Chapter 4

Question 1

Trade is

Answer 1

when goods, services, or resources are exchanged, sometimes using money as a medium of exchange

Question 2

Barter

Answer 2

Trade without money

Question 3

What is comparative advantage?

Answer 3

producing a good if he/she has a lower opportunity cost of producing the good

Question 4

Trade is advantageous when

Answer 4

the external cost of trading for a good is lower than the internal cost of producing the good

Question 5

Trade comes from what three motivations?

Answer 5

differences in tastes, abilities, and the expansion of the extent of the market

Question 6

Transactions costs arise due to what?

Answer 6

the sacrifice that must be made to search out, negotiate, and complete an exchange

Question 7

Mercantilism is

Answer 7

keeping as much money in the country as possible

Question 8

What is balance of payments?

Answer 8

the dollar value of exported goods and services minus the dollar value of imported goods and services

Question 9

Trade surplus is

Answer 9

A positive balance of payments

Question 10

Trade deficit is

Answer 10

A negative balance of payments

Question 11

The current account measures

Answer 11

the monetary value of the flow of goods and services

Question 12

The capital account measures

Answer 12

the net change in asset ownership

Question 13

What is the exchange rate?

Answer 13

The price of one country’s currency in terms of another country’s currency

Question 14

The supply of dollars is determined by

Answer 14

• how many of the rest of the world’s good, services, and financial instruments that people holding dollars wish to have
• whether people expect the dollar to gain or lose value–in terms of other currencies
• the central bank–the U. S. Federal Reserve Bank

Question 15

If the dollar has appreciated it has

Answer 15

gained in value.
An appreciation of the dollar makes it harder to export and more profitable to import. A depreciation of the dollar has the opposite effect.

Question 16

Modern day mercantilists, are sometimes called

Answer 16

Protectionists

Question 17

Tariffs are

Answer 17

taxes on imports, sometimes more than 100% of the import’s price

Question 18

Quotas are

Answer 18

restrictions on the quantity of imports that citizens can purchase

Question 19

Subsidies are

Answer 19

paying domestic firms to produce

Question 20

Export subsidies are

Answer 20

paying domestic firms for each unit they export

Question 21

Domestic content restrictions are

Answer 21

laws that say a product made in the country must be primarily made using resources from the country

Question 22

Anti-competitive manufacturing specifications

Answer 22

require that a particular imported product be manufactured with inputs that are difficult to acquire except in the importing country