Download Chapter 17: International Trade

Chapter 17: International
Trade
Vocabulary
Absolute Advantage: when an economy or individual can
produce more per unit of labor than another in the production
of the good under consideration.
Comparative Advantage: the ability to produce a product
most efficiently given all the other products that could be
produced; occurs if the opportunity cost of producing that
good or service is lower for that economy than for any other.
Specialization: a method of assigning different tasks to
different workers; implies an economy is producing goods or
services at which there is a comparative advantage.
Terms of Trade: the rate at which a country can trade
domestic products for imported goods.
Vocabulary
One-Way Trade: when countries specialize in
producing the goods in which they have a
comparative advantage and then export those
goods so they can import the goods in which they
do not have a comparative advantage.
Two-Way Trade: involves international exchanges
in which countries both import and export the
same or similar goods.
Protectionist Policy: one in which a country
restricts the importation of goods and services
produced in foreign countries.
Tariff (free trade barrier): a tax on imported
goods.
Vocabulary
Quota (free trade barrier): direct restriction on
the total quantity of a good or service.
Voluntary Export Restrictions (free trade
barrier): a form of trade barrier by which foreign
firms agree to limit the quantity of goods exported
to a particular country.
Infant Industry (free trade barrier): government
imposed tariffs or subsidizes industries.
Strategic Trade Policy (free trade barrier):
promotes development of key industries and
increases a country's trade.
Dumping (free trade barrier): selling goods in a
foreign market at a price below production cost.
Vocabulary
Outsourcing: when a business obtains services or products
used in manufacturing from an outside (often overseas)
supplier or manufacturer in order to cut costs.
Off shoring: occurs when businesses conduct much of their
businesses in a different country than that in, which they are
incorporated.
International Free Trade Agreement: a system of trade
policy that allows traders to act and or transact without
interference from government
World Trade Organization: promotes trade among
countries around the world by reducing trade barriers,
establishes common rules for trade, increases international
trade, and improves the world's standard of living.
NAFTA (North American Free Trade Association): trade
agreement between Mexico, the United States, and Canada
that reduces trade between the countries, increases
economic activity, and improves the standard of living.
Objectives
People choose because Wal-Mart offers a
wide variety of products, and this reflects
the study of economics.
Consumers tend to choose products that
are lower in price.
A lowering in prices tends to mean an
increase in sales.
People’s need for lower prices have
indirectly led to an increased trade deficit
and a lower standard of living.
Concepts of Absolute Advantage
Absolute advantage is the principle
that one country loses nothing in
producing a good, while comparative
advantage means that a country loses
less when specializing in a product.
Countries decide what goods they
import and export through these
principles.
Methods of Restricting International
Trade
Quotas and tariffs are two of the most
used methods of trade restriction.
Some countries also voluntarily
restrict the amount they trade.
Quotas and Tariffs
Quotas and tariffs raise the
equilibrium price and lower quantity
due to the limited amount of products
that are exported.
Justifications for Trade Restrictions
Infant Industries
government imposed tariffs or subsidies industries
Domestic industry with potential economies of scale
Strategic Trade Policy
Promotes development of key industries
Increases a country’s trade
National Security
Protects the oil industry in case the Middle eastern Supply is lost
Stockpile commodities for time of crisis
Job protection
Threatened by foreign competition
Raises prices for US consumers and reduces consumer surplus
Cheap Foreign Labor
Workers need to be protected
Retaliation Against Dumping
Dumping-selling goods in a foreign market at a price below production cost
Differences in Environmental Standards
Trade is unfair if regulatory standards aren’t the same
Objectives
The winners of trade restrictions are
the companies within the countries
that issue the trade restrictions. The
losers are consumers.
Objectives
Some arguments are national
security, job protection, cheap foreign
labor, and dumping. Benefits of
international trade outweigh the loss
of jobs in America.
Objectives
Two arguments in favor of
outsourcing are that it lowers the
prices of good or service and help
relations with foreign nations.
Arguments against outsourcing are
that it loses American jobs and
increases our trade deficit.