Microecon chapter 15

Question 1

The country with whom Canada has the msot of trade in terms of exports and imports

Answer 1

USA

Question 2

Canada export what products (at 25%)

Answer 2

energy

Industrial goods and materials

Question 3

What is NAFTA

Answer 3

North American Free trade agreement ( an agreement between USA, Mexico and Canada)

Question 4

An agreement on trade between Canada and EU is called

Answer 4

CETA (comprehensive economic and trade agreement)

Question 5

Who is more open to trade large economies or small economies

Answer 5

Small economies, because they have resources themselves

Question 6

Which sector has more part of GDP: manufacture or service

Answer 6

Service

As incomes
grow, the demand for health, education, leisure, financial services, tourism, etc., dominates the
demand for physical products.

Question 7

If services have more GDP, do they have the higher prevalence in interrnational trade?

Answer 7

Trade in goods—
merchandise trade—remains dominant, partly because many countries import goods, add some
value, and re-export them.

Question 8

what has the largest proportion of Canadian imports

Answer 8

Motor vehicles and parts (19%)

Consumer goods (22%)

Question 9

the opportunity cost is

Answer 9

The opportunity cost of a good is the quantity of another good or service given up in
order to have one more unit of the good in question

Question 10

Trade issues for the world

Answer 10

• Agricultural Protection
• Protects developed economy farmers, hurts farmers from LDCs
• Globalization: Outsourcing of manufactures to LDCs
• Has the West lost good jobs due to outsourcing? Or is the loss of manufacturing jobs due to technological change? Or structural change in the economy?
• Trade or Aid: Do trade barriers offset aid to LDCs?

Question 11

What is the principle of comparative advantage

Answer 11

Principle of comparative advantage states that even if one country has an absolute
advantage in producing both goods, gains to specialization and trade still materialize,
provided the opportunity cost of producing the goods differs between economies.

Question 12

A no-trade state is called

Answer 12

Autarky

Question 13

Who has the rcomparative advantage?

Answer 13

Canada

The opportunity cost of a unit of V
in Canada is 7F (the slope of Canada’s PPF is 5/35 = 1/7). In the US the opportunity cost of
one unit of V is 5F (slope is 8/40 = 1/5).

Question 14

What is an absolute advantage and who has it in this situation

Answer 14

•If one economy uses fewer inputs than another economy to produce a good or service, then that economy has an absolute advantage in its production

The opportunity cost of a unit of V
in Canada is 7F (the slope of Canada’s PPF is 5/35 = 1/7). In the US the opportunity cost of
one unit of V is 5F (slope is 8/40 = 1/5). In this set-up the US is more efficient in producing
V than F relative to Canada, as reflected by the opportunity costs.

Question 15

What is terms of trade

Answer 15

the rate at which
the two goods will trade post-specialization.

Question 16

Who should specialize in what here

Answer 16

We now permit each economy to specialize in producing where it has a comparative advantage.

So Canada specializes completely by producing 35F and the US produces 8V

Question 17

Consumption possibility frontier shows

Answer 17

what an economy can consume after production specialization and trade.

Question 19

Why comparative advantage arises

Answer 19

economies have different endowments
of the factors of production – land, capital and labour endowments differ.

• Endowments as the result of investments – the knowledge economy: high-skill economies have an advantage over lower-skill economies in engineering products
• But scale economies can also give rise to trade where no strong advantages exist – particularly in the form of intra-industry trade, where we see specialization in particular goods or services within a broad product group

Question 20

When creating an agreement for trade what should 2 companies do, if they have different currencies

Answer 20

•In economies with many goods being traded internationally the exchange rate combined with comparative advantage will determine which goods are traded

Question 21

What is intra-industry trade

Answer 21

two-way international trade in products produced within the
same industry.

Canada exports some models of a given manufacturer to
the United States and imports other models.

Question 22

What is intra-firm trade

Answer 22

Intra-firm trade is two-way trade in international products produced within the same
firm.

Question 23

What are supply chains and intermediate good

Answer 23

they have supply chains for components that comprise numerous
suppliers. In the automotive industry transmissions, gearboxes and seats are such intermediate
goods.

Question 24

What is content requirement

Answer 24

requires that a specified percentage of the final value of a
product originate in the producing economy

Question 25

What is dynamic gains

Answer 25

the potential for domestic producers to increase productivity by competing with, and learning from, foreign producers.

Question 26

what is total factor productivity

Answer 26

how efficiently the factors of production are combined.

