Global Economics Flashcards
What is comparative and absolute advantage?
How do you calculate them?
Absolute Advantage is when one country can produce a good at a lower unit than another country.
Comparative advantage is when a country can produce a good at a lower opportunity cost than another country.
What are subsidies?
Draw and explain the subsidies affect on markets
What are some pros and cons of subsidies
Export subsidies are financial aids from the government. These are given to domestic producers in order to increase their production and lower production costs. This helps protect them from foreign competition.
Some pros is that it helps lower production costs for domestic producers, leading to more domestic employment. Additionally, there is no loss in consumer surplus as the quantity supplied doesn’t change nor does the price of the world.
Some Cons are that citizens might need to pay higher taxes in order for the government to have enough money to supply domestic producers with subsidies. Additionally, there is a deadweight loss represented by g. This is when the less efficient domestic producers take over a space where the more efficient foreign producers did before the subsidy. This means there is a misallocation of resources leading to inefficiency.
What are Tarrifs?
Draw and explain the tarrifs effect on markets
What are some pros and cons of tarriffs
Tariffs are taxes on imports.
Some pros and cons are that government revenue increases and domestic producers/industries are protected. Additionally, this can help decrease structural unemployment in the country and help decrease the trade deficit. It can also safeguard against dumping, increase domestic innovation, and strengthen political ties by granting some countries better access to trade with this country.
Some cons are that the market size decreases from Q2 to Q4. This means that there is less consumer surplus leading to deadweight loss of k. There is also deadweight loss of h where there is misallocation of resources due to the increase of the inefficient domestic producers that replace the more efficient foreign producers.
Can lead to political tensions as high tariffs can make countries suffer. Increased cost of good.
What are quotas?
Draw and explain the quotas’ effect on the market
What are some pros and cons of quotas?
Quotas are a physical limit of a good or service imported from foreign producers. This is set by the government.
Some pros are that quotas help protect domestic producers. They can also decrease unemployment. Also, it can reduce the trade deficit of a country. Some cons are that it leads to deadweight loss such as j where the less efficient domestic producers take over the space of the more efficient, foreign producers. Also, as prices increase, there is less consumer surplus leading to deadweight loss of k. Not to mention, this can cause political tensions between countries.
What is international Trade?
What are their benefits?
Exchange of goods/services between countries
- More variety of goods/services that a country might not get if they didn’t trade with other countries.
- Increased production efficiency as countries trade and produce based on their comparative advantage which lowers the opportunity cost for each country.
- Increase the market size for the producer.
- Helps some industries that aren’t thriving in their own country to have the chance to export and stay in business due to foreign demand
- Increases competition
- Makes goods/services more available and cheap
– able to sell surplus of goods/services to other markets
- Economies of scale
What is free trade?
What are some pros and cons?
This is an extension of the free market where trade is non-regulated.
Some pros are that it lowers cost of production, it allows for productivity through specialization.
Some cons are that some domestic producers will be threatened by foreign competition.
Efficiency of foreign producers might not be ethical
Can increase the trade deficit
Can form monopolies around the world
What is opportunity cost?
The best next option foregone?
What are some other forms of protectionism?
Red Tape bureaucratic barriers: these are hidden barriers. Such might include the necessity of obtaining a license for trade. A country might need to go through a large amount of paperwork to trade with one country. A country does this to protect infant industries or even well established companies.
What is economic integration? Why do countries do this?
Economic integration is the linking / coordinating of the economic policies of different countries.
Countries do this because they recognize the benefits of free trade such as lower prices, variety of goods/services, etc. They also recognize that it increases the efficiency of production of goods due to comparative advantage. Hence, it lowers its trade barriers.
Why is protectionism so important for the defense industries?
This can allow for more employment in these industries, technological advancements (innovation), prevents overreliance on foreign producers, lowers the trade deficit. Less disruptions to the supply of weapons.
What is trade creation and diversion?
Trade creation is when a country switches from a higher cost producer to a lower cost producer after becoming pare of a trading bloc.
Trade diversion is when a country switches from a lower cost producer to a higher cost producer after becoming part of a trading bloc.
What is a trading bloc?
This is an agreement between countries where trading barriers are decreased and members are economically integrated
What is a multilateral trade agreement?
This is an agreement amongst countries where members are treated equally and it creates a free trade area.
