitating international trade, collecting import duties, and enforcing U.S. regulations, including trade, customs, and immigration. CBP is one of the largest law enforcement agencies in the United States. It has a workforce of more than 45,600 sworn federal agents and officers. It has its headquarters in Washington, D.C.

Question 24

U.S. Department of Commerce

Answer 24

The United States Department of Commerce is the Cabinet department of the United States government concerned with promoting economic growth. Among its tasks are gathering economic and demographic data for business and government decision-making, and helping to set industrial standards. This organization’s main purpose is to create jobs, promote economic growth, encourage sustainable development, and improve standards of living for all Americans. The Department of Commerce headquarters is the Herbert C. Hoover Building in Washington, D.C.

Question 25

Bureau of Industry and Security (BIS)

Answer 25

The Bureau of Industry and Security (BIS) is an agency of the United States Department of Commerce that deals with issues involving national security and high technology. A principal goal for the bureau is helping stop proliferation of weapons of mass destruction, while furthering the growth of United States exports. The Bureau is led by the Under Secretary of Commerce for Industry and Security.

Question 26

Export Administration Regulations (EAR)

Answer 26

The U.S. Department of Commerce administers the Export Administration Regulations, or “EAR,” which regulate the export of “dual-use” items. These items include goods and related technology (including technical data) and technical assistance, which are designed for commercial purposes, but which could have military applications, such as computers, aircraft, and pathogens. EAR publishes a Commerce Control List (CCL), which specifies what is regulated. EAR Technical Data may take forms such as blueprints, plans, diagrams, models, formulae, tables, engineering designs and specifications, manuals, and instructions written or recorded on other media or devices such as disk, tape, and read-only memories. EAR Technical Assistance may take forms such as instruction, skills training, working knowledge, and consulting services.

Question 27

U.N. Commission on International Trade Law

Answer 27

The United Nations Commission on International Trade Law (UNCITRAL) was established by the United Nations General Assembly in 1966. It is the core legal body of the UN system in the field of international trade law. UNCITRAL describes its function as the modernization and harmonization of rules on international business. The salient areas of commercial law its mandate covers include dispute resolution, international contract practices, transport, insolvency, electronic commerce, international payments, secured transactions, procurement, and sale of goods.

Question 28

Protectionism - Import Quotas

Answer 28

Trade quotas are non-tariff barriers that are put in place to limit the number of products that can be imported over a set period of time. The purpose of quotas is to limit the supply of specified products, which typically raises prices and allows local businesses to capitalize on unmet demand. Quotas are also put in place to prevent dumping, which occurs when foreign producers export products at prices lower than production costs. An embargo, in which the importation of designated products is forbidden, is the most severe type of quota.

Protectionist policies can also be implemented in three other main ways: Tariffs, product standards, and government subsidies.

Question 29

Protectionism - Product Standards

Answer 29

Limitations based on product standards are implemented for a variety of reasons, including concerns over product safety, sub-standard materials, or labeling. Whether these concerns are valid or exaggerated, limiting imports benefits local producers. For example, French cheeses made with raw, instead of pasteurized, milk must be aged at least 60 days prior to being imported to the U.S. Because the process for producing young cheeses is often 50 days or fewer, some of the most popular French cheeses are banned, providing local producers the opportunity to compete with pasteurized versions.

Protectionist policies can also be implemented in three other main ways: Tariffs, import quotas, and government subsidies.

Question 30

Protectionism - Government Subsidies

Answer 30

Governments can help domestic businesses compete by providing subsidies, which lower the cost of production and enable the generation of profits at lower price levels. Examples include U.S. agricultural subsidies and subsidies paid by the Chinese government to help grow the country’s automotive industry.

Protectionist policies can also be implemented in three other main ways: Tariffs, product standards, and import quotas.

Question 31

Economics - Dumping

Answer 31

Dumping is a term used in the context of international trade. It’s when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market. Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product’s manufacturers or producers in the importing nation.

Question 32

Economics - Anti-Dumping

Answer 32

An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping is a process where a company exports a product at a price lower than the price it normally charges in its own home market. To protect local businesses and markets, many countries impose stiff duties on products they believe are being dumped in their national market.

Question 33

General Agreement on Tariffs and Trade (GATT)

Answer 33

General Agreement on Tariffs and Trade (GATT) was a legal agreement between many countries in 1948, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” It remained in effect until the signature by 123 nations in Marrakesh on 14 April 1994, of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on 1 January 1995. The WTO is a successor to GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.

Question 34

Sovereignty

Answer 34

Sovereignty is the full right and power of a governing body over itself, without any interference from outside sources or bodies. In political theory, sovereignty is a substantive term designating supreme authority over some polity. It is a basic principle underlying the dominant Westphalian model of state foundation.

