Global – International Trade Flashcards
What are the Benefits Countries obtain from Trade?
- Increased competition
- Greater efficiency
- Lower prices for consumers
- Greater choice for consumers
- Acquiring needed resources
- Source of foreign exchange
- Access to larger markets
- Economies of scale
- Specialization
- More efficient resource allocation
- Flow of new ideas and tech
- Economic growth
What is Free Trade?
Refers to the absence of government intervention of any kind in international trade, resulting in trade without restrictions.
How does a Country decide what Goods to Export/Import?
A country will export a good if its domestic price is lower than the price set in international trade (world price). The opposite of this will bring the country to import the good.
How can Export Revenues be Calculated?
Quantity of exports x World price
where quantity of exports is Qs - Qd
What is the Effect of Exports on Stakeholders?
Producers: better off (higher Q and higher P)
Consumers: worse off (higher P and lower Q)
How can Import Expenditure be Calculated?
Quantity of imports x World price
where quantity of imports is Qd - Qs
What is the Effect of Imports on Stakeholders?
Producers: worse off (lower Q and lower P)
Consumers: better off (higher Q and lower P)
What is Absolute Advantage?
The ability of a country to produce a good using fewer resources than another country.
Explain the Theory of Absolute Advantage
According to the theory, if countries specialize in and export the good in which they have absolute advantage upon, the result will be higher production and consumption in each country.
What is Comparative Advantage?
The situation in which one country has a lower opportunity cost in the production of a good than another country.
Explain the Theory of Comparative Advantage
As long as opportunity cost in two or more countries differ, it is possible for all countries to gain from specialization and trade according to their comparative advantage. This increases the global allocation of resources resulting in greater global output allowing countries to consume outside of their PPC.
What happens when the PPCs of Two Countries are Parallel to Each-Other?
It shows that opportunity cost is nearly identical and therefore there is no comparative advantage and there are no possibilities for the countries to gain from specialization.
What are the Assumptions of the Theory of Comparative Advantage?
- Factors of production are fixed
- Technology is fixed
- Perfect mobility of factors of prod.
- There is full employment of resources
- There is free trade
- There are homogeneous products
- Transportation costs are ignored
What are the Disadvantages of the Theory of Comparative Advantage?
- Depends on unrealistic assumptions
- Spec. can prevent structural changes
- Risk of excessive specialization
What are the Types of Trade Protection?
1) Tariffs
2) Quotas
3) Subsidies
4) Export subsidies
5) Administrative barriers
What is Trade Protection?
Government intervention in international trade through the imposition of trade restrictions to prevent free entry of imports in a country.
What is a Tariff?
Taxes on imported goods.
What are the Goals of Tariffs?
- Protect domestic industry
* Raise government revenue
What is the Effect of a Tariff on the Market?
Under free trade imports the quantity demanded was at Q4 and quantity produced at Q1, the price instead is at Pw. When the tariff is imposed, quantity produced increases to Q2 and quantity demanded decreases to Q3 at the new price Pw + t.
What is the Effect of Tariffs on Stakeholders?
Domestic producers: better off Domestic consumers: worse off Domestic workers: better off Income distribution: worse off Efficiency: worse off Government: better off Foreign producers: worse off Global r. allocation: worse off
What is the Effect of Tariffs on Consumer and Producer Surplus?
Consumer surplus: decreases
Producer surplus: increases
Welfare loss created
What are Import Quotas?
Legal limit to the quantity of a good that can be imported over a particular time period.
What are the Goals of Import Quotas?
Protect domestic industry from foreign competition
What is the Effect of an Import Quota on the Market?
Under free trade imports the quantity demanded was at Q4 and quantity produced at Q1, the price instead is at Pw. When the import quota is imposed, the amount of imports is reduced to Q2 - Q3 and an additional supply curve is created determined by the amount of the quota. Quantity demanded is now at Q3 where domestic supply intersects with domestic demand.
What is the Effect of Import Quotas on Stakeholders?
Domestic producers: better off Domestic consumers: worse off Domestic workers: better off Income distribution: worse off Efficiency: worse off Government: neutral Foreign producers: worse off + better off Global r. allocation: worse off
What is the Effect of Import Quotas on Consumer and Producer Surplus?
Consumer surplus: decreases
Producer surplus: increases
Creation of welfare loss
What are Production Subsidies?
Payments per unit of output granted by the government to domestic firms that compete with imports.
What are the Goals of Production Subsidies?
To protect firms which compete with imports.
What is the Effect of Production Subsidies on the Market?
Under free trade imports the quantity demanded was at Q2 and quantity produced at Q1, the price instead is at Pw. When a production subsidy is implemented, the supply curve shifts so that quantity produced increases to Q3 and firms receive higher prices as Pw + s.
What is the Effect of Production Subsidies on Stakeholders?
Domestic producers: better off Domestic consumers: neutral Domestic workers: better off Efficiency: worse off Government: worse off Taxpayers: worse off Foreign producers: worse off Global r. allocation: worse off
What is the Effect of Production Subsidies on Consumer and Producer Surplus?
Consumer surplus: neutral
Producer surplus: increase
Creation of welfare loss
What are Export Subsidies?
Payments by the government per unit of the subsidized good, where the subsidy is paid for each unit of output that is exported.
What is the Effect of Export Subsidies on the Market?
Under free trade imports the quantity demanded was at Q1 and quantity produced at Q2, the price instead is at Pw. When an export subsidy is implemented, the supply curve shifts so that the quantity produced increases to Q4 at price Pw + s. Instead, the quantity demanded decreases from Q1 to Q2 at higher price Pw + s.
What is the Effect of Export Subsidies on Stakeholders?
Domestic producers: better off Domestic consumers: worse off Domestic workers: better off Efficiency: worse off Government: worse off Taxpayers: worse off Foreign producers: worse off Global r. allocation: worse off
What is the Effect of Export Subsidies on Consumer and Producer Surplus?
Consumer surplus: decreases
Producer surplus: increases
Creation of welfare loss
What are Administrative Barriers?
Administrative procedures used by countries to prevent the free flow of imports into a country.
What are Types of Administrative Barriers?
Costum procedures involving inspections, valuation, controls on packaging and others.
What are Arguments in Favor of Trade Protection?
- Aid infant industry growth
- National security (domestic production of armaments)
- Health, safety and environmental standards
- Diversification (increasing variety of production)
What are Arguments Against Trade Protection?
- Only producers and workers are benefitted
- Higher costs of production and reduced efficiency
- Consumers lose in most cases
- Income distribution worsens in most cases
- Foreign producers are always worse off
- Resource allocation is always worse off
- Effects on prices of firms dependent on imports
- Decrease in export competitiveness
- Risk of trade wars
- Potential of corruption
What are Some Questionable Arguments in Favor of Trade Protection?
- Anti-dumping
- Correcting balance of payment deficit
- Government revenue from tariffs
- Protection of domestic jobs
- Unfair competition
