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Chapter 1

1. For nations with limited resource endowments and limited domestic markets

to export is mandatory in order to obtain the import products desired?

TRUE

2. The increased openness makes a country more vulnerable to disturbances

which occur in the domestic economy whereas it makes it invulnerable to

overseas disturbances.FALSE

3. The first aim of a nation is to create a high standard of living for its

people. The major determinant of a nation’s standard of living is

productivity because it shows the domestic per capita income. TRUE

4. According to the principle of the competitive advantage, if a nation is

bad at producing any goods it can not gain from international competition.

In fact nations can not prosper through trade if they are inefficient.FALSE

5. What is economic interdependence?

The economic interdependence is a concept that reflects the historical

evolution of the economy and the politics of the entire world.

Since the end of the Second World War we have been assisted to a process of

collaboration and cooperation (worldwide speaking) of a constant growing

number of countries. This cooperation is not strictly political, but it is

also economical. In fact all aspects of a nation’economy are more and more

linked to the economies of other countries. We have been assisted to

movements of goods and services, nonetheless of labor, investments,

technologies until the present century, in which this economic

interdependence is not just a matter of the industrialized countries, but it

became an issue for the less developed countries, who want to get benefits

and gains from the international trade, being more present in the global

economy scenario. The late result of this phenomenon is the globalization of

the economy.

Q: It can be said that the US economy has become increasingly integrated into the world economy in recent decades.

Ans. True

Q: US exporters, US ___________, and US creditors stood to lose during the Asian crisis.

Ans. Business that compete with imports for Asian.

Q: Opening the economy to foreign trade tends not to curtail inflationary pressures at home.

Ans. False, it does curtail.

Q: Increased openness makes the domestic economy ______________ to disturbances initiated overseas, as seen in the oil crises of the 1970s.

Ans. Vulnerable

Q: Please define comparative advantage.

Comparative advantage is the concept of two countries that produce different goods where there are gains for them to specialize and trade these products. This may exist even if one of the countries is bad at producing all goods than any other nation. A country can benefit from trade by making a good in which its margin of disadvantage is smaller, or its margin of advantage is greater. CHAPTER 1: The International Economy.

True/False Section. Write down T if is true or F if is false at the end of each question.

In today’s world, some nations perform economic isolation, in other words, all aspects of their economy such as industries, service sectors, levels of income and employment are not linked to the economies of their trading partners F .

The close linkage of nation economies can be mutually worthwhile for trading nations because it permits producers in each nation to take advantage of specialization and economies of scales T.

Fill out the blank with the appropriate word/words within the parenthesis.

Opening the economy to foreign trade tends to curtail inflationary pressures (interdependence among nations, inflationary pressures, gross domestic product) at home.

The major economic objective of a nation is to generate a high standard of living (create jobs, trade with other countries, generate a high standard of living).

Agree or disagree to the following statement.

International trade harmed some workers while benefit some others.

International trade, actually, does not harm any kind of workers. On the contrary, benefits most of them by providing purchasing power to buy goods and services at cheaper costs. What happens is that when a country specializes in producing determined products and gives up some others, those workers lose their jobs in that particular industry. However, they will be able to obtain experience in the economic activities in which their countries have specialized. In other words, the jobs lost in one industry are replaced by jobs gained in another industry. Thus, the labor force of those countries will become more efficient and will be able to produce at cheaper costs because of the comparative advantage against others countries in producing the same products.

1. Opening the economy to foreign trade tends to (reduce) inflationary pressures at the home country.

2. True or False. International trade makes a nation’s productivity decrease by eliminating the need to produce goods and services within the nation itself. (False).

3. True or False. Relative productivity performance in industries is closely linked to globalization. (True).

4. The principle of (comparative advantage) dictates that as long as the relative cost of two goods differ in two nations, there are gains to be made from specialization and trade.

5. Explain how international trade allows a nation to increase its productivity.

Because of the principle of comparative advantage, each country should specialize on producing and exporting those products in which they have a comparative advantage, in other words, which they are more productive, and import those goods in which they are less productive. According to this reasoning, goods (resources) will be channeled from low-productivity uses to high-productivity uses, making the overall production process more efficient. Countries will no longer loose time trying to produce inefficiently some products, since they will import them from more productive countries. For this reason it is said that both, imports and exports, are necessary and vital to increase a country’s productivity.

Recognizing that world economic interdependence is complex in its effects uneven, the economic community has made efforts toward international cooperation.

Competitiveness refers to the extent to which the goods of a firm or industry can compete in the marketplace; this competitiveness depends on the relative prices and quality of products. ( True )

The United States remains among the countries for which exports constitute a large fraction of national output. ( False )

The primary economic objective of a nation is to generate a high and increasing standard of living for its people. ( True )

What are the implications that an increase in international economic interdependence has for the domestic economy:

Inflationary pressures at home, the practice of wage concessions or givebacks, elimination of the crowding out of private investment, the domestic economy becomes vulnerable to disturbances initiated overseas and also affects fiscal policy (taxes and government spending).

1. The reluctance of creditor nations to lend as much as in the past meant that debtor nations were pressed to increase imports or cut exports. (F)

Answer: The reluctance of creditor nations to lend as much as in the past meant that debtor nations were pressed to cut imports or increase exports.

2. Opening the economy to foreign trade tends to curtail inflationary pressures at home. (T)

3. The long-run tread in a firm’s productivity (output per worker hour) relative to those of other firms is a key indicator of changing competitiveness.

4. Relative productivity performance in industries is closely linked to nation’s manager’s education. (F)

Answer: Relative productivity performance in industries is closely linked to nation’s manager’s exposure to global competition.

5. Essay questions:

Company a, headquarter in Boston, managers, directors, shareholders are all in USA,

its employees are mostly in China.

Company b., headquarter in Canada, managers and directors, stockholders are in

Canada, but its employees are in the Silicon Valley, and its product is

Exported to Canada.

Use Reich’s theory, decide which one is more important to "American competitiveness", what USA government should do to boost "American competitiveness".

Answer: B distributes more in "American competitiveness".

Reich defines "American competitiveness" as the capacity of U.S. workers to add values to the international economy irrespective of the nationality the company that employs them. U.S. competitiveness is thus not the profitability or market share of U.S. owned corporations, in stead, it relies on U.S. workforce, the people, their training, skills, and knowledge.

In order to raise the American competitiveness, the U.S. should invest in people, not in nationally defined corporations. The States should open its boundaries to foreign investors, and should increase investment in education, training, research, and infrastructure, so that the U.S. becomes a good location to set up shop for any international firm seeking talented employees.

2. Rising exports of competitive industries make the domestic currency more costly in foreign exchange markets. (T)

3. According to the of comparative advantage theory a nation can benefit from specialization and trade by making a good in which its margin of disadvantage is greater. (T)

4. When domestic industry is insulated from global competition the incentive to innovate is strong and productivity is high. (F)

5. Opening the econmy to foreign trade tends to curtail inflationary pressures at home. (T)

Essay: What are the potential macroeconomics effects of recent Asia crises on the US economy?

The US trade balance hurt as exports to the region suffer and imports become cheaper. The decreasing in value of currencies in Asia make Asian goods relatively cheaper for Americans. This increases the US trade deficit. The US economic growth might suffer as a result of Asian’s economic decline.

The increased openness makes a country more vulnerable to disturbances which occur in the domestic economy whereas it makes it invulnerable to overseas disturbances. FALSE

The first aim of a nation is to create a high standard of living for its people. The major determinant of a nation’s standard of living is productivity because it shows the domestic per capita income. TRUE

According to the principle of the competitive advantage, if a nation is bad at producing any goods it can not gain from international competition. In fact nations can not prosper through trade if they are inefficient. FALSE

What is economic interdependence?

The economic interdependence is a concept that reflects the historical evolution of the economy and the politics of the entire world.

Since the end of the Second World War we have been assisted to a process of collaboration and cooperation (worldwide speaking) of a constant growing number of countries. This cooperation is not strictly political, but it is also economical. In fact all aspects of a nation’economy are more and more linked to the economies of other countries. We have been assisted to movements of goods and services, nonetheless of labor, investments, technologies until the present century, in which this economic interdependence is not just a matter of the industrialized countries, but it became an issue for the less developed countries, who want to get benefits and gains from the international trade, being more present in the global economy scenario. The late result of this phenomenon is the globalization of the economy.

Q: Increased openness makes the domestic economy not vulnerable to disturbances iniated overseas.

A: False

Q: Globalization refers only to trade.

A: False

Q: Opening the economy to foreign trade tends to curtail inflationary pressures at home.

A: True

Q: How does Reich defines American competitiveness?

A: As the capacity of US workers to add value to the international economy irrespective of the nationality of the company that employs them.

2.) T/F Increased openness in the world economy can help to dissipate any

domestic dusturbances in a domestic market.

4.) T/F International trade aloows a nation to increase its' productivity

by eliminating the need to prodcue all goods and services within the nation

Question 3

Share of export in GDP for the U.S. was increased from 1970 to 1998.

TRUE False

Question 4

Which of the following countries is the largest trade partner of the U.S.?

CANADA

Japan

China

Germany

None of the above

Question 5

Which of the following is NOT a result of increasing openness?

to curtail inflationary pressures at home

reduction of the crowding out effect

domestic economy becomes more vulnerable to foreign disturbances

HIGHER UNEMPLOYMENT AT HOME

None of the above

All aspects of a nation economy are linked to the economies of its trading partners T

Competitiveness is the extent to which the goods of a firm or industry can compete in the marketplace T

A nation can simultaneously be competitive and a net exporter F

The exposition of industries to leading technologies of other nations lowers overall productivity F

Why do developing nations maintain that a liberalized trading system works on the disadvantage of developing nations? Explain.

In the twentieth century the prices of developing nations exports have not increased as much as the prices of developing nations imports. This means that developing nations have generally exported goods of lesser value such as raw materials and commodities, while the developed countries have exported technology and other goods with higher value added.]

Globalization has not played a important role in the new international economics scene, in other words it has not been an important factor in the matter? F

The extent at which the goods of a certain firm and industry can compete in the marketplace can be referred as Competitiveness.

How has Globalization helped to integrate the world wide economy?

In today’s open market global economies countries rely on each other’s in order to remain as competitive as possible in the global marketplace. Globalization has helped to break down most of the barriers used by some countries in order to protect their national economy. Globalization has played a very important role in the new global economy, were we see countries trading and exchanging products, technology, and R & D in order to improve their skills and take advantage of this to be considered a competitive force in the international marketplace.

5. How can openness of the economy affect fiscal policy of a government?

Let's suppose domestic residents spend more on imports out of each

dollar of their income. In this situation, an expansionary fiscal policy,

which increases the income of domestic residents, will be transmitted

overseas via increased imports quickly. Thus, the fiscal policy's impact

will be lessened on the domestic economy.

Developing Nations maintain that the liberalized trading system called for by the Developed Nations works to the disadvantage of the Developing Nations.

Economic interdependence often results in strong and uneven impacts among nations and sectors TRUE

Opening the economy to foreign trade usually tends to reduce inflationary pressures.

It is believed that international trade results in higher consumption and investment and lower commodity prices. TRUE

Please give the reason why developing countries believe that liberalized trade system is for the most part to their disadvantage.

Developing nations have argued that the current free trade system among developing and developed nations is to their disadvantage for the following reason.

In the current global trade system, the prices of commodities being exported from developing nations, have not increased as much as the prices of commodities being imported by developing nations.

3-. How can a country benefit from trade?

A country can benefit from trade by producing the goods and services that it has a comparative advantage. It increases the demand for capital and labor in the nation.

4-. A country that has an open trade policy helps to reduce the ________________ at home.

Inflationary Pressure.

5-. Why do Countries trade?

Countries trade because it creates high level of consumption and investments as well as lower prices and a wide range of consumer choices. When countries trade everyone gains form it, the world the countries involved, investors and consumers. Trade is possible by taking advantage of the principle of Comparative Advantage. A country should produce the goods and services, in which it has a comparative advantage over the other countries, even though if the country does not have an advantage over all of the countries in the world.

International trade benefits most workers. True

When a domestic industry is exposed to competition from other countries, it must compete vigorously to survive, thus it has to reduce the productivity advantage of the industry leader. >True.

A competitive nation is one who creates jobs for its citizens. However it is not the number of jobs that will judge the country's strength, whereas it is the salary size that will improve a nation's high or low standard of living. >True.

The concept of comparative advantage is not analogous to exchange between individuals. >False.

What determines a company's nationality? As I already said before, multinationals have no strict identities, so wherever the wind blows more profitably, that is where they will go and by "means <always> justifies the ends" they will later state: i.e. "we are an African company, and we're proud of that". Who controls that, and its political, social, and most of all economic effects? Shouldn't we have an organization such as IMF, WTO, which would only exist to control multinational companies?

1. Throughout the post- World War II era, the world’s economies have become increasingly interdependent in terms of the movement of goods and services, business enterprise, capital and technology.

(T)

2. Which one is wrong about interdependency in international trade;

a. Interdependency curtails inflationary pressures at home,

b. Interdependency fastens domestic wage increases,

c. Interdependency makes the economy vulnerable to external disturbances,

d. Interdependency limits impact of domestic fiscal policy on economy.

