International Trade

Question 1

What is the basis of comparative advantage between countries?

Answer 1

Divergent opportunity costs in the production

Question 2

When does a country have a comparative advantage?

Answer 2

When OC in producing 1 unit of the G/S is less than the OC of any other country (world supply)

Question 3

What does world PPF allow a country to do with output

Answer 3

Produce excess where they have CA to create export revenue which can be used to buy imports

Question 4

4 gains from international trade are…

Answer 4

1. EOS
2. Greater consumer choice
3. Competition increases
4. Overall gross surplus increases

Question 5

Distribution of trade gains from importing country (Producer vs. Consumer)

Answer 5

Fall in price benefits consumer
Consumer pays less, gains consumption = higher surplus
Producer lower price, unchanged costs = lower profit

Question 6

Distribution of trade gains to exporting country (Producer vs. Consumer)

Answer 6

Increase in price benefits producer
Consumer pays more, consumes less= lower surplus
Producer higher price, higher revenue= higher surplus

Question 7

Tariff

Answer 7

Tax on import

Question 8

Subsidy

Answer 8

Government payment to producer based on quantity produced

Question 9

Voluntary export restriction

Answer 9

Agreement between two countries that the exporter will restrict its exports

Question 10

3 arguments for protectionism

Answer 10

1. Infant industry protection
2. Protection from dumping
3. Save jobs

Question 11

3 arguments against protectionism

Answer 11

1. Protectionism aid one industry at expense of all others (leads to inefficient allocation of resources and higher prices)
2. Retaliation
3. In free trade gains better distributed