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Macroeconomics Ch. 7
Swalaheen Comparative Advantage and Gains from International Trade
| Question | Answer |
|---|---|
| Tariff | A tax imposed by a government on imports. |
| Imports | Goods and services bought domestically but produced in other countries. |
| Exports | Goods and services produced domestically but sold in other countries. |
| Comparative Advantage | The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. |
| Opportunity Cost | The highest values alternative that must be given up to engage in an activity. |
| Absolute Advantage | The ability to produce more of a good or service than competitors when using the same amount of resources. |
| Autarky | A situation in which a country does not trade with other countries. |
| Terms of Trade | The ratio at which a country can trade its exports for imports from other countries. |
| Why don't we see complete specialization? | 1) Not all goods and services are traded internationally, 2) prod. of most goods involves increasing opportunity costs, and 3) tastes for products differ. |
| Where does Comparative Advantage come from? | 1) Climate and natural resources, 2) Relative abundance of labor and capital, 3)Technology, 4) External Economies. |
| External Economies | Reductions in a firm's costs that result from an increase in the size of an industry. |
| Free Trade | Trade between countries that is without government restrictions. |
| T/F: The most common interferences with trade are Tariffs. | TRUE. |
| Quota | A numerical limit a government imposes on the quantity of a good that can be imported into the country. *Imposed by the government of the importing country. |
| Voluntary Export Restraint (VER) | An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. |
| T/F: The main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face. | TRUE. |
| T/F: The US economy would not gain from the elimination of Tariffs and quotas even if other countries did not reduce their tariffs and quotas. | FALSE. The economy would gain. |
| World Trade Organization (WTO) | An international organization that oversees international trade agreements. |
| Globalization | The process of countries becoming more open to foreign trade and investment. |
| Protectionism | The use of trade barriers to shield domestic firms from foreign competition. |
| Protectionism is usually justified by these arguments. | 1) Saving Jobs 2) Protecting high wages 3) Protecting infant industries 4) Protecting national security |
| Dumping | Selling a product for a price below its cost of production. |
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