(Answer is "b". Actually, interdependency curtails domestic wage increases via imports.)

3. Generally, 1997-98 Asian economic crisis harmed to the US consumers via cheaper imports.

(F) The answer is false, because after the crisis Asian currencies depreciated, and Asian export goods’ prices to the US became lower in terms of US Dollar. Hence, US consumers could purchase cheap Asian products.)

4. Inrenatioanl trade aloows countries to focus on producing what they make efficiently.

(The answer is "T" or true.)

5. Is international trade an opportunity or a thread to workers?

This is a very controversial subject. Some workers can gain from international trade. Especially, workers in export industries are the most beneficiaries from free trade, because free trade allows export industries to sell extra product in foreign markets, which means extra production for country and company and extra work for workers. But some workers can suffer from free trade. Especially, less skilled workers in developed countries cannot compete low-waged countries low-wage labor force. For example, the US textile industry, where low skilled labor force work generally, cannot compete against Chinese textile industry. Textile industry usually is accepted as a less skilled and labor intensified industry. We assume while an average American worker works $2,500 per month, a Chinese worker can earn $300 in the same period. Because of higher labor costs, American textile industry cannot survive without protection.

Briefly, while a Boing worker is enjoying free trade, a textile worker might suffer from free trade.

1. True or False. As a consequence of the today’s economic interdependence the industrialized countries are focused in increased cooperation just with their closer partners. (False)

2. True or False. The size of the domestic market and the country’s resource limitations are factors that decrease the exporting efforts in a particular country. (False)

3. Filling the Blank. The most powerful force transforming the today’s economy is (Globalization). Nations gain from (Trade) because they obtain goods and services more cheaply.

4. True or False. Specialization and Trade are the key factors that a nation can be benefit according with the principle of comparative advantage. (True)

5. What criteria underlie a nation’s international competitiveness? Explain.

While the ability of create jobs for the nation’s citizens is important, the key factor to measure the country’s international competitiveness is the capability of the creation of high paying jobs that improve a nation’s standard of living, increase the domestic per capita income and as a consequence elevate the national income and allow people the option of choosing more leisure instead of working long hours. .

1-what are the advantages of specialization?

2-what are the reasons for int’l trade?

3-int’l trade forces firms to be more competitive in their product prices.

4-_______ has the largest amount of trade with the U.S.

5-_______ has the least affect in the American industry by import competition

1- (T) (F) Netherland’s export was 55 % of Gross Domestic Product by 1997.(T)

2- (T) (F)Economic interdependence curtails inflationary pressures at home.(T)

3- ---------------- allows countries to focus on producing what they make efficiently. (International Trade)

4- Even countries that make nothing ------------ can benefit from specialization.(cheaply)

5- What are the components of interdependence?

a-Trade : Goods ,services ,raw materials and energy.

b-Finance: Foreign debt ,foreign Direct investment, exchange rates

c-Business :Multinational Corporations.

1- Competitiveness depends on the relative prices and qualities of products. (T/F)

2-According to principle of comparative advantage nations that are inefficient or desperately bed at making everything can not expect to gain from international competition and through trade. (T/F)

3- Global trade or open trade leads managers and engineers to be more productive and competitive. (T/F)

1. T/F Opening an economy to foreign trade will tend to increase inflationary pressures in the home economy. False

2. T/F International trade allows a nation to increase its productivity by eliminating the need to produce all goods and services within the nation itself. True

3. According to the principle of ________ ________, as long as the relative costs of two goods differ in two nations, there are gain to be made from specialization and trade; this occurs even if one nation is worse at making all goods than any other nation.

4. T/F According to the McKinsey institute research intense global competition between economies in the main reason for improved labor productivity. True

5. What is the main advantage of international trade among nations?

International trade allows a nation to increase its productivity by eliminating the need to produce all goods and services within the nation itself. A nation can thus specialize in those industries in which its firms are more productive than foreign rivals and can import the goods and services in which its firms are less productive

1. According to the principle of comparative advantages, as long as

relative costs of two goods differ in two nations, there are gains to be

made from specializationand trade. ( the answer is true)

2. After the post world war 2 era , U.S.A.has seen growing interdependence

with the rest of the world in it trade sector , financial markets, owner of

production facilities, and labor force. (the answer is true)

3. The relative productivity performance has nothing to do with

globalization. ( the answer is false)

4. ------------------------- refers to the extent to which the goods of a

firms or industry can compete in the market place. ( compettitiveness)

5. International trade is very important today . What is the opportunity

and threat of international trade to workers?

International trade benefits most workers . It enables them to shop

for consumption goods that are cheapest and permit employers to purchase the

technologies and equipment that best complement their workers' skill.Trade

also allows most worker to become more productive .Moreover , producing

goods for export generates jobs and income for domestic workers .But trade

also has come under attack by some industrial countries where rising

unemployment and wage inequality have made people feel apprehensive about

the future .

1. What is more beneficial for the US economy: a company which is owned by US citizens but most of its employees are foreign even though it’s head quarters are in the US, or a foreign company owned by foreigners where most of its employees are American citizens?

It is important to know that in an economy of increasing international investment, foreign owned companies with manufacturing facilities in the US is more significant to US economic welfare than US owned companies with foreign staff since "American competitiveness has been described as the capacity of US workers to add value to the international economy irrespective of the nationality of the company that employs them". That US and all countries are represented by its people and it’s work force but not necessarily it’s own companies. For the US economic welfare is more important the training , skills and knowledge attained by US workers - who are ultimately be hired by foreign firms. In order for a country to increase its competitiveness it has to invest in its people; education, training, research and infrastructure to set up an attractive location for international firms.

2. More than 250 foreign banks operate in the US; in particular, JAPANESE banks have been the dominant group of foreign banks operating in the US.

3. (T) Opening the economy to foreign trade tends to curtail inflationary pressures at home. US dollar can become more expensive in terms of foreign currencies, largely due to high interest rates since they attract foreign investment to the US and increases the demand for the dollar.

4. (F) Low wages are the key to exporting.

5. (T) By specializing according to their comparative advantage, nations can prosper through trade regardless of how inefficient, in absolute terms, they may be in their chosen specialty.

1. The ________ is used as a rough measure of the importnace of

international trade in a nations economy.

a Gross Domestic Product

b trade barrier

c international trade quota

d trade policy

Answer: a

2. What foreign banks are the most dominant group operating in the US today?

a Japanese

b English

c German

d Swiss

Answer: a

3. The ability to compete in the marketplaces is known as a firms _________

a Market value

b competitiveness

c strategy

d productivity

Answer: b

4. Describe the function of a comparative advantage.

- Comparative advantage describes a situation i where one country is better

fitted to produce a product than another country.

In the same way, the other country has an advantage in their production of

another product. As the comparative advantage given

through special resources, geographics or demographics are used to focus on

producing the product mostly to be competitive, the

two countries can trade with the other in order to make the most out of each

comparative advantage.

5. A common economic consequence of increased openness is:

a inflationary preasure

b higher wages

c more capital

d all of the above

Answer: d

1. What are the elements of economic interdependence? trade, finance,

business.

2. The main objective of any nation is to generate high and rising standard

of living. True.

3. Opening the economy to foreign trade tends to curtail inflationary

pressures at home. True.

4. All workers gain from international trade. False.

5. What is comparative advantage?

If the relative cost of making two items is different in two countries,

each can gain by specializing in the one it makes most cheaply, each has a

comparative advantage in that product.

1. According to the principle of comparative advantages, as long as

relative costs of two goods differ in two nations, there are gains to be

made from specializationand trade. ( the answer is true)

2. After the post world war 2 era , U.S.A.has seen growing interdependence

with the rest of the world in it trade sector , financial markets, owner of

production facilities, and labor force. (the answer is true)

3. The relative productivity performance has nothing to do with

globalization. ( the answer is false)

4. ------------------------- refers to the extent to which the goods of a

firms or industry can compete in the market place. ( compettitiveness)

5. International trade is very important today . What is the opportunity

and threat of international trade to workers?

International trade benefits most workers . It enables them to shop

for consumption goods that are cheapest and permit employers to purchase the

technologies and equipment that best complement their workers' skill.Trade

also allows most worker to become more productive .Moreover , producing

goods for export generates jobs and income for domestic workers .But trade

also has come under attack by some industrial countries where rising

unemployment and wage inequality have made people feel apprehensive about

the future .

Q1: It is generally agreed that the U.S. economy has become increasingly

separated from the world economy (become a close economy) in recent

decades.(T or F)

Ans. F

Q2: For the U.S. an Increased openness makes the domestic economy

vulnerable to disturbances initiated overseas, but increased openness also

helps to dissipate the disturbance that occur in the domestic economy. (T

or F).

Ans. T

Q3: According to the principal of ????. Advantage, as long as relative

costs of two goods differ in two nations, there are gains to be made from

specialization and trade.

Ans. Comparative

Q4: Because of its wide economic diversity, the United States remains among

the countries for which exports constitute a small fraction of national

input. (T or F)

Ans. T

Q5: What are some of the consequences of an open economy?

Opening the economy to foreign trade and increased openness makes the

domestic economy vulnerable to disturbance initiated overseas, as seen in

the oil crisis of the 1970s. But in the same time increased openness also

helps to dissipate the disturbances that occur in the domestic economy, for

example during periods of domestic recession, the rest of the world may

operate somewhat like a sink into which excess domestic output can be

poured.

CHAPTER 2

========================================

1. According to David Hume price-specie-flow doctrine a favorable trade

balance is possible only in a short term, therefore the mercantilist

policies (such as government regulation of trade through tariffs and

quotas) could not provide economic advantages in a long run. TRUE

2. According to David Ricardo, if a nation has a cost disadvantage in the

production of all the goods, this nation can not have any benefits from the

trade. FALSE

3. Two of the Ricardo assumptions state that the 1) the free trade occurs

between nations and there are not government barriers to obstaculate the

trade. 2) There is a transportation cost, in fact the consumers will notice

that the domestically produced good will be cheaper compared to the same

good, but imported. FALSE

4. In the real world partial specialization is the result of the free trade.

TRUE

5. What is the Marginal Rate of Transformation?

It shows how many products a nation has to sacrifice in order to get another

additional unit of another product. This is also called opportunity cost of

production. It represents the ability from a country to shift from the

production of (let¡¦s say) shoes to wine. There is a formula to calculate

it, which is: ƒ´ wine on ƒ´ shoes. This formula tells how many units of

shoes I have to sacrifice in order to add a bottle of wine in my production.

True/False Section. Write down T if is true or F if is false at the end of each question.

According to Adam Smith’s principle of absolute advantage, a nation will import those goods in which it has an absolute cost disadvantage; it will export those goods in which it has an absolute cost advantage T.

According to David Ricardo’s comparative advantage principle, if a nation has an absolute cost disadvantage in the production of both goods, there is no room for trade with the other nation F.

The principle of comparative advantage under constant costs suggest that trading nations will achieve the greatest possible gains from trade when they completely specialize (do not specialize, completely specialize, hire someone else) in the production of the commodities of their comparative advantage.

In the world, nations tend to experience increasing cost-conditions (increasing cost-conditions, lacking of trade, products).

Sustain the following statement.

5) It has been said that none of the absolute and comparative advantage’s assumptions can be maintained in a study of the real world. Explain why?

Because apart from land, factors of production are not geographically immobile and fixed in their location, although there are differences in the degree of mobility of different factors. In general, for example, capital is far more mobile geographically than labor, while skilled labor tends to be more mobile than unskilled labor. Such differential factor mobility is an important element in the shifting global patterns of economic activity. In addition, technology plays an important influence on production (through its impact on the production function) and, therefore, on trade. Finally, economies of scale and knowledge are exceptionally important in creating differential advantage rather than location of factors of production.

Q: Under constant opportunity costs, a nation will specialize in the product of its comparative advantage.

Ans. True

Q: _________, a country’s transformation schedule represents the possible points along which its productions and consumption occur.

Ans. Autarky

Q: What is the reason for partial specialization?

The reason behind partial specialization is the increasing cost constitutes a mechanism that forces cost in two trading nations to converge. The reason is because unit costs rise as each nation produces additional amounts of its export good. As the cost differentials among nations are eliminated, the basis for continued specialization disappears.

Question 1: Describe Adam Smith’s trading principle of absolute advantage

Answer: Adam Smith said that international trade and specialization would be very beneficial in a world of two-countries and two-products when one country has an absolute cost advantage in one product and the other country has and absolute cost advantage in the other product. This way the two countries could export to the other country the goods where they have an absolute advantage, and import from the other country the goods where they have an absolute disadvantage. Therefore both nations would benefit. The key issue is that each nation must have a product that it is absolutely more efficient in producing than its trading partner. Countries need to specialize on those goods.

Question 2: Adam Smith was the founder of the principles of Absolute advantage and Comparative advantage (True/False)

Answer: Adam Smith was the founder of the principle of Absolute advantage only. David Ricardo was the founder of the principle of Comparative advantage.

Question 3: Countries often develop comparative advantages resulting from natural advantages (True/False)

Answer: Countries may also have acquired advantages.

