Chapter 4- Creating Value Through Trade

Question 1

trade

Answer 1

occurs when goods, services, or other resource are exchanged (money may or not be medium of trade)

Question 2

barter

Answer 2

trade without money

Question 3

3 incentives to trade:

Answer 3

1. people differ in tastes
2. people differ in abilities
3. more highly populated markets give rise to better use of resources through specialization

Question 4

trade based on tastes

Answer 4

ex: if two jobs pay the same wage, you will probably still prefer one job rather than the other (based on the kind of work)

Question 5

Trade based on division of labor/extent of the market

Answer 5

if one person wanted to produce a pencil/iPod, it wouldn’t be profitable because of all of the trading necessary to get these products- it is only efficient to engage in all trades necessary to make these products if the markets for them are big enough that millions of units are desired

Question 6

trade based on abilites

Answer 6

individuals have different abilities that they offer to the market as labor (specialized)

Question 7

comparative advantage

Answer 7

when an individual has a low opportunity cost of producing a good in terms of other goods sacrificed

Question 8

transactions costs

Answer 8

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

Question 9

balance of trade

Answer 9

(dollar value of exported goods/services) - (dollar value of imported goods/services)

Question 10

trade surplus

Answer 10

positive balance of trade

Question 11

trade deficit

Answer 11

a negative balance of trade

Question 12

current account

Answer 12

monetary value of the flow of goods and services in a nation

Question 13

capital account

Answer 13

monetary value of financial assets, stocks/bonds of a nation

Question 14

balance of payments

Answer 14

sum of current and capital accounts- always equals 0

Question 15

exchange rate

Answer 15

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

Question 16

Demand for a dollar depends on:

Answer 16

1. how much US stuff the world wants

2. whether people expect the US dollar to gain or lose value

Question 17

Supply of dollars demands on:

Answer 17

1. the Fed creating or destroying money
2. how much of the rest of the world’s stuff people holding dollars wish to have
3. whether people expect the US dollar to gain or lose value

Question 18

gain value, dollar

Answer 18

appreciates

Question 19

protectionists are:

Answer 19

modern day mercantilists

Question 20

tariffs are:

Answer 20

taxes on imports

Question 21

quotas are:

Answer 21

restrictions on quantity of imports citizens can buy

Question 22

subsidies are:

Answer 22

paying domestic firms to produce

Question 23

export subsidies are:

Answer 23

paying domestic firms for each unit of product they export

Question 24

domestic content restrictions:

Answer 24

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

Question 25

anti-competitive manufacturing specifications

Answer 25

requiring that a particular imported product be manufactured with inputs that are difficult to acquire except in the importing country (meant to decrease foreign competition to domestic firms)

Question 26

Who benefits from importing resources?

Answer 26

both domestic producers and domestic consumers

Question 27

dead loss

Answer 27

loss to producer and consumer not compensated for by anyone- caused by quotas