International Trade Flashcards
(30 cards)
What happens if a country’s domestic price is lower than the world price?
The country has a comparative advantage and will export the good.
What happens if a country’s domestic price is higher than the world price?
The country has a comparative disadvantage and will import the good.
What are the welfare effects of exports?
Producers benefit, consumers lose, and total surplus increases.
What are the welfare effects of imports?
Consumers benefit, producers lose, and total surplus increases.
What is a tariff?
A tariff is a tax on imports that raises the domestic price of the imported good.
Why do countries impose tariffs?
To protect local jobs, infant industries, national security, or as a bargaining chip.
What is the net effect of international trade on total surplus?
Positive – gains exceed the losses.
How do you determine if a country will export or import?
Compare the domestic price to the world price.
What is the impact of tariffs on total welfare?
They reduce total surplus by creating deadweight loss.
Why do countries restrict trade despite overall welfare losses?
To protect jobs, industries, or for political leverage.
What is the starting point of trade analysis in this unit?
A small economy that acts as a price-taker and initially does not engage in trade.
What is the effect of allowing international trade?
It changes domestic prices to align with world prices, leading to imports or exports depending on comparative advantage.
How do you determine if a country has a comparative advantage?
If the domestic price is lower than the world price.
How do you determine if a country has a comparative disadvantage?
If the domestic price is higher than the world price.
What happens to domestic consumption when a country becomes an exporter?
Domestic consumption decreases as goods are sold overseas.
What happens to domestic production when a country becomes an exporter?
Domestic production increases due to higher world prices.
What happens to domestic consumption when a country becomes an importer?
Domestic consumption increases due to lower world prices.
What happens to domestic production when a country becomes an importer?
Domestic production decreases due to competition with cheaper imports.
How is total economic surplus affected by trade?
It increases as long as the country engages in trade based on comparative advantage.
What does a tariff do in terms of market price?
Raises the domestic price of the good by the amount of the tariff.
What is the welfare effect of a tariff on consumers?
Consumer surplus decreases due to higher prices.
What is the welfare effect of a tariff on producers?
Producer surplus increases as they can sell at higher prices.
How does a tariff impact total welfare?
It reduces total welfare due to deadweight loss.
What is the government revenue from a tariff?
It is equal to the tariff amount multiplied by the quantity of imports after the tariff.