Question 4: According to the principle of comparative advantage when a large number of goods are produced by 2 countries, each country ______the product(s) in which it has the greatest comparative______, and _______ the product(s) in which it had the greatest comparative _______. (Answer: imports-disadvantage, exports-advantage)

Question 5: The gains from specialization and trade are discussed in terms of ______ and ______ gains. (Answer: production, consumption)

Claudia Naffah

1. True or False. Mercantilists didn’t use tariffs, quotas and other commercial policies to minimize imports in order to obtain a trade balance surplus. (False).

2. According to Adam Smith (labor) is the only factor of production.

3. (David Ricardo) developed a principle to show that mutually beneficial trade can occur even when one nation is absolutely more efficient in the production of all goods.

4. True or False. The Marginal Rate of Transformation (MRT) or opportunity cost shows the amount of one product a nation must sacrifice to get one additional unit of another product. (True).

5. Explain how some assumptions made in David Ricardo’s Theory have changed.

Factors of production were considered immobile and fixed geographically. This meant that each country was endowed with specific factors of production, which constituted its comparative advantages, and those resources were to stay in the country. Additionally, it was assumed that countries were not capable of mobilizing the factors of production from one country (place) to another. So only the country that had the factor endowment would have a comparative advantage over the others and was supposed to produce and export the finished product. This supposition is clearly not valid anymore, since transportation and communications systems have improved (in terms of costs, distance, speed, infrastructure, quality, etc.), and liberalization of trade have also given freedom of mobility not only for primary resources, but also for capital flows, labor, intermediate goods, capital goods, etc. Transport costs were assumed to be zero, considering trade as a "space -less" operation. Although improvements in communications, infrastructure and transportation systems have dramatically caused a sharp reduction in costs, these costs are never to be deemed zero, and the "shrinkage" of the world caused by all these enhancements does not mean that there is no distance between different places in the world, so that transportation costs are to be considered when talking about trade. Technology is another factor of production, which in the comparative advantage theory, is assumed to be given and to be geographically fixed. This supposition is not valid, since technology is originated by men, who also spread it throughout the world however they want to. The classical trade theory of comparative advantage denies the existence of economies of scale, as it is based on the assumption of perfect competition. Economies of scale, both internal and external, are unmistakable in today’s world, as they represent reductions of unit costs caused by the increase of the firm’s size, or resulting from the scale of an entire industry. Economies of scale appear as a consequence of the increasing volume of output, reducing the unit production costs.

The Mercantilist (1500 – 1800) believed that a nation could regulate its domestic and international affairs so as to promote its own interest. ( True )

Adam Smith, a classical economist, was a great believer of free trade on the grounds that it promoted the international division of labor.

According to Adam Smith, each nation benefits by specializing in the production of the good that it produces at a lower cost than the other nation, while exporting the good that it produces at a higher cost. ( False )

The principal of comparative advantage, in which countries often develop a comparative advantage resulting from natural advantages and acquired advantages, was the principal of David Ricardo.

What is the modern trade theory and what are the gains:

The modern trade theory is the product of an evolution of ideas in economic thought in particular the thoughts of the mercantilist, Adam Smith and David Ricardo. It reasons that if in the absence of trade the comparative cost (prices) of two products differ between nations, both nations can benefit from international trade.

The gains from trade stem from increase levels of production and consumption brought about by the international division of labor and specialization.

Chapter 2. Foundations of modern trade theory

1. According to Adam Smith’s absolute advantage theory, a nation will import those goods in which it has a comparative disadvantage; it will export those goods in which it has a comparative advantage. (F)

Answer: According to Adam Smith’s absolute advantage theory, a nation will import those goods in which it has an absolute disadvantage; it will export those goods in which it has an absolute advantage.

2. Ricardo’s theory depends upon the assumption that: Labor can move freely among industries within a nation, but is incapable of moving between nations (T).

3. The definition of MRT on transformation schedules is: the amount of one product a nation must sacrifice to get one additional unit of the other product.

The definition of MRS on indifferent curves is: the rate at which the substitution occurs.

4. In the increasing-cost model, the partial specialization is result from the increasing cost decrease the demand of import nation. (F)

Answer: The reason for partial specialization is that increasing costs constitute a mechanism that forces costs in two trading nations to converge.

5. _________________________________________________________________

Before After Net Gain

Specialization Specialization

_________________________________________________________________

Auto PC Auto PC Auto PC

United States 40 40 120 0

Japan 40 80 0 160

World

_________________________________________________________________

a) Fill in the blank of the table.

b) Explain the term: autarky.

c) Give a brief description why the specialization can result in consumption gains in both countries.

Answer: a)

Before After Net Gain

Specialization Specialization

_________________________________________________________________

Auto PC Auto PC Auto PC

United States 40 40 120 0 80 -40

Japan 40 80 0 160 -40 80

World 80 120 120 160 40 40

_________________________________________________________________

b) Autarky means the absence of trade.

C) In autarky, the consumption alternatives of USA and Japan are limited to points along their domestic transformation schedules. The exact consumption point for each nation will be determined by the tastes and preference in each country. But with specialization and free trade, the two nations can achieve post-trade consumption schedules; that is they can thus consume more PC and more autos than they could consume in autarky, thus, trade can result in consumption gains for both countries.

1. Changes in demand affect unit production costs and prices under-constant conditions. (F)

2. According to the principle of comparative advantage, complete specialization occurs under constant opportunity. (T)

3. Taking advantage of specialization can result in production gains for both countries. (T)

4. Transformation schedule, also called production possibilities schedule. (T)

5. David Ricardo emphasized the importance of absolute cost differences among nations. (F)

Essay: Identify the basic questions with which modern trade theory is concerned?

Modern trade theory seeks to answer the following questions: 1. Why do nations export and import certain products? 2. At what terms of trade are products exchanged in the world market? 3. What are the gains from international trade in terms of production and consumption? In other words, Modern trade theory is primarily concerned with determining the basis for trade, the direction of trade, and the gains from trade.

According to David Hume price-specie-flow doctrine a favorable trade balance is possible only in a short term, therefore the mercantilist policies (such as government regulation of trade through tariffs and quotas) could not provide economic advantages in a long run. TRUE

According to David Ricardo, if a nation has a cost disadvantage in the production of all the goods, this nation can not have any benefits from the trade. FALSE

Two of the Ricardo assumptions state that the 1) the free trade occurs between nations and there are not government barriers to obstacolate the trade. 2) There is a transportation cost, in fact the consumers will notice that the domestically produced good will be cheaper compared to the same good, but imported. FALSE

In the real world partial specialization is the result of the free trade. TRUE

What is the Marginal Rate of Transformation?

It shows how many products a nation has to sacrifice in order to get another additional unit of another product. This is also called opportunity cost of production. It represents the ability from a country to shift from the production of (let’s say) shoes to wine. There is a formula to calculate it, which is: D wine on D shoes. This formula tells how many units of shoes I have to sacrifice in order to add a bottle of wine in my production.

3. Q: Ricardo’s trading principle emphasizes the demand side of the market.

A: False

Q: Unlike the mercantilists, Adam Smith maintained that, all nations can gain from free international trade.

A: True

Q: What did the mercantilists believe?

A: They believed that the only way to promote a nation’s interest would be to reach a surplus of exports over imports, i.e. a favorable trade balance.

1.) The _______ is why nations export and import certain products.

2.) What are the mercantilists' thoughts? Explain their solution.

3.) T/F Adam Smith was not an advocate of free trade (open markets).

4.) The _______ assumes that within each nation , (1) labor is the only

factor of production and is homogenous (of one quality), and (2) the cost or

price of a good depends exclusively upon the amount of labor required to

produce it.

5.) According to David Hume's___________ , a favorable trade balance was

possible only in the short run, for over time it would automatically be

eliminated.

Question 1

Explain sources of "gains from trade"?

Production gains from specialization: According to comparative advantage, countries employ resources in an industry in which the country has a higher efficiency (lower opportunity cost). As a result of international specialization, total production on global scale increases while using the same total resources.

Consumption gains from trade: Consumers pay less amount of money for the same goods that they would consume in an autarky. Production gains due to specialization would be transferred into lower prices.

Question 2

Adam Smith published its famous book Wealth of Nations in 19th century.

True FALSE

Question 3

Adam Smith developed "comparative advantage" theory.

True FALSE

Question 4

"Countries should specialize according to their comparative advantage based on lower opportunity cost". Which of the following economists formulated this theory.

Karl Marx

Adam Smith

DAVID RICARDO

John M. Keynes

Question 5

Which of the following was the dominant economic understanding between 1500 and 1800 in the world?

Classic economy

MERCANTALISM

Monetarism

Keynessian school

Adam Smith stated in his book " The Wealth of Nations " that trading partners could simultaneously enjoy higher levels of production and consumption with trade T

According to Ricardo’s Comparative advantage principle if a nation has an absolute cost disadvantage in the production of both goods there is no basis for mutually beneficial trade F

The marginal rate of transformation shows the amount of one product a nation must sacrifice to one additional unit of the other product T

Competitive advantages accruing to manufacturers of a particular product in a particular country can vanish over time when productivity growth falls behind that of foreign competitors T

In brief words explain the empirical findings of economists how have tested Ricardo’s comparative Advantage theory? What is this theory limitation? The empirical testing suggested that nations tend to export goods in which their labor productivity is relatively high, the study showed negative correlation between relative cots and relative unit labor costs.

The theory has the serious limitation that it assumes labor as the only factor input, when allowance for production and distribution costs should be made.

The principle proposed by Adam Smith of absolute advantage states that a nation will import those goods in which it has absolute cost disadvantage and it will export those goods in which it has absolute cost advantage? T

If a country decides to reduce the volume of trade, trade restrictions tend to reduce the gains from trade? T

Exit barriers can be defined as cost conditions that will prolong exit rational response by any given company.

When a country decides to sacrifice the amount of a given product to get one additional unit of other product, we can say that they are incurring in Marginal rate of transformation.

Favorable trade balance refers to a Surplus of exports over imports.

Ricardo’s comparative advantage principle states that even if there is a cost disadvantage in production of goods among trading partners basis for mutual trade benefit may exist. TRUE

Autarky is considered to be the absence of trade among nations.

The law of competitive advantage asserts that with trade, each country will find it favorable to specialize in the production of one commodity of its competitive advantage and will trade portion of such good for a good of its competitive disadvantage. TRUE

List the 3 question modern trade theory seeks to answer.

1-What constitutes the balance of trade?

2-At what terms of trade are products exchanged in the world market?

3-. It is possible for a nation to have no absolute advantage in all goods and services?

TRUE

4-. It is possible for a country to have a comparative advantage in all goods and services?

FALSE

5-. By using an example explain the difference between Absolute and Comparative Advantage.

Country A can be more productive than other countries in the automobile industry and in the computer processor industry. It is better for country A to import from country B computer semiconductors and export automobiles to the rest of the world, because it is cheaper to produce computer semiconductors in country B.

______ _______ developed a principle to show that mutually beneficial trade can occur even when one nation is absolutely more efficient in the production of all goods. >David Ricardo

There are two reasons for constant costs: the factors of production are perfect substitutes for each other, and all units of a given factor are of the same quality. > True.

In ________ a country's transformation schedule represents the possible points along with its production as well as consumption will occur. >Autarky= Greek word, means: having plenty of, as much as needed.

The reason for partial specialization is that increasing costs constitute a mechanism that forces costs in two trading nations to converge. >True.

Having a given number of world natural resources, international trade may lead to higher world output than no trade. That happens because all countries can specialize in something, that could be: low wages, high skilled labor, natural resources, economies of scale, low environmental standards, aggressive industrial policies, etc. However, there are countries mostly in the Sub-saharan region of the African continent which can not specialize in anything, not even in stages of production. Are we supposed to help them, or just take advantage of them by exploiting its uneducated poor people? Because that is the only way for some of those countries to achieve some level of competitiveness. In a world of so many multinationals with so much money on their hands, shouldn't they invest in some countries (unselfishly and with some generosity) for the future?

1. According to the Mercantilists, if a country could achieve a favorable trade balance (a surplus of exports over imports), it would enjoy payment received from rest of the world in form of gold and silver.

(T)

2. According to Adam Smith’s absolute advantage theory, if a nation imports goods in which it has as absolute cost disadvantage and exports goods in which it has absolute cost advantage, the country will benefit from foreign trade.

(T)

3. Ricardo wrote Wealth of Nations in 1776.

(F) (Adam Smith wrote Wealth of Nations)

4. Ricardo’s trade theory is known as the principle of comparative advantage, in which if a country which has absolute disadvantage in the production of all goods specializes and exports the goods in which it is relatively less inefficient (where its absolute disadvantage is least), and imports other goods, the country can benefit international trade.

(T)

5. Why are the Mercantilists wrong?

According to the Mercantilists, if a country could achieve a favorable trade balance (a surplus of exports over imports), it would enjoy payment received from rest of the world in form of gold and silver. Such revenues would contribute to increased spending and a rise in domestic output and employment. To promote a favorable trade balance, the mercantilists advocate government regulation of trade. Tariffs, quotas, and other commercial policies were proposed by the mercantilists to minimize imports in order to protect a nation’s trade positions.

