Chapter 9: Application: International Trade

Question 1

Define ‘World price’.

Answer 1

The price of a good that prevails in the world market for that good.

Question 2

Define ‘Tariff’.

Answer 2

A tax on goods produced abroad and sold domestically.

Question 3

The effects of free trade can be determined by comparing the domestic price without trade to the world price. What does a low domestic price indicate? A high one?

Answer 3

A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter.
A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.

Question 4

Who is better off when a country allows trade and becomes an exporter? Importing?

Answer 4

Exporter: Producers are better off and consumers are worse off.
Importer: Consumers are better off and producers are worse off.
In both cases, the gains from trade exceed the losses.

Question 5

What does a tariff do to a market?

Answer 5

• Moves a market closer to the equilibrium without trade.
• Reduces the gains from trade (produces deadweight loss).
• Domestic producers are better off, government raises revenue, but losses to consumers exceeds gains.

Question 6

What are some arguments for restricting trade?

Answer 6

1. Protecting jobs.
2. Defending national security.
3. Helping infant industries.
4. Preventing unfair competition.
5. Responding to foreign trade restrictions.