Los 17.a Flashcards
(12 cards)
What are the benefits and costs of international trade?
Benefits:
Comparative advantage leads to higher output and wealth by specializing in goods that countries produce more efficiently.
Economies of scale reduce export costs and increase variety, lowering prices and improving quality.
Consumers benefit from greater variety and reduced monopoly pricing.
Costs:
Loss of domestic jobs in certain industries and increased economic inequality, especially when labor costs are lower in exporting countries.
While costs may occur in the short term, long-term gains may offset losses, as workers may transition to other industries.
What are the main types of trade restrictions and their economic implications?
Trade Restrictions:
Tariffs: Taxes on imported goods, raising domestic prices and decreasing imports.
Quotas: Limits on the amount of goods that can be imported, raising prices and benefiting domestic producers.
Export subsidies: Government payments to exporters that increase domestic prices and reduce consumer surplus.
Voluntary export restraints (VERs): Agreements to limit exports, similar to quotas.
Economic Implications:
Tariffs and quotas increase domestic prices, benefiting producers but harming consumers.
Export subsidies benefit domestic producers but may harm consumers both domestically and abroad.
Overall welfare loss from trade restrictions, though tariffs in a large country may increase welfare under certain conditions.
What are the motivations for and advantages of trading blocs, common markets, and economic unions?
Motivations:
Increase economic welfare by reducing trade barriers among countries, allowing for more efficient resource allocation.
Positive effects include increased competition, better specialization, and greater consumer choice.
What are the types of trade agreements, from free trade areas to monetary unions?
Free Trade Area (FTA):
Removes barriers to trade (import/export) among member countries.
Customs Union:
Removes barriers to trade among members and adopts a common set of trade restrictions with nonmembers.
Common Market:
Removes trade barriers among members.
Adopts common trade restrictions with nonmembers.
Removes barriers to the movement of labor and capital among member countries.
Economic Union:
Removes trade barriers among members.
Adopts common trade restrictions with nonmembers.
Removes barriers to the movement of labor and capital.
Establishes common institutions and economic policies.
Monetary Union:
Similar to an economic union but also includes the adoption of a single currency by all member countries.
What is the effect of a tariff on domestic price, supply, and demand?
A tariff increases the price of imported goods, shifting the domestic price up.
This leads to an increase in domestic supply and a decrease in domestic demand
Imports decrease as the difference between demand and supply narrows.
How does a tariff impact welfare and deadweight loss?
The deadweight loss from a tariff is the inefficiency caused by the higher price. The welfare effects include:
Consumer surplus loss: Consumers pay higher prices and consume fewer goods.
Producer surplus gain: Domestic producers benefit from selling more at higher prices.
Tariff revenue: The government gains revenue from the tariff per unit imported, represented by the area between P world and P protection
.
How does a quota impact domestic price, supply, and imports?
A quota raises the price of imported goods., increases domestic supply from and reduces the quantity of imports. Imports are limited to the quota amount,
.
What are quota rents and how do they affect welfare?
Quota rents are the extra profits made by foreign producers who receive the import licenses to export goods under a quota. If the government does not capture these rents, the welfare loss is greater as the quota limits imports but does not provide revenue to the government
How do tariffs and quotas compare in terms of welfare effects?
Both tariffs and quotas reduce imports, increase domestic prices, and decrease consumer surplus. They increase domestic producer surplus, but lead to deadweight loss. However, quotas can create additional inefficiency if the import licenses are not sold to capture the quota rents.
hat is a Voluntary Export Restraint (VER) and how does it affect the importing country?
A VER is an agreement by an exporting country to limit the quantity of a good it exports to another country. This leads to an increase in domestic price (
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protection
P
protection
), reduces imports, and increases domestic producer surplus. However, it leads to a welfare loss in the importing country similar to a quota, as consumers face higher prices and reduced variety.
What is the impact of a Voluntary Export Restraint (VER) on welfare in the exporting country?
In the exporting country, the VER limits the potential for increased export volumes. Foreign producers may benefit from higher prices and profits due to the restriction on supply. The exporting country may not gain tariff revenue, but producers receive higher returns from restricted exports. The exporting country experiences welfare gain through higher producer surplus.