By the eighteen-century, the economic policies of the mercantilists were under strong attack. According to price-specie-flow doctrine, a favorable trade balance was possible only in the short run, for over time it would be automatically eliminated. If a country has trade surplus, which means gold and silver inflow the country is higher than gold and silver outflow, the country’s gold and silver amount increases. Due to money supply was based on total gold and silver amount, trade surpluses caused to increase total money amount and consequently inflation in the economy. After rising general price level, country’s trade surplus disappears.

1. True or False. David Ricardo’s model of comparative advantage, based on constant opportunity costs, requires the use of import barriers to preserve domestic production in critical sectors. (True)

2. True or False. Adam Smith’s principle of absolute advantage is based on the restrictive trade policies in order to achieve trade surpluses instead of advocate policies of free trade to secure benefits of lower-cost imports. (False)

3. True or False. The Marginal rate of transformation shows the opportunity cost and it’s the amount of product a nation must sacrifice to get one additional unit of the other product. (True)

4. Filling the Blank. When a large number of goods are produced by two countries the comparative advantages among them requires that the goods be ranked by the degree of comparative cost. Each country (Exports) the product(s) in which it has the greatest comparative disadvantage and (Imports) the product(s) in which it has the greatest comparative advantage.

5. According with Smith’s principle of absolute advantage, and David Ricardo principle of comparative advantage, which is the most important element that isolates these principles from the reality? Explain.

Based upon the Labor Theory of Value, which assumes that labor is the only factor of production and is homogeneous, and the cost of a good depends exclusively upon the amounts of labor required to produce it; both principles have severe limitations because are considering the labor the only input to production, and forget that some important factors are also involved and offering to different countries advantages in the production of its trade goods.

1- (T) (F)Transformation Schedules shows combinations of products that can be made if only one factor are used efficiently.(F) all factors

2- (T) (F)Net production gains from specialization do not always occur because of constant opportunity costs.(F) Under assumption constant costs it is always possible.

3- One factor that limits specialization is the --------------- governments impose on the movement of commodities among nations. (restrictions)

4- In smith’s absolute advantage theory of trade , ----------- will gain from trade if each exports that product for which it has lower labor costs. (both countries)

5- What is the price-specie-flow doctrine ?

D. Hume developed a price –specie-flow doctrine to show that national use of trade barriers to achieve trade surpluses would be self-defeating ,since the revenue inflows would soon raise domestic price levels ,making the nation’s export less competitive and eventually converting the trade surplus into a balanced trade position.

1- While mercantilists asserted that world economic volume is a fixed quantity, classical economists asserted that world’s economic volume is not static, but because of specialization and division of labor increase the world output. (T/F)

3- If a country is not as efficient as the other country in production of a good, its lower wage rate is more than compensates for its inefficiency. (T/F)

4- According to production possibilities schedule, a country can produce various alternative of two goods when it use its all resources. (T/F)

1. T / F According to the comparative-advantage price, even if a nation has an absolute cost disadvantage in the production of both goods, a basis for mutually beneficial trade may still exist. True

2. The ________ ____ __ ____________ shows the amount of one product a nation must sacrifice to get one additional unit of the other produce.

Marginal rate of transformation (MRT)

3. What are the two reasons for constant cost and what does it imply.

The first reason is the factors of production are perfect substitutes for each other. The second is that all units of a given factor are of the same quality. This implies that as a country transfers resources from the production of a product such as wheat into the production of say autos, of vice versa, the country will not have to resort to resources that are less well suited for the production of the commodity. Therefore, the country must sacrifice exactly the same amount of wheat for each additional auto produced, regardless of how many autos it is already producing.

4. T / F The law of comparative advantage asserts that with trade each country will find it favorable to specialize in the production of the commodity of its comparative advantage and will trade part of this commodity for the commodity of comparative disadvantage. True

5. The reason for _________ ______________ is that increasing costs constitute a mechanism that forces cost in two trading nations to converge. When cost differentials are eliminated, the basis for further specialization ceases to exist.

Partial specialization

1. We can talk about two kinds of comparative advantage: NATURAL and

ACQUIRED.

2. TERMS OF TRADE defines the relative prices at which two products are

traded in the marketplace.

3. If a country has absolute disadvantages for all products, then it has

no comparative advantage. (F)

4. Transformation schedule illustrates the minimum output possibilities of

a nation. (F)

5. How can the gains from trade be distributed?

The country whose transformation schedule is closer to the terms

of trade line will gain more from trade. Thus, the country whose rate of

transformation is closer to terms of trade will get bigger gain from

trade. In other words, the country whose relative domestic price is

further from the international price will get more gain.

CHAPTER 2: Foundations of Modern Trade Theory.

True/False Section. Write down T if is true or F if is false at the end of each question.

According to David Ricardo’s comparative advantage principle, if a nation has an absolute cost disadvantage in the production of both goods, there is no room for trade with the other nation F.

Fill out the blank with the appropriate word/words within the parenthesis.

In the world, nations tend to experience increasing cost-conditions (increasing cost-conditions, lacking of trade, products).

Sustain the following statement.

5) It has been said that none of the absolute and comparative advantage’s assump tions can be maintained in a study of the real world. Explain why?

============

1.According to the------------------------------ , the central question was

how a nation could regulate its domestic and international affairs so as to

promote its own interests. ( mercantilists)

2.According to -----------------------------------, a favorable trade

balance was possible only in short run, for over time it would automatically

be eliminated.( price -specie-flow doctrine)

3.------------------------------, assumes that within each nation, 1. labor

is the only factor of production. 2. the cost of good depends upon the

amount of labor required to produce it. ( labor theory of value )

4.According to Smith, each nation benefits by specializing in the production

of the good that it produces at a lower cost than the other nation, while

importing the good that it produces at a higher cost. ( the answer is true

5.What is the difference between the principal of absolute and principal of

comparative advantages?

The principal of absolute advantage: in a two-nation, two- product world,

international trade and specialization will be beneficial when one nation

has an absolute cost advantage in one good and the other nation has an

absolute cost advantage in the other good. On the other hand, for the

principal of comparative advantage even if a nation has an absolute cost

disadvantage in the production of both goods, a basis for mutually

beneficial trade may still exist. The less efficient nation should

specialize in and export the good in which it it is relatively less

inefficient.

1. (T) The labor theory of value assumes that with in each nation, labor is the only factor of production and is homogeneous, and the cost or price of a good depends exclusively upon the amount of labor required to produce it.

2. In a two nation, two-product world international trade and specialization will be beneficial when a nation will import those goods in which it has a comparative disadvantage; and it will export those goods in which it has an absolute cost advantage, this is what Smith called THE PRINCIPLE OF ABSOLUTE ADVANTAGE.

3. (F) It is possible to have a comparative advantage in nothing.

4. Why would a country import a good in which it has a comparative disadvantage?

It is well known that the principle of comparative advantage under constant costs suggests that trading nations will achieve the greatest possible gains from trade when they specialized, however there is something called trade restrictions where governments impose limitations on the movements of commodities among nations, basically because of national security issues, this might be the reason why countries might have to import a good in which it has a comparative disadvantage.

1. When a nation has a surplus of export over imports this is called:

a export value

b extrem export

c favorable trade balanse

d low import factor

Answer: c

2. Who was the first exonomist to promote the idea of free trade?

a Adam Roberts

b Will Smith

c Jean Austin

d Adam Smith

Answer: d

3. The "principle of comparative advantage" is a trade theory written by:

a David Kemp

b Adam Smith

c David Ricardo

d David Andersen

Answer: c

4. The maximum amount of any two products an economy can produce can be

illustrated with a:

a transformation schedule

b production analyzes

c maxi schedule

d transformation prognosis

Answer: a

5. What is a typical reaction of loss of comparative advantage to an

economy?

- As a country looes its comparative advantage the result is a higher

cost/time line on the production. This means that

the products are more expensive and timely to produce, forcing the economy

to adjust to a higher price and probably loss of

market shares to another competitiors. As the foriegn markets slowly start

to eat up the market shares, the result will be a hard

impact on the domestic market, decreasing its size, jobs and wages.

1. The slope, or marginal rate of transformation shows the opportunity cost

of making more of one good. True.

2. Production gains from trade. False.

3. What are the three phases on the historical development of trade theory?

mercantilism, absolut advantage, comparative advantage.

4. When costs differentials are eliminated, the basis for further

specialization ceases to exit. True.

5. What are constant opportunity costs?

Constant opportunity costs suggest that the relative cost of one product

in terms of the other will remain the sa1. According to the principle of comparative advantages, as long as

relative costs of two goods differ in two nations, there are gains to be

made from specializationand trade. ( the answer is true)

2. After the post world war 2 era , U.S.A.has seen growing interdependence

with the rest of the world in it trade sector , financial markets, owner of

production facilities, and labor force. (the answer is true)

3. The relative productivity performance has nothing to do with

globalization. ( the answer is false)

4. ------------------------- refers to the extent to which the goods of a

firms or industry can compete in the market place. ( compettitiveness)

5. International trade is very important today . What is the opportunity

and threat of international trade to workers?

International trade benefits most workers . It enables them to shop

for consumption goods that are cheapest and permit employers to purchase the

technologies and equipment that best complement their workers' skill.Trade

also allows most worker to become more productive .Moreover , producing

goods for export generates jobs and income for domestic workers .But trade

also has come under attack by some industrial countries where rising

unemployment and wage inequality have made people feel apprehensive about

the future .

me no matter where a nation chooses

to locate on its transformation schedule.

In the integrating world economy benefits of trade have outweighed losses T

1. As economies become more integrated into the world economy, there is a bigger role for the government F

2. Industrial countries are rapidly loosing jobs manufacturing jobs to low wage countries F

3. When one country rises the others loose F

4. In China’s case study, What was the recipe for its success?

As other nations industrialized in the area, China became attractive for its cheap labor and space availability. This process created jobs and raised the living standards for Chinese workers. The textile industry from Hong Kong migrated to China along with its Know-how and technology, this enabled thousands of workers to learn a new trade that would benefit the country' exports.

===================================

1. If a nation is in autarky, it will achieve its equilibrium at the point

where its community indifference curve is tangent to its transformation

schedule. Here the nation experiences its highest attainable level of

satisfaction. TRUE

2. John Stuart Mill demonstrated that the desire of a country to trade at

given terms of trade is determined by comparing its optimal production point

and its optimal consumption point. TRUE

3. The theory of reciprocal demand states that the price at which trade

takes place does not depend on the interacting demands of the trading

partners. FALSE

4. The commodity terms of trade measure the relationship between the prices

that a country gets for its exports and the prices that it has to pay for

its imports.

5. What is the immiserizing growth?

If we consider a developing country, whose main source of business is

agriculture, and taking advantage of its competitive advantage it starts to

concentrate in the export of the agriculture products, by increasing the

volume of the trade, this growth will tend to worsen the nation’s terms of

trade, reducing therefore some gains from the trade. In an extreme case the

terms of trade could go so down to that even with economic growth, the

country will end up with an indifference curve after trade that it had

achieved before trade. In this case we talk about immiserizing growth.

Question 1: Construct the indifference curves of consumers for two products and explain

Answer: The indifference curves consider graphically the role of personal tastes and preferences in demand analysis. An indifference curve depicts the various combinations of two commodities (wheat and autos) that are equally preferred in the eye of the consumer that is, the consumer gets the same satisfaction level from them. The first indifference curve tells us that the consumer receives the same satisfaction by consuming 6 bushels of wheat and 1 auto as he/she does by consuming 3 bushels of wheat and 2 autos and so on. All the combination points on the indifference curve derive the same level of satisfaction for the consumer.

Question 2: The best description of the gains from trade that Ricardo could provide was only the _________ within which the equilibrium terms of trade would fall. (Answer: outer limits).

Question 3: A nation will benefit from trade when it is able to reach a higher indifference curve than could be achieved with trade (True/False)

Answer: A nation will benefit from trade when it is able to reach a higher indifference curve than could be achieved without trade.

Question 4: An improvement in a nation’s terms of trade requires that the prices of its _____ rise relative to the prices of its ______over a given period of time. (Answer: exports, imports).

Question 5: The marginal rate of substitution is equal to the indifference curve’s absolute slope (True/False).

Chapter 3

Q: MRS or marginal rate of substitution is the rate at which substitution occurs.

Ans. True

Q: The theory of reciprocal demand states that the actual price at which trade takes place depends on the trading partner’s interacting demands.

Ans. True

Q: _________ is the most frequent used measure of the direction of trade gains.

Ans. Commodity terms of trade

Q: __________ and ___________ conditions determine the basis for trade and the direction of trade.

Ans. Supply, Demand

5. Q: What is the optimal level of production and consumption for a nation?

If the nation wishes to maximize satisfaction, it will attempt to consume some combination of goods on the highest indifference curve that it can reach. If tries to each the autarky equilibrium of production an consumption.

True/False Section. Write down T if is true or F if is false at the end of each question.

The autarky (absence of trade) equilibrium helps us to determine what is the optimal level of production and consumption for a nation T.

For gainful international trade to exist, a nation must achieve a post-trade consumption location at least equivalent to its autarky point along with its domestic transformation schedule T.

