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Chapters 20 and 21
Terms in this set (55)
At low cost of other goods forgone such as textiles, electronics, clothes, toys, and sporting goods
Vast amount of lands and can inexpensively produce wool and meat
Relatively large amounts of capital and can inexpensively produce goods whose production requires much capital such as airplanes, machinery, and chemicals
A country produces more of a certain good (exports) and fewer of another good (imports) than it would otherwise. If it can produce more of a product at a lower opportunity cost.
If it is the most efficient producer of that product, it can produce more output of a product from any given amount of resource input than any other producer.
With full employment countries can work on the production possibility curve so that it can increase the production of say one ton of a product by forgoing the production of one ton of a different product, the slope would be 1. Otherwise known as the domestic-exchange ratio) calculated by whats given up over what you're making.
Self-sufficiency Output Mix
Each country must choose some output mix on its production possibility curved select the one that provides the greatest total utility or satisfaction.
Principle of comparative advantage
The total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good
Terms of trade
The exchange ratio at which the US and Mexico trade meat and veggies, it establishes whether each country will find it in its own better interest to bother specializing at all. It determines whether each country can get a better deal by specializing and trading than it could if it opted instead for self-sufficiency
Trading possibilities line
Shows the amount of the two products that a nation can obtain by specializing in one product and trading for another. It reflects the assumption that both nations specialize on the basis of comparative advantage
Domestic price versus world price
Price that would prevail in a closed economy that does not participate in international trade versus the price that equates the quantities supplied and demanded globally
Export supply curve
Connecting points a, b, and c and shows the amount that producers will export at each world price above $1. A sloping upward curve indicates a direct or positive relationship between the world price and the amount of exports
Import demanded curve
A downsloping curve shows the amounts that will be imported at world prices below the $1 domestic price. The relationship between world prices and imported amounts is increase or negative
Equilibrium world price
The equilibrium world levels of exports and imports went he world is opened to trade
Usually applied to a product that is not being produced domestically like tin or coffee
Is implemented to shield domestic producers from foreign competition. They impede free trade by increasing the prices of imported goods and therefore shifting sales toward domestic producers. Usually not high enough to stop the importation of foreign vantage but can make domestically produced products more attractive to consumers
Limit on the quantities or total values of specific items that are imported in some period. They are more effective than tariffs in impeding international trade
Includes onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures
Voluntary export restriction
Trade barrier by which foreign firms voluntarily limit the amount of their exports to a particular country. They have the same effect as import quotas and are agreed to by exporters to avoid more stringent tariffs or quotas.
Consists of a government payment to a domestic producer of export goods and is designed to aid that producer. By reducing production costs, the subsidies enable the domestic firm to charge a lower price and thus to sell more exports in world markets
Direct effects of tariffs
Decline in consumption, increased domestic production because there is no tariff within the country, decline in imports, and tariff revenue
Represented by a yellow rectangle and the amount of revenue the tariff yields. Its determined by multiplying the tariff, P t - Pw per unit, by the number of players imported , bc. It is a transfer of income from consumers to government and does not represent any net change in the nations economic well-being.
Indirect effect of tariffs
Reduce efficiency and the world's real output
Economic impact of quotas
While tariffs generate revenue, quotas transfer revenue to foreign producers. The higher price of a quota results in additional revenue for foreign producers.
Net costs of tariffs and quotas
Protection raises the price of a product in three ways: 1. the price of the imported product goes up. 2. the high price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods, and 3. the prices of domestically produced goods rise because import competition has declined. Can cause economic inefficiency, reduced consumption, and lower standards of living
Military self-sufficient argument
Protective tariffs are needed to preserve or strengthen industries that produce the materials essential for national defense. Must take precedence over economic goals.
Highly specialized economies such as Saudi Arabia (oil) and Cuba (sugar) are dependent on international markets for their income. In these economies, wars, recessions abroad, and random fluctuations in world supply and demand can cause deep declines in export revenues and therefore domestic income. Tariff and quotas are needed in such nations.
Infant Industry Argument
Protective tariffs are needed to allow new domestic industries to establish themselves temporarily shielding young domestic firms from the severe competition of more mature and more efficient foreign firms will give infant industries a chance to develop and become efficient producers
Tariffs are needed to protect domestic firms from dumping by foreign producers. Dumping is the sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home
Increased Domestic Employment Argument
Arguing for a tariff to save US jobs becomes fashionable when the economy encounters a recession such as the severe recession of 2007-2009
Cheap foreign labor argument
Says that domestic firms and workers must be shielded from the ruinous competition of countries where wages are low. If protection is not provided, cheap imports will flood US markets and the prices of US goods along with the wages of US workers will be pulled down; living standards will be reduced
General agreement on tariffs and trade
1947, 23 nations including the US signed it and it includes three principals: 1. equal, nondiscriminatory trade treatment for all member nations 2. the reduction of tariffs by multilateral negotiation and 3. the elimination of import quotas. GATT provided a forum for the multilateral negotiation of reduced trade barriers.
