The theory of comparative advantage suggest that a
country specialized in producing goods or services for which it has a lower opportunity cost
Assume the United States can use a given amount of its resource to produce either 20 airplanes or 8 automobiles and Japan can employ the same amount of its resources to produce 20 airplanes or 10 automobiles the United States should specialize in what?
A tariff is a
tax on a import product
the principal objective of the WTO is to
reduce the level of all tariffs
What are the arguements for protectionism?
Infant Industry Argument, National Security, Employment Arguement, Cheap Foreign Labor Argument, Free Trade Agreement.
Describe Infant Industry Argument in favor of protectionism
new domestic industry in their forming stage and it is difficult for them to compete with competitors the problem: is that infant and mature industry line is very arbitary or hard to define
Describe National Security
defense industries must be protected so the nation at war will not depend on foreigners essential goods, the problem: the government has stock piles of most goods needed when their at war.
restricting imports increasing domestic jobs in protected inudstries, the problem: higher prices reduces competition loss of imports jobs and ignores that US workers tend to be more productive because of human capital
Cheap foreign labor
U.S Cannot compete with unfair lower wages in other countries
Free Trade Agreement
Nations negotiate reduction of trade barriers
the account that records a nations foreign economic transactions is called
balance of payments
Expenditures for services such as tourism income for foreign investment and foreign gifts are tabulated in the
Suppose a German bank purchases a treasury bond from the US this transaction is recorded
A country that has a lower opportunity cost for producing a good
has a comparative advantage
if one country can produce a good with fewer resources than another country
one big difference between tariffs and quotas is that tariffs
generate tax revenues while quotas do not
what is not included in the current account
U.S capital inflow and outflow
the main explanation of why the cheap foreign labor arguement is poor reasoning for restricting international trade is
workers who get paid less tend to have lower productivity than those who get paid more
why is it important to specialize in trade
more choices goods ad services choices are lower costs, purchase or consumers more lifts the quality of life lifts standard of living world consumptions increase total output.
who are the US largest trading partners
Canada, China, Mexico Japan
a law prohibits trade with another country
a limit on the quantity of a good that may be imported in a given time period calendar year
when was the GATT established and it became what
in 1947 General Agreement on Tariffs and trade then in 1995 became WTO world trade organization
When did the WTO first resolve a conflict
in 2002 President Bush and steel imports to protect jobs, US steel industry against foreign compettionthe WTO favored Europe and Asia allowed retaliation and targeted FL GA and SC
Examples of Free Trade
NAFTA purpose was to link Canada and Mexico economies without any restrictions expired in 15 years
Balance of Payment
a book keeping record all internation transactions between country other countries during a given time
Current Account/ Capital Account
Current: lists all exports and imports and services charges of transactions U.s will always have a trade deficit
Capital, inflows of investmens foreigners investment payment flows, stock, treasury
Explain Exchange Rate
The number of units of one nation's currency that equals one unit of another nation's currency
The Supply and Demand for Dollars
If U.S exports are less popular--> leads to a decrease in the demand for dollars
Leads to value of the dollar falls
If the Japanse exports are less popular--> leads to a decrease in the demand for dollars
Leads to the value of the dollar falls
Define depreciation of currency?
a fall in the price of one currency relative to another
Define Appreciation of currency?
a rise in the price of one currency relative to another
What can we conclude about the depreciation of the dollar?
U.S goods and services cost foreign consumers less, so they buy more U.S exports, at the same time, a weak dollar means foreign goods and services cost U.S consumers more so they buy fewer imports
What can we conclude about the appreciation of the dollar?
U.S good and services cost foreign consumers more, so they buy fewer U.S exprts. At the same time a strong dollar means foreign goods and services cost U.S consumers less, so they buy more foreign imports
What are the 3 basic types of Economies?
Traditional, Command, Market
Define a Traditional Economy?
An economic system that answers the how, what, whom, as it always has been answered traditionally.
What are the strengthens and the weaknesses of the Traditional Economy?
Strengthens: little or no friction no disput
Weaknesses: Restricts individual initiative creativity inovation. lacks the advanced goods
Describe the Economic System?
organization and methods used to determine what goods and services are produced, how they are produced for whom and what is produced
Describe the Command Economy?
an economic system that answers the what, how, and for whom questions by a dictator or central authority.
What are the strengthens and weaknesses of the Command Economy?
Strengthens: change economic quickly, government provides economic security and equity
Weakness: power to be absolutely wrong, quality and variety of goods suffer
Define a Market Economy: Free Enterprise System also known as Capitalistic?
Answers the how, whom, and what using prices determined by intraction of supply and demand.
What is the advantage provided by the Market Economy?
Provides wide varieties of goods at lower cost
What critiscims of Market Economy?
-lack of competition
In the real-world, do we have a single pure economic system?
No, the closest country to a pure economic system is Hong Kong.
Describe a Mix Economy system?
the answered questions what, how, whom mixes traditional, command and market system.
Who wrote the Wealth of Nations?
Adam Smith wrote it in 1776
Adam Smith believed in laissez faire, describe this concept?
He believed that the government should not intervein, the market should be left alone. And the market is self regulating and their is no need for the government.
Describe what Adam Smith meant about "an invisible hand"
He explains that the market is like an invisible hand individual that competes in the market and pursues interest of society
What is the advantage of a market economy?
•It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices
What are criticisms of a marketeconomy?
•lack of competition•externalities•public goods•income inequality
What is a mixed economy?
•An economic system that answers the basic questions through a mixture of traditional, command, and market systems
What is capitalism?
•An economic system characterized by private ownership of resources and markets. Also called the free enterprise system.
What is consumer sovereignty?
•The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets
What is socialism?
•An economic system characterized by government ownership of resources and centralized decision making
Who was Karl Marx?
His criticism of capitalism advanced the theory of communism
What two books did Karl Marx write?
•The Communist Manifesto, 1848•Das Kapital, 1867-1885
What is communism?
•A stateless, classless economic system in which the factors of production are owned by the workers, and people share production according to their needs
What are characteristics ofsocialism?
public ownership and centralization
What are the strengths and weakness we of socialism?
Strengthens: •an equitable distribution of income•rapid growth is possible•no unemployment
Weaknesses: •inefficiencies•Discourages the profit motive and stifles economic growth
An economic system is the organizations and methods used to determine what?
how, what, for whom are goods and services going to be produced
In a command economy, the basic economic questions are answered by
Adam Smith was an advocate of
unrestricted or free trade
In Adam Smith's competitive market economy the question of what goods to produce is determined by the
invisible hand of the price system..
Adam Smith wrote the
pursuit of private self interest promotes the publich interest in a market economy
What is a criticism of capitalism
unequal distribution of income, failure to protect the environment, exploitation of workers
What is a strength of a command based economic system?
Good can be allocated based on need rather than willingness and ability to pay
The term socialism refers to what?
An economic system characterized by government ownership of resources and centralized allocation
Karl Marx was a
19th century German philosopher
In Marx ideal communist society the state
does not exist
Which nation achieved the ideal communist society as described by Marx
No nation has achieved Marx vision of communist society