Fill out the blank with the appropriate word/words within the parenthesis.

In order for two nations to obtain equal gain from trade they should approximately be the same size (the same size, completely different, it does not matter).

A nation will actually benefit from trade when it is able to reach a higher level of satisfaction (economic performance, level of satisfaction, employment rate) than could be achieved without trade.

Sustain the following statement.

When there is absence of monopoly elements working in the markets, how could small nations benefit from trade?

Nations can benefit from trade in those conditions by exporting as much as its commodities as it wishes and as a consequence perform gains from it. On the contrary when there are barriers, restrictions or monopoly signs it is very difficult gain from trade and take advantage of the welfare that it brings to countries. However, when a small nation trades with a large one, it has to adapt the price to local circumstances (price taker) because its volume of products is not going to modify the local price levels. Consequently, if one nation is much larger than the other is, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade. Thus, when nations are different sizes, there is a strong possibility that the larger nation will continue to produce its comparative-disadvantage because the smaller nation is unable to supply all of the world’s demand for this product.

6. The (indifference curve) represents the various combinations of two commodities that are equally preferred in the eyes of the consumer – that is, yield the same level of satisfaction.

7. True or False. The Marginal Rate of Substitution (MRS) is equal to an indifference curve’s absolute slope. (True).

8. True or False. Under indifference-curve analysis, the gains from trade are measured in terms of number of goods consumed rather than in terms of total satisfaction. (False).

9. True or False. John Stuart Mill’s principle of reciprocal demand states that the equilibrium terms of trade between two nations will be established by the intersection of their respective offer curves. (True).

10. Explain the concept of commodity terms of trade or barter terms of trade.

Commodity terms of trade measure the direction of trade gains. It is the relationship between the prices a nation obtains from its exports and the price it has to pay for its imports. As the prices of its exports increase relatively to the price of its imports, it is said that there has been an enhancement in the country’s terms of trade. Contrary, a relative rise in the price for imports to the price from exports causes weakening on the nation’s terms of trade.

Modern trade theories contends that the pattern of world trade is govern by international differences in supply conditions and demand conditions.

Offer curves can be use to demonstrate the determination of the terms of trade between two nations. ( True )

The commodity terms of trade (also known as the barter terms of trade) is the most frequently used measure of direction of capital gains. ( False )

An improvement in a nation’s terms of trade requires that the prices of its exports rise relative to the prices of its imports over the given time period.

Explain what Ricardo’s theory of trade relied on and who addressed the equilibrium terms of trade better:

Ricardo’s trade theory relied only on supply analysis so he was not able to determine precisely the equilibrium terms of trade. But, this limitation was then addressed by John Stuart Mill in his theory of reciprocal demand. The theory suggests that before the equilibrium terms of trade can be established it is necessary to know both nations’ demands for both products.

Chapter 3. International Equilibrium

1.Ricardian theory relied solely on the role of demand, but ignored the supply conditions in explaining trade patterns. (F)

Answer: Ricardian theory relied solely on the supply conditions in explaining trade patterns, but ignored the role of demand.

2. A nation’s domestic price line becomes its no-trade boundary.

3. If one nation is significant larger then the other, the larger nation attains most of the gains. (F)

If one nation is significant larger then the other, the smaller nation attains most of the gains.

4. Theory of reciprocal demand suggests that the actual price at which trade takes place

depends on the trading partners’ interacting demands.

5. Suppose the transformation schedule’s function is x^2 +y^2=4. the indifference curve’s function is x^2/(1.5)-y^2=c. (x-axis for pc, y-axis for auto)

1) draw a graph to decide the point where a nation achieves autarky equilibrium.

2) Describe why indifference curve are concave.

3) Why indifference curve cannot be used to describe a nation’s satisfaction in strict term?

Answer :

1) The tangent point is (square (3), 1).

2) The indifference curve depicts the various combinations of two commodities are equally preferred in the eyes of the consumer---that is, yield the same level of satisfaction. The indifference curve usually sloped downward. The reason is based on the assumption that a consumer always desires more of a commodity than less of it.

If a consumer who increases auto holding must decrease pc consumption to maintain the initial level of satisfaction. Because changes in one commodity will result in change in another, it follows that an indifference curve slopes downward to the right.

3) In strict term, indifference curve cannot be used to describe a nation’s satisfaction.

The reason is it is impossible to make interpersonal comparisons of satisfaction.

CHAPTER 3

1. The indifference curves are convex to the diagram’s origin. (T)

2. Indifference map consists of a set of indifference curves. (T)

3. Offer curves can be used to demonstrate the determinations of the terms of trade between two nations. (T)

4. David Ricardo formulated the theory of reciprocal demand. (F)

5. A nation will benefit from trade when it is able to reach a lower indifference curve. (F)

Essay: Briefly explain the theory of reciprocal demand

Ricardian trade theory relied solely on supply analysis, it was not able to determine precisely the equilibrium terms of trade. This limitation was addressed by John Stuart Mill in his theory of reciprocal demand. This theory suggests that before the equilibrium terms of trade can be established, it is necessary to know both nation’ demands for both products. The theory can be analyzed by means of offer curves, which illustrate the determination of the equilibrium terms of trade.

If a nation is in autarky, it will achieve its equilibrium at the point where its community indifference curve is tangent to its transformation schedule. Here the nation experiences its highest attainable level of satisfaction. TRUE

John Stuart Mill demonstrated that the desire of a country to trade at given terms of trade is determined by comparing its optimal production point and its optimal consumption point. TRUE

The theory of reciprocal demand states that the price at which trade takes place does not depend on the interacting demands of the trading partners. FALSE

The commodity terms of trade measure the relationship between the prices that a country gets for its exports and the prices that it has to pay for its imports.

What is the immiserizing growth?

If we consider a developing country, whose main source of business is agriculture, and taking advantage of its competitive advantage it starts to concentrate in the export of the agriculture products, by increasing the volume of the trade, this growth will tend to worsen the nation’s terms of trade, reducing therefore some gains from the trade. In an extreme case the terms of trade could go so down to that even with economic growth, the country will end up with an indifference curve after trade that it had achieved before trade. In this case we talk about immiserizing growth.

Q: The marginal rate of substitution is measured by the absolute value of the slope of an …… .

A: indifference curve

Q: With trade a country will maximize its satisfaction when it moves to the highest possible indifference curve.

A: True

Q: Term of trade = Import Price Index/ Export Price Index x 100

A: False

Q: What is the theory of reciprocal demand?

A: (Formulated by John Stuart Mill, 1806-1873)

It suggests that the actual price at which trade takes place depends on the trading partners interacting demands. This theory however best applies if both nations have equal economic size, so that each nation’s demand has a noticeable effect on market price.

Question 1

Define "immiserizing growth".

One country could improve its existed technology to produce more of its exported product. This situation could have two effects. First, the country would have more products to export and it is good news. On the other hand, for a large country, increasing total output could worsen the terms of trade for that country since total world supply is determined by the large country. If the negative terms-of-trade effect dominates positive effect of increased output, the technological improvement created the outcome is called "immiserizing growth".

Question 2

Marginal rate of substitution tells us at what rate two products could be substituted to each other to keep consumer on the same satisfaction level.

TRUE False

Question 3

In order to find the trade equilibrium we need to find the tangency point of indifference curve and the domestic price line.

True FALSE

Question 4

Which of the followings explain the terms-of-trade?

(Import price index/Export price index) * 100

(EXPORT PRICE INDEX/IMPORT PRICE INDEX) * 100

Change in Product Y/ Change in Product X

Change in Product X / Change in Product Y

None of the above

Question 5

Offer curves could be used to demonstrate

the determination of the terms of trade between two nations

utility level of a nation with given resources

how opportunity costs are increasing

production possibilities frontier

none of the above

(Indifference Curve) is the idea that consumers are indifferent among the many possible commodity combinations that provide identical amounts of satisfaction.

The Marginal substitution rate is equal to an indifference curve’s absolute slope T

The theory of reciprocal demand suggests that the actual price at which trade takes place depends on the trading partners Interacting Demand T

5.Explain in brief words what happens when nations of different Economic sizes trade?

The nation of the smaller size receives all of the benefits, because they have access to a larger market while the bigger country only has a limited market. This situation is characterized as the importance of being unimportant, when nations are very dissimilar in size there is a strong possibility that the larger nation will continue to produce the its comparative disadvantage good. This is smaller nation is unable to supply all of the world’s demand for this product.

For improvement to occur in a countries terms of trade, it specifically requires that the prices of its exports rise in accordance to the prices if its imports over a specific period of time? T

The commodity terms of trade is no longer used as a measure of the direction of trade gains? F

The region of mutually beneficial trade is that bounded by the opportunity cost of two countries? F

John Stuart Mill formulated the theory of reciprocal demand, which formulates that the actual price at which trade takes place depends on the interacting of the trading partners.

A curve that depicts the numerous combinations of two commodities that yield the same level of satisfaction is called indifference.

1. If domestic price ratio is smaller than terms of trade, a country will

not trade. This point is known as NO-TRADE BOUNDARY.

2. If a country is small enough to be price-taker, it will attain most of

the gains from trade. This situation is known as the IMPORTANCE OF BEING

UNIMPORTANT.

3. Theory of Reciprocal Demand suggests that the actual price at which

trade takes place is independent from the trading partners' interacting

demands. (F)

4. The commodity terms of trade is the most frequently used measure of the

direction trade gains. (T)

5. Explain immiserizing growth.

If a country is sufficiently large enough to affect world price,

under certain conditions, export-biased growth worsens its terms of trade,

causing a decrease in its welfare. Immiserizing growth is more

likely to occur when the foreign demand for the nation's export product is

highly price-inelastic and the nation is heavily engaged in international

trade, so that the negative effects of the terms of trade deterroration

more than the positive effects of the increased production.

Indifference maps and curves never reflect illustrate or emphasize on levels of satisfaction for commodities for a particular consumer FALSE.

A problem with the Richardian principle of comparative advantage was its inability to fully explain the distribution of the gains form trade among trade partners. TRUE

The commodity terms of trade are often referred to as the barter terms of trade; and is the most frequent used measure of the direction of trade gains. TRUE

Stuart Mill formulated the theory of Reciprocal Demand.

Explain and give an example of the theory of reciprocal demand.

The theory of reciprocal demand states that an actual price of a commodity being traded, is affected by the trading partner’s interacting demand.

An example could be seen as US and Canada trade Autos (US Good) for Wheat (Canadian Good). If at some point, Canadian demand for Autos increases, the # of bushels Canada is willing to trade for the Autos will increase

1-. What is known to be the actual price at which trade takes place between trading partners?

The theory of Reciprocal Demand.

2-. What is called the optimal level of production and consumption for a nation?

The Autarky Equilibrium.

3-. In accordance with modern Economic Theory, what determines an individual indifference curve?

The level of disposable income and the personal taste on preferences determines an individual indifference curve, which is the combination of commodities that are equally preferred by consumers.

4-. What is the most used measurement of trade gains?

The most used measurement of trade gains is know as commodity terms of trade also known as batter terms of trade. It indicates the relationship between the prices a nation gets form its exports and the price it pays for its imports.

5-. What determines the basis and direction of trade?

Demand and supply conditions determine the basis for trade. A country will benefit form trade as long as there is demand for the product traded and as long as a nation can reach a higher indifference curve.

5. According to the Mercantilists, if a country could achieve a favorable trade balance (a surplus of exports over imports), it would enjoy payment received from rest of the world in form of gold and silver.

(T)

6. According to Adam Smith’s absolute advantage theory, if a nation imports goods in which it has as absolute cost disadvantage and exports goods in which it has absolute cost advantage, the country will benefit from foreign trade.

(T)

7. Ricardo wrote Wealth of Nations in 1776.

(F) (Adam Smith wrote Wealth of Nations)

8. Ricardo’s trade theory is known as the principle of comparative advantage, in which if a country which has absolute disadvantage in the production of all goods specializes and exports the goods in which it is relatively less inefficient (where its absolute disadvantage is least), and imports other goods, the country can benefit international trade.

(T)

5. Why are the Mercantilists wrong?

1. True or False. The indifference curve symbolizes the various combinations of two commodities that are unequally preferred in the eyes of the consumer. (False)

2. Filling the blank. The terms of (Trade-ratio) frequently is used to measure or estimate a nation’s gains from international trade.

3. True or False. For two countries with equal size and same demand patterns, one would expect the equilibrium terms of trade to be about halfway between the pre-trade domestic price ratio of the two nations. (True)

4. True or False. When the relative commodity prices of two nations differ, a basis for mutually beneficial trade exists. (True)

5. What is commodity terms of trade and why is important in trade?

Is the most frequently used measure of the direction of trade that measures the relationship between the prices a nation gets for its exports and the prices it pays for its exports.

1- (T) (F) A single indifference curve for an individual represents various combinations of goods that are of equal value o that person.(T)

2- (T) (F) For a country like Brasil producing coffee and using Export –biased growth there is no opposing effects for its welfare (F) It is not true. Because in some case This strategy would worsen Country’s terms of trade.

3- Higher indifference curves represent greater levels of ----------------- (satisfaction)

4- -------------- -------is used frequently to measure or estimate nation’s gains from international trade.( The commodity terms of trade)

Explain "Terms of Trade".

