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BUEC 503 > Module 12 > Flashcards

Module 12 Flashcards

1
Q

What is the PPF and what does it show?

A

Production Possibilities Frontier.
Combinations of goods possible to produce.

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2
Q

How do we shift the PPF outwards?

A

Economic growth:
- Use resources to create more capital goods.
- Improve technology.

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3
Q

What are the assumptions of the PPF?

A
  • all resources are used effectively
  • all other resources are fixed, especially technology
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4
Q

Looking at a PPF, Which points are efficient?

A

Any point on it. Points outside it are impossible and points inside are inefficient.

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5
Q

Why is the PPF curved?

A

Increasing marginal opportunity cost due to specialization of resources.

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6
Q

Why does Comparative Advantage exist?

A

Differing opportunity costs.

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7
Q

How does trade leave people better off?

A
  • Allowing them to specialize where they have the lowest opportunity cost.
  • This allows them to consume outside their PPF.
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8
Q

What is comparative advantage?

A

Having a lower opportunity cost to produce a good or service than someone else.

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9
Q

What is absolute advantage?

A

Being more efficient at producing a good or service (more production given same resources).

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10
Q

Which is the basis for trade? Comparative or Absolute Advantage?

A

Comparative advantage is the basis for trade because it allows gains from specialization.

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11
Q

If two producers have the same opportunity cost, does trade benefit them?

A

No

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12
Q

What are the main sources of comparative advantage?

A
  • Climate and natural resources
  • Relative abundance of labour and capital
  • Technology
  • External economies
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13
Q

What is autarky?

A

When a country refuses to have any trade partners.

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14
Q

Why don’t we see complete specialization in trade?

A
  • increasing marginal opportunity cost
  • consumer tastes
  • some goods / services are not traded
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15
Q

Does everyone gain from specialization?

A

No - there are winners and losers but overall the economic surplus increases.

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16
Q

What is Free Trade

A

no restrictions

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17
Q

What happens to economic surplus under free trade?

A
  • CS increases
  • PS decreases
  • Peq falls to Pworld
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18
Q

What happens to economic surplus under tariffs?

A
  • Loss of consumer surplus
  • Increase in producer surplus
  • Gov gets $
  • DWL
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19
Q

Which area represents the loss of consumer surplus with a tariff?

A

ACTD

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20
Q

What is area T in this tariff diagram?

A
  • Lost by consumers, gained by government
21
Q

What is area A in this tariff diagram?

A

lost by consumers, gained by local producers

22
Q

Where is the DWL for this tariff diagram?

A

DWL = C + D

23
Q

What is area C in this tariff diagram?

A

Area C is the DWL from consumers being forced to buy from less efficient producers.

24
Q

What is area D in this tariff diagram?

A

Area D is DWL from consumers buying less than they would have at the world price.

25
Q

What is a Voluntary Export Restraint / Voluntary Restraint Agreement?

A

A voluntarily negotiated trade restraint.

26
Q

What is area B in this quota diagram?

A

Area B is the loss by local consumers to foreign producers who are able to sell their product at the inflated local price.

27
Q

What is area A in this quota diagram?

A

Area A is the loss by local consumers to local producers.

28
Q

Does it make sense to unilaterally reduce tariffs and quotas?

A

YES - the net increase to economic surplus is significant, even if the trading partners don’t also reduce tariffs and quotas.

29
Q

Do quotas and tariffs protect jobs?

A

NO
- Some jobs are protected while jobs in industries to which the protected industry is a supplier are lost.
- No studies have ever successfully linked employment rates to tariffs and quotas.

30
Q

How do we know what a price will be after a quota?

A

Software, or just visually see the size of a quota’s quantity on the graph and match it to the same size gap between supply and demand.

31
Q

What are the possible trade restrictions?

A
  • Tariffs
  • Quotas
  • Health & Safety requirements
  • National defence requirements
32
Q

What happened with trade in the 1930s?

A

Tariff war, tariffs in USA climbed as high as 60%.

33
Q

What happened with trade in 1945?

A

Trade opened up between allied countries, and closed down for many under-developed nations.

34
Q

What happened in 1948?

A

GATT - General Agreement on Tariffs and Trade
Trade rounds - multilateral tariff and quota reduction negotiations.

35
Q

What was GATT?

A

1948
General Agreement on Tariffs and Trade.
Only covered goods, not services and intellectual property.
Agreement amongst members not to impose tariffs or quotas on goods.

36
Q

What happened with trade in the 1980s?

A

Globalization - many of the previously closed-off underdeveloped nations started opening up to trade and foreign investment.

37
Q

What happened in 1995?

A

WTO - World Trade Organization.

38
Q

What did the WTO cover?

A
  • goods
  • services
  • intellectual property
39
Q

How strong is the WTO?

A

Pretty toothless - hasn’t actually stopped a lot of treaty violations, even if the ruling is in favour of the victim country.

40
Q

What are some examples of violations the WTO has failed to adress?

A
  • Trump: tariffs on imported washing machines
  • China: forcing foreign companies to share technology with local companies in order to do trade in China.
41
Q

What are some reasons people oppose the WTO?

A
  • opposition to globalization
  • protectionism
  • concern that WTO may protect high-income countries at the expense of low-income countries.
42
Q

What happened in 2018 with trade?

A

Donald trump started a trade war. USA put tariffs on many items from many countries, who all retaliated. Cost consumers roughly $1.4B/month in DWL

43
Q

What’s behind anti-globalization sentiment?

A
  • desire to protect local culture and customs
  • producers from high-income countries come in and take advantage of looser safety/labour/environmental regulation.
44
Q

Are low-income countries OK with high-income countries’ producers taking advantage of them?

A

Many local officials in low-income countries argue that it’s a natural part of the development cycle, and that it still provides improved opportunities for their citizens.

45
Q

What are some of the reasons behind protectionism?

A
  • shield local firms
  • perception that it protects jobs
  • infant industries
  • national security
46
Q

Which job impacts are easier to track - losses from trade or gains from trade?

A

Losses from trade are more obvious and easier to track. Gains must often be estimated and don’t get much media attention.

47
Q

What is dumping?

A
  • Foreign firms selling into the local market below their cost of production
  • A catch-all excuse for retaliatory tariffs
48
Q

How does the WTO define dumping?

A

Foreign firms selling into the local market at a cost below what they sell the item for in their home market. Even though this is actually just a sound business practice.

BUEC 503 (12 decks)

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