Term
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Definition
Countries, International Trade Theory,
Production Possibilities Two Countries (NS-NT),Settling on terms of trade,Trade Restrictions ,Why restrict trade?? ,World Trade Organization. |
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Term
| International Trade Theory |
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Definition
Trade exists to make both parties better off.
Comparative Advantage:
Situation when one country can produce at a lower opportunity cost than another country (Comparative Advantage)
Countries specialize in production of goods in which they have a comparative advantage. Both better off.
Comparative advantage determined by market forces and price incentives. |
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Term
| Production Possibilities Two Countries (NS-NT) |
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Definition
U. S. Opportunity cost of producing 1 unit of clothing = 3 units of food.
90 food 0 clothing
Japan opportunity cost of producing 1 unit of food = 1 unit of clothing
15 food 15 clothing
U.S. cost to produce food is lower opportunity cost than Japan
Japan’s cost to produce clothing lower opportunity cost than
U.S. specializes in food. Japan specializes in clothing
Both countries gain from specialization/ trade |
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Term
| Settling on terms of trade |
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Definition
Agreement @ 2 Food = 1 Clothing
U.S. produces 90 F and trades 20F to Japan for 10C.
Japan produces 15 C and trades 10 C to U.S. for 20 F.
No specialization: U.S. 90 F and 0 C Japan 15 C and 15 F
After specialization: U.S. 70 F and 10 C Japan 5 C and 20 F
U.S. + 10 F and Japan + 10 F with specialization |
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Term
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Definition
Free trade can benefit both countries so why all the restrictions??
Distributional effects: benefits trade not equally distributed
Consumers’ Surplus = Max. Buying Price – Price Paid
Producers’ Surplus = Price Received – Min. Selling Price
Tariffs: Tax on U.S. imports. Result = higher prices to consumers/ decreases consumers’ surplus/ increases pruducers’ surplus/ increases G revenues. Net loss to economy.
Quotas: legal limit on amount of good that can be imported. Result = P increases/ decreases consumer surplus/ increases producers’ surplus/ increases importers revenue. Net loss |
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Term
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Definition
National Defense : Too risky to have other countries produce weapons for U.S. Has been used for pencils, candles, tuna fishing, etc.
Infant- Industry – temporary protection for start -ups. Note: Politics makes it difficult to remove support.
Anti-dumping (selling at below domestic prices)
Foreign –Export-Subsidies Argument
Low-Foreign Wages: high wages may not be so high when productivity taken into consideration
Saving Domestic Jobs (what about comparative advantage?) |
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Term
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Definition
| “help trade move smoothly, freely, fairly and predictably”. Critics say WTO has met objectives at cost of nation’s sovereignty/ met goals at expense to environment. |
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Term
| countries of world have different gifts |
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Definition
Hong Kong no oil but Middle East has lots
Bananas – Honduras
U.S. Exports : Aircraft, autos, technology, agricultural products
U.S. Imports: autos, oil, seafood, clothes, coffee |
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Term
Trade Restrictions
Distributional effects: |
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Definition
| benefits trade not equally distributed |
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Term
Trade Restrictions
Consumers’ Surplus = |
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Definition
| Max. Buying Price – Price Paid |
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Term
Trade Restrictions
Producers’ Surplus= |
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Definition
| Price Received – Min. Selling Price |
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Term
Trade Restrictions
Tariffs: |
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Definition
| Tax on U.S. imports Result = higher prices to consumers/ decreases consumers’ surplus/ increases pruducers’ surplus/ increases G revenues. Net loss to economy. |
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Term
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Definition
| : legal limit on amount of good that can be imported. Result = P increases/ decreases consumer surplus/ increases producers’ surplus/ increases importers revenue. Net loss. |
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