1- An difference curve depicts the various combinations of two commodities that are equally preferred in the eyes of the consumer, and each consumer has different type indifference curve, that’s why all consumer’s in the nation could not be added up and summarized by a community indifference curve. (T/F)

2-If the U.S and Turkey have an international trade relationship, the U.S will attain fewer gains from trade while Turkey attains most of gaining from trade according to importance of being unimportant theory. (T/F)

3- If we want to find out deterioration or in a nation’s terms of trade due to change in export and import prices over a time period, we can use Terms of Trade formula in order to calculate improvement and deterioration in a nation’s terms of trade. (T/F)

4-. At F point, a country has the highest attainable level of satisfaction.(T/F)

1-what is marginal rate of substitution?

2-indifference curves reflect the tastes & preferences of a consumer.

3-marginal rate of substitution is measured by the absolute value of the slope of ________.

4-export growth will lead to host country welfare.

5-it is best to apply the theory of ________ when markets are equal in size & importance.

1. In regards to indifference map the rate at which the substitution occurs is called the _______ _____ __ __________. Answer: Marginal rate of substitution (MRS)

2. T / F Economic theory reasons that an individual’s demand curve is based on several underlying, with most important being a persons level of disposable income and the other being a persons tastes and preferences. True

3. T / F An improvement in a nation’s term of trade requires that the prices of its exports fall relative to the prices of its imports over the same amount of time. False

4. T / F An indifference curve slopes downward to the right because changes in the consumption of one commodity are inversely related to changes in the amount consumed of another for a given level of satisfaction to be maintained. True

5. Briefly describe John Stuart Mill theory of reciprocal demand.

Mill’s theory suggests that the actual price at which trade takes place depends on the trading partners’ interacting demands. For example if Canadian demand for autos is stronger relative the U.S. demand for wheat, the closer the terms of trade will settle to the Canadian domestic price ratio. This theory best applies when both nation are of equal size, so that the demand of each nation has a noticeable effect on market price.

The theory of reciprocal demand suggests that the actual price at which trade takes place depend on the trading partners' interacting demand. >True

Offer curves can be used to demonstrate the deliberation of the terms of trade between two nations. >False, not deliberation -> determination

The barter term of trade, or ______ ______ _______ is the most frequently used measure of the direction of trade gains. > commodity terms of trade

Potential for gains from international trade can be seen by the slope of the tangent line, which can be interpreted, as the terms of trade. >True.

Why don't poor nations, raise the relative offer of exports by investing on something they can get an edge; either by outside help, or by their relative comparative advantage (create an export-biased situation), while in the same time using a dual strategy, to achieve an import-biased situation (focus on a one of the products that they import - there should be a lot- create a dynamic comparative advantage, through a supportive industrial policy), à and according to the book that should give them high productive differences where they could reach high gain potentials from trade.?

============================

1.-----------------------,the theory suggests that the actual price at which

trade takes place depends on the trading partners' interacting demands. (

theory of reciprocal demand )

2.The commodity terms of trade for oil exporting countries rose from 1970

through 1990. ( false )

3.The commodity terms of trade is the ratio of a nation's export price index

to its import price index. ( true )

4.A country that exports labor intensive goods and experiences a rapid

growth in its labor force will have export biased growth. ( true )

5. What is the Marginal Rate of Substitution?

The Marginal Rate of Substitution indicates the extent to which a consumer

is willing to substitute one good for another good while maintaining a given

level of satisfaction.

1. (T) An indifference curve depicts the various combinations of two commodities that are equally preferred in the eyes of the consumer.

2. (T) Demand and supply conditions determine the basis for trade and the direction of trade.

3. (T) The theory of reciprocal demand suggests that the actual price at which trade takes place depends on the trading partners interacting demands.

4. What advantages are provided by introducing community indifference curves into the trade model?

The main advantage is that it can be used as a pedagogical device that depicts the role of consumer preferences in international trade, however it is imp0ortant to consider that is very difficult to compare the dissimilar nature of all individuals as one may prefer one combination of things (ex: coffee and sugar) in different amounts another individual may rather completely the opposite.

5. The rate at which some amount of one good must be sacrificed if more of another is to be acquired is called THE MARGINAL RATE OF SUBSTITUTION (MRS)

1. The role of taste and preference can be illustrated in an:

a taste curve

b psychological graph

c idifference curve

d Maslow's hierarchy

Answer: c

2. The _______ suggests that the actual price of which trade takes place

depends on the trading partners`interacting demands.

a price curve

b equilibrium terms of trade

c theory of reciporcal demand

d equilibrium price

Answer: c

3. What are "offer curves" used to demonstrate?

a termination of terms of trade between two nations

b termination of price

c amount of volum being traded

d cost per unit of trade

Answer: a

4. Measuring the relationship between prices a nation gets for its exports

and the prices it pays for its imports is called:

a import/export ratio

b cost relationship

c commodity terms of trade

d differencialization cost

Answer: c

5. Does a nation necessarily become better off when it produces more?

- Taken into account the advantage of economies of scale, ther are also a

risk of producing too much on the market.

The result of overpooring the market with a product can reach the

consequence of pushing the price down to a level that

is not sustainable. In other words, as with the Brazilian coffee example,

the volume of coffee became so big that it changes the

whole price for coffee around the world. This again lead to a drop in

revenues and furthermore a drop in the capital that was

required to keep people in jobs.The importance of finding a balance of how

much to produce and sell to keep

the market as healthy as possible is crucial.

1. Indifference curves show the various combinations of two goods that give a

consumer the same total level of satisfaction. True.

2. Indifference curves have a positive slope. False.

3. Indifference curves are convex. True.

4. Higher indifference curves represent lower levels of satisfaction. False.

5. What is the commodity terms of trade?

The commodity terms of trade is the most frequently used measure of the

direction of trade gains. It measures the relationship between the prices a

nation gets for its exports and the prices it pays for its imports.

1.-----------------------,the theory suggests that the actual price at which

trade takes place depends on the trading partners' interacting demands. (

theory of reciprocal demand )

2.The commodity terms of trade for oil exporting countries rose from 1970

through 1990. ( false )

3.The commodity terms of trade is the ratio of a nation's export price index

to its import price index. ( true )

4.A country that exports labor intensive goods and experiences a rapid

growth in its labor force will have export biased growth. ( true )

5. What is the Marginal Rate of Substitution?

The Marginal Rate of Substitution indicates the extent to which a consumer

is willing to substitute one good for another good while maintaining a given

level of satisfaction.

Q1: Production subsidies are less distorting in most cases than export

subsidies (T or F)

Ans. T

Q2: An ??? curve depicts the various combinations of two commodities that

are equally preferred in the eyes of the consumer.

Ans. Indifference

Q3: Demand and supply conditions determine the basis for trade and the

direction of trade, it also helps determine the relative price at which

commodities are exchange between countries. (T or F)

Ans. T

Q4: A nation will benefit from trade when it is able to reach a higher

indifference curve than could be achieved without trade. (T or F)

Ans. T

Q5: What are the two conditions that governed world trade? And why are they

part of the trade model?

Modern trade theory argues that the pattern of world trade is governed by

international differences in supply conditions and demand conditions.

Therefore the role of demand as well as supply are developed and introduced

in the trade model.

CHAPTER 4

1. The (factor endowment) theory developed by Heckscher and Ohlin states that comparative advantage is explained exclusively by differences in national supply conditions.

2. True or False. The Leontief Paradox contradicted the factor endowment theory. (True).

3. True or false. According to the specific-factors theory, in general, owners of factors specific to import-competing industries tend to gain from international trade, while owners of factors specific to export industries suffer. (False)

4. The Staffan Linder theory of overlapping demands suggests that nations with similar (per capita incomes) will have overlapping demand structures and will likely consume similar types of manufactured goods.

5. Explain the implications of Product Life Cycle Theory on trade.

Technological changes occur in different countries at different rates of speed. Due to this matter, many manufactured goods will follow a trade cycle. The innovator country will manufacture the goods and introduces them into the home market (Introduction Stage). Then, the domestic manufacturer begins to export the goods (Growth Stage) to foreign markets with similar income levels (Linder). Then, the manufacturer decides to open branches in those countries, in order to be closer to the markets (Maturity Stage). As the innovative technology becomes known, foreign producers begin to copy, adopt or imitate the process, making the innovative country to loose gradually its comparative advantage and its exports start to decline (Declining Stage). In many cases, the innovating nation may even become an importer of the good.

The factor endowment theory (also known as the Heckscher-Ohlin theory) states that comparative advantage is explained exclusively by differences in national supply conditions. ( True )

The factor endowment theory actually highlights the role of nation’s resource endowments such as labor and capital.

The product life cycle theory focuses on the role of labor forces as a key determinant of trade patterns in manufacturing products. ( False )

The trading of products among countries is limited to the exporting and importing of manufactured goods, but includes a group of activities known as business services.

What are the two explanations of world trade patterns that Staffan Linder offers:

According to Linder, trade in primary products and agricultural goods conforms well to the factor-endowment theory. But trade in manufactured goods is best explained by overlapping demand structures among nations. For manufactured goods, the basis for trade is stronger when the structure of demand in the two nations is more similar, which means, when the nations per capita incomes are similar.

Chapter 4. Trade Model Extensions and Applications.

1. The Heckscher-Ohlin theory states that comparative advantage is explained

exclusively by differences in national supply conditions.

2. Economy of Scale: Large organization may decrease profit by specialization because increase productivity tends to reduce the demand, thus lower the price.(F)

Answer: Large organization may reduce costs by specialization by specializing its machinery and labor, operating assembly-line production, using its by-products, and obtaining quantity discounts on the purchase of inputs.

3. Staffan Linder believe that trade in primary products and agricultural goods can best be explained by overlapping demand structure among nations.(F)

Answer: Staffan Linder believe that trade in primary products and agricultural goods confirms well to the factor-endowment theory.

4. Theory of overlapping demands hypothesis that nations with similar per capita incomes are most likely to trade with each other. (F)

5. Merger Talk Fills the Skies,

According to Wall Street Journal, AMR co. is talking about merge Northwest Airline and Delta Airline these days. Use the theory of economy of scale to explain this phenomenon.

Economies of scare means that a large organization may reduce costs by specializing its machinery and labor, operating assembly-line production, and obtaining quantity discounts on the purchase of inputs.

AMR Company, by way of merge international airlines, can specialize its line of business, increase its size, thus reduce the cost of labor, administration and increase its efficiency. Also, AMR can have business in more countries. By adding the size of the market, the company is permitted to take advantage of longer production runs, which lead to increasing efficiency.

Based upon Heckscher-Ohlin theory, the fundamental key of the comparative advantage of a nation are the resources endowments such as labor and capital. TRUE

Investments in skill, education and training better off workers productivity and create human capital, as well as investments in equipment and machinery create physical capital. TRUE

The theory of overlapping demands states that countries with similar per capita income are willing to trade to each other. Therefore wealthy nations want to trade with wealthy nations, and poor nations are willing to trade with poor nations. TRUE

Interindustry trade can be explained using the concepts of product differentiation and economies of scale. FALSE

What is the product cycle theory?

The product cycle theory is a dynamic concept. The focus of this theory is the technological innovation as a fundamental of trade in the manufactured products. There are 5 stages. In the first one the manufactured product is introduced to the home market. In this first phase the manufacturer operates in the local market in order to get quick feedback on the quality of the product. In the next phase the company starts to export the product abroad. The conditions of the foreign market will be similar to its domestic market (tastes and preference of the consumers). In this phase the market becomes large enough to support mass operation. In the following phase the manufacturer realizes that it is less costly to place the production close to the foreign market, that is a way to protect his export profits. The company enters now in a mature stage, reaching a mature market. In this phase the company starts loosing its comparative advantage, because the innovation technology used becomes a commonplace. Foreign producers begin in fact to imitate it until the company starts entering in a declining phase. In this phase the production process is so standardized that other nations can easily produce it. At this point starts the import competition

Q: The Leontief Paradox questioned the validity of the theory of …… .

A: factor endowments

Q: The factor endowment – theory is also known as the …… .

A: Heckscher – Ohlin Theory

Q: The overlapping – demand – theory states that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to lower cost of nations.

A: False

Q: Interindustry trade is based on interindustry specialization.

A: True

Q: Show an example for the factor – endowment – theory.

A: Nations with relatively large amounts of skilled labor tend to emphasize the exports of manufactured goods (i.e. Germany) whereas nations with abundance in land tend to focus on exports of primary goods (i.e. Russia).

Question 1

Explain the existence of comparative advantage according to factor endowment theory.

Swedish economists Eli Heckscher and Bertin Ohlin (H-O) formulated the factor endowment theory in the 1920s and 1930s. According to this theory "factor endowments" of countries underlie a country’s comparative advantage. The relative price levels differ among nations because 1) different relative endowment of factor inputs and 2) different commodities require that the factor inputs be used with differing intensities in their production.

A nation, therefore, would export that commodity for which a large amount of the relatively abundant and therefore relatively cheap input is used.

Question 2

As a result of increasing demand for the abundant factor to be used in the export sector, the return to this factor increases.

