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Flashcards in Chapter Sixteen Deck (21):

Explain imports and exports

Imports are the goods and services that we buy from people in other countries

Exports are the goods and services we sell to people in other countries


What drives international trade

The fundamental force that generates trade between nations is comparative advantage. The basis for comparative trade is divergent opportunity costs between countries. National comparative advantage is the ability of a nation to perform an activity of produce a good or service at a lower OC than any other nation


Explain gains and losses from imports

Domestic consumers gain from imports: compared to a situation with no international trade the price paid by domestic consumers falls and the quantity consumed increases. The domestic consumers gain. The greater the price fall and the increase in quantity bought, the greater is the consumers gain.

Domestic producers lose from imports
Compared to a situation with no international trade, the price received by the domestic producer of the imported goods falls. The quantity sold by domestic producers of the imported good decrease. Domestic producers of the imported goods lose from international trade.


Explain domestic consumer lose from exports

Compared to a situation with no international trade, the price paid by domestic consumers rises and the quantity bought decreases. The domestic consumers lose. The greater the price rise and the decrease in quantity bought the greater is the consumers loss.

Domestic producer lose from exports: compared to a situation with no international trade the price received by the domestic producer of the exported goods rises. The quantity sold by domestic producers of the exported good increases. Domestic producers of the exported good rain from international trade.


Explain net gain

Export producers and import consumers gain. Export consumers and import producers lose. But the gains are greater than the losses. In the case of imports consumers gain what producers lose and the. Gain even more from the cheaper imports. In the case of exports, producers gain what consumers lose and then gain even more from the items exported. So international trade provides a net gain for country.


What are the international trade restrictions


Import quotas

Other import restrictions

Export subsidies


Explain tariffs

A tariff is a tax on a good that is imposed by the importing country when a imported good crosses its international boundary. For example, the government of India imposed a 100 percent tariff on wine imported from Australia so when an Indian wine merchant imports a $10 bottle of Australian wine he pays the undid an government $10 import duty.


Explain import quotas

An import quota is a quantitative restriction on the import of a good that limits the maximum quantity of a good that may be imported in a given period.


What are some other import barriers

Two set of policies influence imports are health, safety and regulation barriers and voluntary export restraints. A voluntary export restraint is like a quota allocated to a foreign exporter of the good. The voluntary export restraint decreases imports just like a quota does but the foreign exporter gets the profit from the gap between the domestic price and the world price.


Explain the export subsidies

A subsidy is a payment made by the government to a producer. An export subsidy is a payment made by the government to a domestic producer of an exported good. Export subsidies bring gains to domestic producers but they result in overproduction In the domestic economy and underproduction in the rest of the world and so create a dead weight loss.


What are the three traditional arguments for restricting international trade

The national security argument

The infant industry argument

The dumping argument


Explain the national security argument

A country must protect industries that produce defence equipment and armaments and those on which the defence industries rely for their raw materials and other intermediate inputs. The argument for protection an be taken too far.


Explain the infant industry argument

The infant industry argument is that it is necessary to protect a new industry from import competition to enable it to grow into a mature industry that can compete in world markets. This argument is based on the concept of dynamic competitive advantage which can arise from learning by doing. Leaning by doing is a powerful engine of productivity growth but this fact does not justify protection.


Explain the dumping argument

Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production. Two reasons why a firm might engage in a
Dumping are predatory price: when a firm sells below cost in the hope of driving out competitors and subsidy: a firm receiving a subsidy can sell profitable at price below cost.

This argument does not justify protection because it is virtually impossible to determine a firms costs, if there was a natural global monopoly it would be more efficient to regulate it than to impose a tariff against it and if the market is truly a global monopoly better to regulate it rather than restrict trade.


What are the four newer arguments for protection

Saves jobs
Allows us to compete with cheap foreign labour
Brings diversity and stability
Penalises lax environmental standards


Explain. Saving jobs

The idea that buying foreign goods costs domestic jobs is wrong. Free trade destroys some jobs and create other better jobs. Free trade also increases foreign incomes and enables foreigners to buy more domestic production. Protection to sae particular jobs is very costly.


explain allows us to complete with cheap foreign labour

The idea that a high wage country cannot compete with a low wage country is wrong. Low wage labour is less productive than high wage labour. And wages and productivity tell us noting about the source of gains from trade which is comparative advantage


Explains brings diversity and stability

A diversified jnvestment portfolio is less risky than one that had all of its eggs in one basket. The same is true for economy production. A disverisifed economy fluctuates less than an economy that produces only one or two goods. The rich advanced economies and developing countries such as Brazil and China have diversified economies and do not have this type of stability problem.


Explain. Penalties lax environmental standards

The idea that protection is good for the environment is wrong. Free trade increases incomes and poor countries have lower environmental standards than rich countries. These countries cannot afford to spend as much on the environment as a rich country can and sometimes they have a comparative advantage at doing dirty work which helps the global environment achieve higher environmental standards


Explain the case against protection.

Those who gain from free trade are the millions of consumers of low cost imports. But the benefit per individual consumer is small. Those who lose are the producers of import competing items. Compared to millions of consumers, there are only a few thousand producers. Because the gain from a tariff is large, producers have a strong incentive to incur the expense of lobbying for a tariff and against free trade. Because each consumers loss is small, consumers have little incentive to organise and incur the expense of lobbying for free trade. The gain from free trade for any one person is too small for that person to spend much time or money on a political organisation to lobby for free trade. each group weighs benefits against costs and chooses the best action for themselves. But the group against free trade will undertake more political lobbying than will the group for free trade


Why is international trade restricted?

The key reason why international trade restricted are popular in Australia and most other developed countries is an activity called rent seeking. Rent seeking is lobbying and our political activity that seeks to capture the gains from trade. You've seen that free trade benefits consumers but shrinks the producer surplus of firms that compete in markets with imports.