Question 35

Failed State

Answer 35

A failed state is a political body that has disintegrated to a point where basic conditions and responsibilities of a sovereign government no longer function properly (see also fragile state and state collapse). Likewise, when a nation weakens and its standard of living declines, it introduces the possibility of total governmental collapse. The Fund for Peace characterizes a failed state as having the following characteristics: Loss of control of its territory, or of the monopoly on the legitimate use of physical force therein; Erosion of legitimate authority to make collective decisions; Inability to provide public services; Inability to interact with other states as a full member of the international community.

Question 36

Capital Flight

Answer 36

Capital flight is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls. Capital flight may be legal, as is the case when foreign investors repatriate capital back to their home country, or illegal, which occurs in economies with capital controls that restrict the transfer of assets out of the country. Capital flight can impose a severe burden on poorer nations since the lack of capital impedes economic growth and may lead to lower living standards. Paradoxically, the most open economies are the least vulnerable to capital flight, since transparency and openness improve investors’ confidence in the long-term prospects for such economies.

Question 37

International Trade

Answer 37

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt roads), its economic, social, and political importance has been on the rise in recent centuries.

Question 38

WTO - Most Favored Nation clause.

Answer 38

A most favored nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted in a trade agreement to one nation to all other World Trade Organization member countries. Although its name implies favoritism toward another nation, it denotes the equal treatment of all countries. It has been a cornerstone of the multilateral trading system conceived after World War II.

Question 39

Supply and Demand of Exchange Rate: Describe the relationship between the demand for currency and the supply for currency.

Answer 39

The supply of foreign exchange stems from foreign demand for U.S. dollars (or domestic currency). When people or businesses in another country wish to purchase American products, they purchase dollars with their currency in order to have the dollars to buy the goods. Their increase in demand for dollars will be matched by an increase in supply of their currency. A significant increase in the overseas demand for US products will have the effect of driving up the value of the dollar vis-a-vis the other currency. Until 1971, exchange rates were heavily controlled by central banks, but since then they have “floated,” with very limited intervention from governments.

Question 40

Supply and Demand of Exchange Rate: Determine what may alter currency supply and demand.

Answer 40

There are numerous economic factors that determine the supply and demand for different currencies. Economic changes that alter the relative strength of different countries are major factors. The economic strength of the Japanese and German economies following World War II, for example, was behind the appreciation of those currencies. Government debt is also a contributing factor. If investors fear a country may default on its debt, they will drop their investments and switch them to another currency. Interest rates also cause shifts in capital accounts as investors move their assets from one currency to another, seeking higher returns. Speculators look for opportunities in foreign exchange markets and can sometimes influence price changes.

Question 41

Exchange Rate

Answer 41

An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an exchange rate has two components, the perceived domestic currency and a perceived foreign currency: The exchange rate is the perceived foreign currency divided by how much it is worth in the perceived domestic currency. It can be quoted either directly or indirectly. In a direct quotation, typically for someone with domestic currency who wants to convert to foreign currency, the price of a unit of foreign currency is expressed in terms of the domestic currency (ex. 0.8 Euro / 1 USD). In an indirect quotation, the price of a unit of perceived domestic currency is expressed in terms of the perceived foreign currency (ex. 1.25 USD / 1 Euro). Exchange rates are quoted in values against the US dollar.

Foreign Currency / [How much it is worth in domestic currency, usually 1] = Exchange Rate

Question 42

Currency Conversion

Answer 42

The process of converting from one currency to another is called currency conversion. The formula for this tells us to multiply perceived domestic currency by the exchange rate for the perceived foreign currency. The new currency equals perceived domestic currency times the exchange rate. Exchange rates can be found by doing an Internet search or by going to the bank.

Domestic Currency * Exchange Rate = Foreign Currency

Question 43

Supply and Demand of Exchange Rate: Demand and Supply Curves

Answer 43

Just like a regular demand curve for a normal good, the demand curve for individual currencies is downward sloping. If the value of a currency declines (it becomes cheaper), the quantity of that currency demanded by foreign consumers would increase, all else constant. The point at where the demand and supply curves intersect determines the market exchange rate. An increase in the demand for a currency creates a rightward shift of the demand curve, ultimately causing a rise in the exchange rate and increasing the value of the currency demanded. Conversely, a fall in demand would shift the demand curve left and lead to a decline in the currency value. On the supply side, an increase in the supply of a currency will shift the supply curve to the right, ultimately creating a new intersection for supply and demand and a lower exchange rate for the currency. A decrease in the supply of a currency shifts the curve leftward, causing the exchange rate and the value of the currency to rise.