TRUE False

Question 3

Airbus presents a case in which governments can design their industrial policies to create comparative advantages in time.

TRUE False

Question 4

Which of the following provides the correct order in product cycle process?

home market production, export, foreign production, import competition, decline in domestic competitive power

export, home market production, foreign production, import competition, decline in domestic competitive power

foreign production, home market production, export, import competition, decline in domestic competitive power

home market production, export, foreign production, decline in domestic competitive power, import competition

Question 5

Intraindustry trade means

trade between nations of products of different industries

trade between nations of products of the same industry

The factor endowment theory states that comparative advantage is explained exclusively by differences in national supply conditions T

According to Adam Smith in his " Wealth of Nations" the division of labor is not limited by the size of the market F

The interindustry specialization concept states that each nation specializes in a particular industry in which it enjoys a comparative advantage T

(The intraindustry trade) can be explained by product differentiation and economies of scale

What is the Product Life Cycle Theory? Explain

This theory focuses on the role of technological innovation as a key determinant of trade patterns in manufactured products. According to the theory manufactured goods undergo a predictable trade cycle. Initially the home country is an exporter then loses competitive advantage to its trading partners and eventually becomes an importer.

Foreign workers to compete with U.S. workers directly and not by the products that they produce and sell? F

Interindustry trade can be defined as the exchange between nations of products of different industries.

The product life cycle theory focuses in the technological innovations as a very important factor that trade patterns in manufactured products? T

The cost of moving goods, including freight, packing and handling expenses can be referred as transportation costs.

1. The factor-endowment theory states that comparative advantage is

explained exclusively by differences in national SUPPLY conditions.

2. In the post-war II era, some industrial nations have specialized on the

production of only a particular type or a groups of products within a

given industry. This is called INTRAINDUSTRY SPECIALIZATION.

3. Trade has no effect on factor prices and distribution of income. (F)

4. Environmental regulations may cause costs that hinder international

competitiveness. (T)

5. Explain briefly product life cycle theory.

Product life cycle theory focuses on the role of technological

innovation as a key determinant of comparative advantage and trade

patterns in manufactured products. According to this theory, many

manufactured goods go through some stages of a predictable trade cycle. In

first stage a new product is introduced to home market only to gain quick

feedback on the quality and chance of the product. If feasible, the

nation begins export and mass production in the second stage. In the

third stage, the nation locates its production operations closer to

foreign markets to take advantage of more suitable conditions for a

higher profit. In the next stage the nation faces competition from

the other countries as it is gradually losing its comparative advantage

and the production procses is becoming standardized. In the last stage,

the production process becomes so standardized that it can be easily used

by other nations. And the innovating nation may become an importer of this

product if the other nations are more competitive.

Interindustry trade is considered to be the exchange of products of different industries among nations.

According to the product life cycle theory, some manufactured goods like TV’s have a predictable trade cycle where the home country is initially an exporter but eventually can become an importer of the product. TRUE

During the early 1990’s the US, Argentina, Mexico and Canada negotiated a free trade agreement called NAFTA. TRUE

Transportation costs have no effect and or do not reduce the volume of international

Trade. FALSE

Explain why it is perceived that international trade can make the poor even poorer

During the past decades, there has been a perception that international trade has been hurting the low-income sector of developed nations. It is believed that with the growth of international trade, lower wage developing nations can create a reduction in demand for lower skilled workers in developed nations like the US. This can cause a decrease low skill wages in developed nations and even lead to unemployment.

1-. The factor-endowment theory states that comparative advantage is explained exclusively by differences in_____________________.

The nations supply conditions.

2-. Does trade makes the poor nations poorer?

False

3-. What is intra-industry trade?

Is the trade between nations of products of different industries and is based on industry specializations.

4-. What is product life-cycle theory?

This theory is based on technology advances. Manufactured goods experience trade cycle. During this cycle a nation that first manufactured and exported a certain good loses its comparative advantage to its trading partners and consequentially becomes an importer of the good it manufactures. This effect occurs when nations that import a product, uses its technological advances to develop the product adding value to the product. Therefore the importer nation becomes an exporter nation and gains comparative advantage over its trade partners.

5-. What is Industry policy?

Industry policy is when a government is actively trying to create comparative advantage to its products. It is a simple strategy of improving, renovating and developing a product or an industry.

Trade not only affects a nation's aggregate income level; it also affects the internal ______ _______ among the owners of resources. >Distribution of income.

Does trade make the poor even poorer? The book uses as an example the US. I do not think US is a poor country. Pg. 78.

It is gainful sometimes for two countries like Canada and US for example, to trade the same products. >True, because of the long borders.

Governments sometimes get actively involved in creating comparative advantage, which can be called export promotion. > False >industrial policy.

The "Polluter Pays Principle", works in the US, and all other industrial countries. Does it also wok when an American company goes to a low environmental standards nation, i.e. in the African continent?

1. Leontief paradox found some empirical results that supported the Heckscher-Ohlin theory.

(The answer is wrong. Leontief paradox demonstrates the Heckscher-Ohlin theory was wrong.)

2. The existence of transportation costs often causes a reversal of comparative advantage among nations.

(The answer is wrong because the existence of transportation costs often reduces comparative advantage).

3. The presence of economies of scale in production also may influence trade partners, generally encouraging nations specialize to a greater extend in their competitive advantage industries than otherwise would be optimal; if economies of scale are extreme, they may specialize completely in production of export goods.

(The answer is correct.)

4. What is factor endowments theory?

Eli Heckscher and Bertil Ohlin formulated a theory in the 1920s and 1930s that identified different relative factor endowments as the source of competitive advantage among nations. For instance, if one country has a relative abundance of land and another country a relative of abundance of capital, the first country has relatively advantage of producing and exporting land-intensive products such as wheat, while the second country has a comparative advantage of producing labor intensive goods, such as autos.

.True or False. The factor-endowment theory relies on several assumptions as: nations have the same tastes and preferences, they se factor inputs that are of uniform quality and they use the latest but different technology. (False)

2. True or False. The intraindustry specialization creates intense pressure for the governments to adopt industrial policy strategies to protect and enhance domestic market and export market shares. (True)

3. True or False. The product life cycle theory is focused in the role of research and development as a key determinant of trade patterns in manufactured products. (False)

4. Dynamic comparative advantages refer to the creation of comparative advantages trough the mobilization of skilled labor, technology, and capital initiated just by the private sector. (True)

5. Can the economies of scale affect the global trade among nations?

Yes, using this method of production a large organization may reduce cost by specializing its machinery and labor, operating assembly-line production, using its by-products, and obtaining quantity discounts on the purchase of inputs that would affect companies overseas.

1- (T) (F) Factor Endowment Theory states that nations export products that use inputs which are relatively abundant at home ,and import products which need inputs which are relatively scarce at home.(T)

2- (T) (F)The overlapping demand theory explains why trade often occurs between nations with different levels of per a capita income.(F) it is not "different "levels…. But it must be "smilar "

3- Two factors that influence international trade are ----------- cost and environmental regulations.(Transportation)

4- When -------------- - is actively involved in creating comparative advantage its purpose is to create "dynamic comparative advantage ".(government)

5- Explain " Leontief Paradox"

It had been widely recognized that in the US capital was relatively abundant and labor was relatively scarce .In 1954,Leontief tested if the factor endowment theory was true. In conclusion Leontief found that the capital/labor ratio for US export industries was lower than that of its import-competing industries .These findings ,which contradicted the predictions of the factor endowment theory ,became known as the Leontief paradox.

1- Turkey has a young abundant labor. That is why, Turkey will export commodity for which a large amount of abundant (cheap) input is used, such as agricultural products. In contrast, it will import commodity in the production of which the relatively scarce (expensive) input is used, such as computer chips, according to Heckscher-Ohlin Theory. (T/F)

2-According to findings of Leontief, the U.S exports more labor-intensive goods than capital intensive goods and imports more capital-intensive goods than labor-intensive goods. This is known as a Leontief Paradox. (T/F)

3- While a country is an exporter of a manufactured good, it can be an importer of the manufactured good according to Product Life Cycle Theory. (T/F)

4-. Even though transportation cost has decrease from 1900’s, it is one of the important obstacle for international trade.(T/F)

3. Explain the different between interindustry trade and intraindustry trade.

Interindustry trade is when each nation specializes in a particular industry enjoys a comparative advantage. As resources shift to the industry with a comparative advantage, certain other industries having comparative disadvantages contract. Intraindustry specialization on the other hand is when a country focuses on the production of particular products or groups of products within given industry. Intaindustry specialization, the opening of trade does not generally result in the elimination of an entire industry, however the range of products produced and sold by each nation changes.

4. T/F Under the product cycle theory a home country who start or invents a product will be a exporter of that product thought it life cycle. False

5. T/F Comparative-advantages principle is not applicable to services of nations because they can't be stored like manufactured goods. False

Question 1: What does the Heckscher-Ohlin theory state and what are the assumptions of this theory?

Answer: It states that comparative advantage is explained exclusively by differences in national supple conditions, In particular, the theory highlights the role of nations’ resource endowments, such as labor and capital, as the key determinant of comparative advantage. For example, theory says that Brazil export coffee because it has an abundance of the soil and climatic conditions required for coffee’s production.

The assumptions are the following:

nations have the same tastes and preferences (demand conditions)

they use factor inputs that are of uniform quality

they use the same technology.

Question 2: Trade affects both a nation’s aggregate income level and its internal distribution of income among the owners of resources. (True/False)

Question 3: With the increase in education in the US, the country should export labor-intensive goods and import capital-intensive goods (True/False it should export capital and import labor).

Question 4: ______found that exports were less capital-intensive than import-competing goods (Leontief)

Question 5: The theory of overlapping demand says that wealthy countries are more likely to trade with ______countries, and poor countries are more likely to trade with ______countries (wealthy, poor).

True/False Section. Write down T if is true or F if is false at the end of each question.

1) According to the factor-price equalization, which is led by trade, in each nation the cheap factor becomes more expensive, and the expensive factor becomes cheaper T.

2) In spite of the fact that new technological advances in transportation and communication have reduced the economics distances among countries, transportation costs tend to reduce the volume of trade T.

Fill out the blank with the appropriate word/words within the parenthesis.

3) The factor endowment theory suggests that comparative advantage is explained exclusively by supply conditions (economies of scale, supply conditions, transportation costs).

4) In a trade relationship, the capital abundant country should exports (exports, imports, stop trading) the capital-intensive products, and the land abundant country exports (imports, exports, stop trading) the land intensive products.

Explain the following statement.

6) Why is the product life cycle theory a dynamic theory of international trade?

Because that trade theory deals with the fact that plenty of manufactured goods are susceptible to it. It mainly explains how a national starts as an exporter, then becomes its exports markets and finally becomes an importer of the products. In addition, that theory does not always apply for some manufactured goods because of a variety of reasons such as political, strategic, traditions, etc. However, it happens many times in the real world, when a country starts producing any product and after some time is not interesting in producing it anymore. That usually could happen if it has developed any other with better features and then other country produces it and gain some part of the market for those products.

Q: The product life cycle focuses on the role of technological innovations as a key determinant of trade patterns in manufactured products.

Ans. True

Q: ____________ refers to the cost of moving goods, which can lead to affecting international trade patterns.

Ans. Transportation costs

Q: By expanding the size of the domestic market international trade allows firms to take advantage of _________ production runs and _______ efficiencies.

Ans. Longer, increased

Q: Intraindustry trade occurs in homogeneous goods as well as in differentiated products.

Ans. True

Q: What are the effects of transportation costs on international trade patterns.

Transportation costs tend to reduce the volume of trade, the degree of specialization in production among the nations concerned, reduce gains from trade, if they are high or expensive. Transportation costs are a huge factor which managers must be aware of before engaging in international business. In the absence of them, free trade results in the equalization of the prices of the traded goods, as well as resource prices, in the trading nations.

=========================================================

1. Based upon Heckscher-Ohlin theory, the fundamental key of the comparative

advantage of a nation are the resources endowments such as labor and

capital. TRUE

2. Investments in skill, education and training better off workers

productivity and create human capital, as well as investments in equipment

and machinery create physical capital. TRUE

3. The theory of overlapping demands states that countries with similar per

capita income are willing to trade to each other. Therefore wealthy nations

want to trade with wealthy nations, and poor nations are willing to trade

with poor nations. TRUE

4. Interindustry trade can be explained using the concepts of product

differentiation and economies of scale. FALSE

5. What is the product cycle theory?

The product cycle theory is a dynamic concept. The focus of this theory is

the technological innovation as a fundamental of trade in the manufactured

products. There are 5 stages. In the first one the manufactured product is

introduced to the home market. In this first phase the manufacturer operates

in the local market in order to get quick feedback on the quality of the

product. In the next phase the company starts to export the product abroad.

The conditions of the foreign market will be similar to its domestic market

(tastes and preference of the consumers). In this phase the market becomes

large enough to support mass operation. In the following phase the

manufacturer realizes that it is less costly to place the production close

to the foreign market, that is a way to protect his export profits. The

company enters now in a mature stage, reaching a mature market. In this

phase the company starts loosing its comparative advantage, because the

innovation technology used becomes a commonplace. Foreign producers begin in

fact to imitate it until the company starts entering in a declining phase.

