Week 4

Question 1

When does trade occur?

Answer 1

when goods, services, or resources are exchanged

Question 2

What is trade without money called?

Answer 2

barter

Question 3

What are the three incentives of trade?

Answer 3

1) people differ in taste
2) people differ in abilities
3) more highly populated markets give rise to better use of resources through specialization

Question 4

What is a comparative advantage?

Answer 4

when someone has a lower opportunity cost of producing a good, in terms of other goods sacrificed

Question 5

When is trade advantageous?

Answer 5

when the external cost of a good is lower than internal cost of producing the good

Question 6

What are transactions costs?

Answer 6

arise due to the sacrifice that must be made to search out, negotiate, and complete a transaction

Question 7

What is mercantilism?

Answer 7

mercantilism aims to keep the most money inside the country (importing is bad and exporting is good)

Question 8

What is mercantilism obsessed about?

Answer 8

balance of trade

Question 9

What is balance of trade?

Answer 9

the value of exported goods and services minus the dollar value of imported goods and services

Question 10

What is a trade surplus?

Answer 10

a positive balance of trade (exporting more than what is being imported)

Question 11

What is a trade deficit?

Answer 11

a negative balance of trade (exporting less than what we are purchasing and importing from other countries)

Question 12

What is the current account?

Answer 12

the monetary value of the flow of goods and services (mercantilist who worry about the drain of money from an economy only look at this)

Question 13

What is the balance of payments?

Answer 13

the sum of the current account and the capital account, is always zero

Question 14

What is exchange rate?

Answer 14

the price of one country’s currency in terms of another country’s currency

Question 15

What does the exchange rate depend on?

Answer 15

the supply and demand for each currency

Question 16

The demand for dollars is determined by?

Answer 16

1) how many U.S. goods, services, and financial instruments the rest of the world wants
2) whether people expect the dollar to gain or lose value in the future – in terms of other currencies

Question 17

The supply of dollars is determined by?

Answer 17

1) how many of the rest of the worlds goods, services, and financial instruments that people holding dollars wish to have
2) whether people expect the dollar to gain or lose value – in terms of other currencies
3) the central bank – the U.S. federal Reserve Bank (the fed) creating or destroying money

Question 18

What does appreciated mean?

Answer 18

to gain; an appreciation of the dollar makes it less profitable to export and more profitable to import

Question 19

What are modern day mercantilist called?

Answer 19

protectionists

Question 20

What are tariffs?

Answer 20

a tax on an imported good

Question 21

What are quotas?

Answer 21

restrictions on the quantity of imports that citizens can purchase

Question 22

What is a subsidy?

Answer 22

paying domestic firms to produce, unless foreign governments retaliate, foreign industries can’t compete

Question 23

What are export subsidies?

Answer 23

paying domestic firms for each unit they export

Question 24

What are domestic content restrictions?

Answer 24

laws that they a product made in the country must be made primarily using resources from the country

Question 25

What is anti-competitive manufacturing specifications?

Answer 25

requiring that a particular imported product be manufactured with inputs that are difficult to acquire except in the importing country

Question 26

Protectionists may accept imports under some limited conditions such as,

Answer 26

1) the good is impossible to produce domestically in sufficient quantities
2) exporting is good, hence importing is a necessary evil
30 the exporter has wages and other regulations similar to ours
3) the imported good will not greatly harm any domestic industry

Question 27

The worst foreign source to import from would be

Answer 27

1) produce a good that we would produce domestically
2) never import from us
3) have zero wages– in fact sell at zero price
4) clearly harm a domestic industry