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Macroeconomics Ch. 7

Swalaheen Comparative Advantage and Gains from International Trade

QuestionAnswer
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.
Created by: KAzetapi
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