World trade organization
GATTs successor, 153 nations belonged to it in2010, and it oversaw trade agreements reached by member nations and rules on trade disputes among them. It also provides forums for further rounds of trade negotiations.
Doha Development Agenda
was the ninth and latest round of negotiations of the WTO in Doha, Qatar, in late 2001.
The European union
Countries have sought to reduce tariffs by creating regional free-trade zones, initiated in 1958 as the common market and in 2003 it comprised 15 nations. It expanded in 2004 by 10, and in 2007 until now it consists of 27 nations. EU abolishes tariffs and import quotas on nearly all products traded among the participating nations.
North American free trade agreement
1993, Cananda, Mexico and US created this major free-trade zone that has about the same combined output as the EU but encompasses a much larger geographic area.
Trade adjustment assistance act
2002 introduced some innovative policies to help those hurt by shifts in international trade patterns. The law provides cash assistance beyond unemployment insurance for up to 78 weeks for workers displaced by imports or plant relocations abroad
Shifting work previously done by domestic workers to workers located in other nations
Balance of payments
The sum of all the financial transactions that take place between its residents and the residents of foreign nations. They fall under either international trade (current account) or international asset transactions (the capital and financial account).
Consist of foreign currencies, certain reserves held with the international monetary fund, and stocks of gold. These reserves are owned by governments or their central banks.
Balance of payments deficit
In some years a net sale of official reserves by a nations treasury or central bank occurs in the process of bringing the capital and financial account into balance with the current account. It is a subset of the overall balance statement not the overall account
Balance of payment surplus
Net purchases of official reserves in the balance of payments or alternatively as the resulting increase in the stock of official reserves held by the government
A flexible or floating exchange rate system
Through which demand and supply determine exchange rates and in which no government intervention occurs
A fixed exchange rate system
Through which governments determine exchange rates and make necessary adjustments in their economies to maintain those rates
The demand for pounds curve
Is downsloping because all British goods and services will be cheaper to the US if pounds become less expensive to the US
Supply of pounds curve
Is upsloping because the British will purchase more US goods when the dollar price of pounds rises
Determinants of exchange rates
1. if the demand for a nations currency increased, it will appreciate, demand declines, depreciate. 2. If the supply of nations currency increases, that currency will depreciate, if the supply decreases, it will appreciate. 3. If a nations currency appreciates, some foreign currency depreciates relative to it
Factors that change the demand for or the supply of a currency
Change in tastes, change in relative incomes, change in relative inflation rates, change in relative real interest rates, changes in relative expected returns on stocks, real estate, or production facilities, speculation
One way to maintain a fixed exchange rate, when the government or central banks manipulate the exchange rate through the use of official reserves. For instance, selling some of its reserves of pounds, the shifting supply curve to the right, so that it intersects and maintains the exchange rate
One way to maintain a fixed exchange rate is to control the flow of trade and finance directly
The US government could handle the problem of a pound shortage by requiring that all pounds obtained by ES exporters be sold to the federal government, then the gov't would allocate or ration this short supply of pounds
Objections to exchange controls
Distorted trade: exchange controls would distort the pattern of international trade away from the pattern suggested by comparative advantage
Favoritism: The process of rationing scarce foreign exchange might lead to government favoritism toward selected importers or big contributors to reelected campaigns
Restricted choice: Controls would limit freedom of consumer choice. The US consumers who prefer one product, might have to buy a different product. The business opportunities for some US importers might be impaired if the gov't limited imports
Black markets: Enforcement problems are likely under exchange controls. US importers might want foreign exchange badly enough to pay more than the official rate, setting the stage for back market dealings between importers and illegal sellers of foreign exchange
Managed floating exchange rates
An almost flexible system where exchange rates are free to float to their equilibrium market levels but nations occasionally use currency interventions in the foreign exchange market to stabilize or alter market exchange rates.
Causes of US trade deficits
1. US economy expanded more rapidly between 2001 and 2007 than the economies of several US trading partners...
2. Enormous US trade imbalance with China...
Implications of US trade deficits
Increased current consumption, increased US indebtedness