Module 12 Flashcards
What is the PPF and what does it show?
Production Possibilities Frontier.
Combinations of goods possible to produce.
How do we shift the PPF outwards?
Economic growth:
- Use resources to create more capital goods.
- Improve technology.
What are the assumptions of the PPF?
- all resources are used effectively
- all other resources are fixed, especially technology
Looking at a PPF, Which points are efficient?
Any point on it. Points outside it are impossible and points inside are inefficient.
Why is the PPF curved?
Increasing marginal opportunity cost due to specialization of resources.
Why does Comparative Advantage exist?
Differing opportunity costs.
How does trade leave people better off?
- Allowing them to specialize where they have the lowest opportunity cost.
- This allows them to consume outside their PPF.
What is comparative advantage?
Having a lower opportunity cost to produce a good or service than someone else.
What is absolute advantage?
Being more efficient at producing a good or service (more production given same resources).
Which is the basis for trade? Comparative or Absolute Advantage?
Comparative advantage is the basis for trade because it allows gains from specialization.
If two producers have the same opportunity cost, does trade benefit them?
No
What are the main sources of comparative advantage?
- Climate and natural resources
- Relative abundance of labour and capital
- Technology
- External economies
What is autarky?
When a country refuses to have any trade partners.
Why don’t we see complete specialization in trade?
- increasing marginal opportunity cost
- consumer tastes
- some goods / services are not traded
Does everyone gain from specialization?
No - there are winners and losers but overall the economic surplus increases.
What is Free Trade
no restrictions
What happens to economic surplus under free trade?
- CS increases
- PS decreases
- Peq falls to Pworld
What happens to economic surplus under tariffs?
- Loss of consumer surplus
- Increase in producer surplus
- Gov gets $
- DWL
Which area represents the loss of consumer surplus with a tariff?
ACTD
What is area T in this tariff diagram?
- Lost by consumers, gained by government
What is area A in this tariff diagram?
lost by consumers, gained by local producers
Where is the DWL for this tariff diagram?
DWL = C + D
What is area C in this tariff diagram?
Area C is the DWL from consumers being forced to buy from less efficient producers.
What is area D in this tariff diagram?
Area D is DWL from consumers buying less than they would have at the world price.
What is a Voluntary Export Restraint / Voluntary Restraint Agreement?
A voluntarily negotiated trade restraint.
What is area B in this quota diagram?
Area B is the loss by local consumers to foreign producers who are able to sell their product at the inflated local price.
What is area A in this quota diagram?
Area A is the loss by local consumers to local producers.
Does it make sense to unilaterally reduce tariffs and quotas?
YES - the net increase to economic surplus is significant, even if the trading partners don’t also reduce tariffs and quotas.
Do quotas and tariffs protect jobs?
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.
How do we know what a price will be after a quota?
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.
What are the possible trade restrictions?
- Tariffs
- Quotas
- Health & Safety requirements
- National defence requirements
What happened with trade in the 1930s?
Tariff war, tariffs in USA climbed as high as 60%.
What happened with trade in 1945?
Trade opened up between allied countries, and closed down for many under-developed nations.
What happened in 1948?
GATT - General Agreement on Tariffs and Trade
Trade rounds - multilateral tariff and quota reduction negotiations.
What was GATT?
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.
What happened with trade in the 1980s?
Globalization - many of the previously closed-off underdeveloped nations started opening up to trade and foreign investment.
What happened in 1995?
WTO - World Trade Organization.
What did the WTO cover?
- goods
- services
- intellectual property
How strong is the WTO?
Pretty toothless - hasn’t actually stopped a lot of treaty violations, even if the ruling is in favour of the victim country.
What are some examples of violations the WTO has failed to adress?
- Trump: tariffs on imported washing machines
- China: forcing foreign companies to share technology with local companies in order to do trade in China.
What are some reasons people oppose the WTO?
- opposition to globalization
- protectionism
- concern that WTO may protect high-income countries at the expense of low-income countries.
What happened in 2018 with trade?
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
What’s behind anti-globalization sentiment?
- desire to protect local culture and customs
- producers from high-income countries come in and take advantage of looser safety/labour/environmental regulation.
Are low-income countries OK with high-income countries’ producers taking advantage of them?
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.
What are some of the reasons behind protectionism?
- shield local firms
- perception that it protects jobs
- infant industries
- national security
Which job impacts are easier to track - losses from trade or gains from trade?
Losses from trade are more obvious and easier to track. Gains must often be estimated and don’t get much media attention.
What is dumping?
- Foreign firms selling into the local market below their cost of production
- A catch-all excuse for retaliatory tariffs
How does the WTO define dumping?
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.
