International Trade and Capital Flows

Question 1

What does it mean when a country is said to have an absolute advantage in the production of a good ?

Answer 1

The country can produce the good at lower cost in terms of resources relative to another country.

Question 2

What does it mean when a country is said to have a comparative advantage in the production of a good?

Answer 2

When a country’s opportunity cost in terms of other goods that could be produced instead is lower than that of another country.

Question 3

Describe the Ricardian model of trade:

Answer 3

• The Ricardian model of trade has only one factor of production—labor.
• The source of differences in production costs and comparative advantage is differences in labor productivity due to differences in technology.

Question 4

Describe the Heckscher and Ohlin model:

Answer 4

• There are two factors of production—capital and labor.
• The source of comparative advantage (differences in opportunity costs) is differences in the relative amounts of each factor that countries possess.

Question 5

What are four types of trade restrictions?

Answer 5

1. Tariffs
2. Quotas
3. Minimum domestic content
4. Voluntary export restraints

Question 6

What are tariffs?

Answer 6

Taxes on imported good collected by the government.

Question 7

What are quotas?

Answer 7

Limits on the amount of imports allowed over some period.

Question 8

What is minimum domestic content?

Answer 8

Requirement that some percentage of product content must be from the domestic country.

Question 9

What are voluntary export restraints?

Answer 9

A country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading partners.

Question 10

Within an importing country trade restrictions will tend to do what three things?

Answer 10

1. Increase prices of imports and decrease quantities of imports.
2. Increase demand for and quantity supplied of domestically produced goods.
3. Increase producer’s surplus and decrease consumer surplus.

Question 11

What is the effect of export subsidies on the importing and exporting countries?

Answer 11

Decrease export prices and benefit importing countries at the expense of the government of the exporting country.

Question 12

What are five types of trade agreements?

Answer 12

1. Free trade area
2. Customs union
3. Common market
4. Economic union
5. Monetary union

Question 13

What is a free trade area?

Answer 13

All barriers to the import and export of goods and services among member countries are removed.

Question 14

What is a customs union?

Answer 14

Member countries also adopt a common set of trade restrictions with non-members.

Question 15

What is a common market?

Answer 15

Member countries also remove all barriers to the movement of labor and capital goods among members.

Question 16

What is an economic union?

Answer 16

Member countries also establish common institutions and economic policy for the union.

Question 17

What is an economic union?

Answer 17

Member countries also adopt a single currency.

Question 18

What is the purpose of trade agreements?

Answer 18

To increase economic welfare by facilitating trade among member countries.

Question 19

What is the equation for net exports?

Answer 19

exports − imports = private savings + government savings − domestic investment

Question 20

What is the IMF?

Answer 20

1. International Monetary Fund
2. facilitates trade by promoting international monetary cooperation and exchange rate stability,
3. assists in setting up international payments systems, and
4. makes resources available to member countries with balance of payments problems.

Question 21

What is the World Bank?

Answer 21

1. Provides low-interest loans,
2. Interest-free credits, and
3. Grants to developing countries for many specific purposes.
4. Provides resources and knowledge and helps form private/public partnerships with the overall goal of fighting poverty.

Question 22

What is the World Trade Organization?

Answer 22

1. Ensures that trade flows freely and works smoothly.
2. Main focus is on instituting, interpreting, and enforcing a number of multilateral trade agreements which detail global trade policies for a large majority of the world’s trading nations.