Question 27

Does everyone gain from trade

Answer 27

* Example: Clothing manufacturers in the West have lost out as the consumer has gained through cheaper manufacture in Asia * Example: Canada’s natural resource and food sectors gain as a result of free trade and comparative advantage

Question 28

What is a tariff and what it is done for

Answer 28

A tariff is a tax on an imported product that is designed to limit trade in addition to generating tax revenue. It is a barrier to trade

Question 29

What is quota

Answer 29

A quota is a quantitative limit on an imported product

Question 30

a trade subsidy is

Answer 30

a domestic manufacturer reduces the domestic cost and limits imports.

Question 31

What do non-tariff barriers do

Answer 31

Non-tariff barriers, such as product content requirements, limit the gains from trade.

Question 32

What is free trade equilibrium

Answer 32

At a price of $10, Canadian consumers wish to buy QD litres, and domestic producers wish to supply QS litres. The gap between domestic supply QS and domestic demand QD is filled by imports

Question 33

When the tax is imposed on import products, why imports fall

Answer 33

total consumption falls and because domestic suppliers can displace some imports under the protective tariff.

Question 34

The relationship between elasticities and imports

Answer 34

The more elastic is the demand curve, the more a given tariff reduces imports.

Question 35

Show on the graph where is tarif revenue,the deidweght loss , total loss in consumer surplus, increased surplus for domestic suppliers

Answer 35

Of the total loss in consumer surplus (LFGJ), tariff revenue equals EFHI, increased surplus for domestic suppliers equals LECJ, and the deadweight loss is therefore the sum of the triangular areas CEI and HFG.

Question 36

Deadweight in free trade when tariff is imposed is a result from

Answer 36

reduction in total purchases, (ii) substitution of high-cost domestic production for lower cost imports the marginal cost of production does not equal the marginal benefit to the consumer.

Question 37

What will happen to the market if the supplier is given a subsidy

Answer 37

A shift of supply curve downward (Qs-Qs')\* 1/2\* (p-p')-\>DWL on supply side no DWL on demand side

Question 38

How the graph of quoata on imported products wuld look like

Answer 38

At the world price P, plus a quota, the supply curve becomes RCUV. This has three segments: (i) domestic suppliers who can supply below P; (ii) quota; and (iii) domestic suppliers who can only supply at a price above P. The quota equilibrium is at T, with price Pdom and quantity Q′D; the freetrade equilibrium is at G. Of the amount Q′D, quota is supplied by foreign suppliers and the remainder by domestic suppliers. The quota increases the price in the domestic market. First it has the segment RC, reflecting the fact that domestic suppliers are competitive with world suppliers up to the amount C. Beyond this output, world suppliers can supply at a price of P, whereas domestic suppliers cannot compete at this price. Therefore the supply curve becomes horizontal, but only up to the amount permitted under the quota—the quantity CU corresponding to quota. Beyond this amount, international supply is not permitted and therefore additional amounts are supplied by the (higher cost) domestic suppliers

Question 39

Quotas on import products changes the domestic price how

Answer 39

It increases it

Question 40

Is there a tax revenue from quotas

Answer 40

No

Question 41

What is dumping

Answer 41

Dumping is a predatory practice, based on artificial costs aimed at driving out domestic producers

Question 42

What are infant industries

Answer 42

Support some industries , so they "mature" and grow The problem with this stance is that these ‘infants’ have insufficient incentive to ‘grow up’ and become competitive. A protection measure that is initially intended to be temporary can become permanent because of the potential job losses associated with a cessation of the protection to an industry that fails to become internationally competitive. Furthermore, employees and managers in protected sectors have insufficient incentive to make their production competitive if they realize that their government will always be there to protect them.

Question 43

World trade organization goal

Answer 43

•Objective is to dismantle existing barriers and prevent further barriers from being erected

Question 44

What is way of life arguments

Answer 44

•Way of Life arguments – frequently in the agricultural sector. However, in Canada agricultural protectionist policy benefits predominantly large farms not small family farms; farm consolidation in recent decades has been enormous

Question 45

EU how many members and why it was created

Answer 45

* EU has expanded to 29 members. Originally founded with the belief that economic integration would improve political relations after WW II: economic integration would lead to political integration, and peace. * Now includes many former ‘Eastern Block’ economies

Question 46

The purpose of NAFTA

Answer 46

* Centerpiece is the dispute resolution mechanism * Canada’s export share of GDP has grown dramatically since these agreements came into being