In this phase the production process is so standardized that other nations

can easily produce it. At this point starts the import competition.

1. What is the factor endowment theory and what it assumes?

The factor endowment theory assumes that all products require a combination of different factors of production (natural resources –land, raw materials-, labor supply and capital to invest in machinery, technology and so on.

Different products might need different combinations in which factors are used, and it is known that factors of production are unevenly distributed around the globe, so what this theory states is that a country should export those goods which use intensively the factor of production with which it is best endowed, and import those goods that use intensively a factor of production with which it is poorly endowed. Generally this theory only accounts two factors of production: labor and capital, so a country with a lot of labor supply should export labor intensive goods while countries with a lot of capital should export capital intensive products.

It assumes that:

Nations have the same tastes and preferences

They use factors inputs that are of uniform quality

They use the same technology

2. (T) The Leontief paradox contradicted the predictions of the Heckscher-Ohlin model, which found out that the US exports were labor intensive instead of capital intensive.

3. (F) By narrowing the size of the domestic market, international trade permits firms to take advantage of longer production runs and increasing efficiencies. Such economies of large-scale production can be translated in to lower production prices, which improve a firm’s competitiveness.

4. (T) Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods.

5. (T) The product life cycle views a variety of manufactured goods as going through a trade cycle, where the home country initially is an exporter, then loses its export markets, and finally becomes an importer of the product.

1. (T) In service sectors is very difficult to measure the output and productivity as a way to look for a company performance.

2. (T) The US is becoming more service oriented

3. A country’s prosperity and STANDARD OF LIVING is based primarily on its own productivity performance.

4. Why is the reason to believe that industrial countries are rapidly losing manufacturing jobs to low wage countries?

Now a days to take advantage of free trade industrialized countries are moving manufacturing facilities to low wages countries such as Taiwan and Hong Kong. The reason for this is that at advanced stages of production a good becomes relatively easy to make so these production shift to countries that had comparative advantage in mass production, not only low wages. What is important is productivity.

5. Power can only be gained at someone else’s expense. Prosperity can be SHARED.

1. Factor-endowment theory is also known Leontief Theory. (F)

2. International trade tends to bring about factor-price equalization between countries. (T)

3. Economies of scale provide additional cost incentives for specialization. (T)

4. Interindustry trade focusing on the production of particular products within a given industry. (F)

5. The product life cycle theory reflects the importance of multiple factors of production. (T)

Essay: What assumptions does the Heckscher-Ohlin have?

Nations all have the same tastes and preferences. In other words, they have the same indifference curves. They use factor inputs that are of uniform quality. They all use the same technology.

1. The ___________ is a theory that looks at comparative advantages from a

different view than David Ricardo did.

a comparativeness theory

b peak performance theory

c factor-endowment theory

d global performance theory

Answer: c

2. The factor-endowment theory relies on which of the following points:

a nations have the same tastes and preferences

b nations use factor inputs that are of uniform quality

c nations use the same technology

d all of the above

Answer: d

3. United states should export captial-intensive goods and import

______________.

a production-intensive goods

b labor-intensive goods

c time-intensive goods

d low-labor goods

Answer: b

4. What is proven to reduce a companies cost per unit?

a lower wages

b higher labor

c economies of scale

d low production

Answer: c

5. How do economis of scale underlie a nation`s comparative advantage?

- Ecomomies of scale underlie a nation`s comparative advantage in the sense

that full efficiency is held so that the

resources of the company can be taken full advantage off. Moreover, the

imortance of producing at full capacity creates

the ability to reduce cost per unit which eventually is what can compete on

the market. Having the ability to find and penetrate

new markets so that the full production can be kept going is essential for a

company to take advantage of their strenghts. As

economies of scale is a result of a major operation where the flow of

products, capital and labor are at its peak, so does it create a

comparative advantage that makes it easier to adapt and offer the market

what it wants.

1. What are the implications of the factor endowment theory? factor price

equalization, distribution of income.

2. Economies of scale provide incentives for specialization. True.

3. What are the stages that many manufactured goods go through?

manufactured good is introduced to home market, domestic industry shows

export strngth, foreign production begins, domestic industry loses

competitive advantage, import competition begins.

4. Trade provides a larger potential market for products. True.

5. What are transportation costs?

Transportation costs refer to the costs of moving goods, including

freight charges, packing and handling expenses, and insurance premiums.

These costs can modify international trade patterns.

1.--------------------- is the theory that Eli Heckscher and Bertil Ohlin

formulated in the 1920s and 1930s as the source of comparative advantage

among nations. ( factor endowments )

2.---------------------, according to this theory, new products developed

through technological innovation are introduced first in the whole market

where both large market and the resources important at this initial stage

are found. ( product life cycle theory )

3.If a labor abundant nation trades freely with a capital abundant nation,

there will be a tendency for wages to rise relative to capital costs in both

nations. ( false )

4.Industrial nations tend to trade more with each other than developing

nations in the Leontief paradox.(false)

5. Does trade make the poor even poorer?

People often think that trade is what cause the income inequality but in

fact the actual coat of the income gap is the development in technology.

Trade and immigration have not been big enough, relative to the entire U.S.

economy, to produce big effects on wages. As the technology gets more

advance it requires more educated and more skilled workers which often widen

the income gap between the skilled and unskilled workers even though the

improvement in technology would increase nation income as a whole.

Q1: The environmental laws and policies of a government can affect the

competitive position of their industry. (T or F)

Ans. T

Q2: Transportation costs tend to reduce the volume of international trade

by increasing the prices of traded goods. Usually a product will be traded

only if the cost of transporting it between nations is less than the

pre-trade difference between their relative commodity prices. (T or F)

Ans. T

Q3: David Ricardo's theory of ???.. advantage has influenced international

????. theory and policy for almost two hundred years.

Ans. Comparative, Trade

Q4: By widening the size of domestic market, international trade permits

firms to take advantage of longer production runs, increase efficiency, and

a lower product price. (T or F)

Ans. T

Q5: Please define the different stages in the product life cycle theory

One of the most important theories of international trade is the product

life cycle theory. According to this theory, manufactured goods such as

electronic product (Exp:VCR) undergo a predictable trade cycle. The cycle

start when the manufactured good is introduced to the local market, then

the domestic industry show export strength, the third stage occur when the

domestic producer decide to produce closer to the foreign markets to

protect it's export profit, the technology is then imitated by locals,

the exporter loses it's competitive advantage and end up becoming the

importer due usually to the cheap labor and the high volume production in

the foreign country.

This cycle is complete when the production process become so standardized

that it can be easily used by other nations.

CHAPTER 5

Chapter 5

1. True or False. The US can charge export tariffs on the products it exports. (False).

2. The FOB valuation and the CIF valuation are different in many ways. For example, the (CIF) valuation includes transportation costs, such as insurance and freight.

3. True or False. The nominal tariff rate is an indicator of the actual level of protection that an effective tariff rate provides the domestic import-competing producers. (False).

4. Tariff structures of industrialized nations have generally been characterized by rising rates that give greater protection to intermediate and finished products than to primary commodities. This is commonly known as (tariff escalation).

5. Explain how tariffs may lead indirectly to reduction in domestic exports

The tariffs will affect initially the importer, who will have to pay duties to the domestic government. This will lead to an increase on the price of the good. The exporters, who will use the imported good as part of their production process, generally purchase these goods, which are now offered at higher prices because of the tariff. The production costs for the exporter will increase because of the duties. Secondly, as tariffs increase the price of imports, they lead to raising the cost of living in the domestic country. This escalation will affect directly the wages level, which will have to augment too. This growth will be a second factor that will add to the production cost of the exporters. Finally, as imports will tend to decrease as a result of the tariffs imposed, these decline will result in other nations’ export revenues and therefore, in their ability to import, leading to a smaller demand for a nation’s exports.

Q: U.S. trade policy includes an …… that provides favorable treatment to products assembled abroad from U.S. manufactured components.

A: offshore assembly provision

Q: A …… is a site within the US where foreign merchandise can be imported without formal US customs entry or government excise taxes.

A: Foreign trade zone

Q: The infant industry argument is a commonly accepted case for tariff protection.

A: False

Q: The principal benefit of tariff protection goes to domestic consumers.

A: False

Q: What are economic arguments for trade restrictions?

A: - job protection

protection against cheap foreign labor

fairness in trade issue

maintenance of domestic standard living

infant industry argument

equalization of protection costs

1.) A __________ is simply a tax (duty) levied on a product when it crosses

national boundaries.

2.) T/F Export tariffs are used in order to raise revenue or promote

scarcity in global markets and hence the world price.

3.) Describe two different types of tariffs. Give an example of each.

4.) _______ occurs when certain aspects of a product's manufacture are

performed in more than one country. For example, electronic parts are

shipped from U.S. to be put into tv sets in Singapore because of low labor

costs.

5.) T/F Consumer surplus refers to the difference between the amount that

buyers would be willing and able to pay for a good and the actual amount

they do pay.

======================================================

1) The tree types of Tariffs can be ________, __________ or ______________.

(specific, ad valorem, compound)

2) What are the principal financial advantages of a Free Trade Zone?

(The principal financial advantages of a "FTZ" are:

a) the improved cash flow through payments of duties at shipment out of the

warehouse or factory instead of on receipt at the facility,

b) no payment of tariffs on scrap, waste or obsolete materials

c) the option of paying the tariff on the imported materials or on the final

product shipped from the Zone, whichever is less

d) no tariff owed on the value of the labor, overhead and profit incurred in

Zone processing in the US

e) no tariff owed on exported merchandise.)

3) The infant - industry argument suggests that only after the young

companies have had time to become efficient producers, should the tariff

barriers be lifted and free trade take place. T/F.

(True)

4) The demand for protection rises as the domestic industry's comparative

_________ intensifies. (disadvantage)

5) The trade pact required WTO countries to convert to tariffs or

tariff-rate quotas, variable levies, discretionary licensing applicable to

imports from other WTO countries; non-tariff barrier restrictions could

continue to apply to non-WTO countries T/F (True).

1. A tariff is a duty levied on a product when it crosses national

boundaries. The most common are the export tariffs, and the less common the

import tariffs. FALSE

2. An ad valorem tariff has the advantage of maintaining a constant degree

of protection for the domestic producers even when there is a period of

change in prices. TRUE

3. The consumer surplus is the difference between the amount that buyers

would pay and the actual amount that they pay for a product. TRUE

4. When there is protectionism the economy moves to a smaller

self-sufficiency by increasing both imports and exports. FALSE

5. What are the arguments in favor of protection against the foreign cheap

labor?

Tariffs are used to protect the domestic jobs against the much more

competitive cheap foreign labor. In fact if a firm pays half wage for the

foreign labor force abroad, this firm could compete because having a low

variable cost it could set up a lower price. The government therefore could

establish a duty as much as the difference between the two wages, in order

to protect the firms who operate only in a domestic basis.

In addition to this, sometimes the foreign labor force is not well trained

and educated, in this case the domestic labor will still be competitive

because of the efficiency and the skills.

Q1: It is generally agreed that the U.S. economy has become increasingly

separated from the world economy (become a close economy) in recent

decades.(T or F)

Ans. F

Q2: For the U.S. an Increased openness makes the domestic economy

vulnerable to disturbances initiated overseas, but increased openness also

helps to dissipate the disturbance that occur in the domestic economy. (T

or F).

Ans. T

Q3: According to the principal of ????. Advantage, as long as relative

costs of two goods differ in two nations, there are gains to be made from

specialization and trade.

Ans. Comparative

Q4: Because of its wide economic diversity, the United States remains among

the countries for which exports constitute a small fraction of national

input. (T or F)

Ans. T

Q5: What are some of the consequences of an open economy?

Opening the economy to foreign trade and increased openness makes the

domestic economy vulnerable to disturbance initiated overseas, as seen in

the oil crisis of the 1970s. But in the same time increased openness also

helps to dissipate the disturbances that occur in the domestic economy, for

example during periods of domestic recession, the rest of the world may

operate somewhat like a sink into which excess domestic output can be

poured.

1. A specific tariff is a fixed amount of money per physical unit of imports. (T)

2. FOB and CIF are the two determiner of an ad valorem tariff. (T)

3. The welfare effects of a tariff can be measured by its protective effect, consumption effect, re-distributive effect, and terms-of-trade effect. (T)

4. Scientific tariffs support and reinforce a nation’s comparative advantage. (T)

5. A nominal $ tariff per of imported glasses is an ad valorem tariff. (F)

Essay: Outline the results of imported restrictions?

Domestic consumer face increased costs. Overall net loss for the economy. Export industries face higher costs for inputs. Cost of living increases. Other nations may retaliate further trade restrictions.

1) an ad valorem tariff is expressed as a fixed percentage of the value of

the imported product. T/F true

2) a compound tariff is imposed for the purpose of generating tax revenues

and may be placed on either exports or imports. T/F false

3) production sharing occurs when certain aspects of a product's manufacture

are performed in more than one country. T/F true

4) According to US tariff law, dutiable imports can be brought into a

customs territory and left in a _____ warehouse, duty free. _bonded

5) what are the financial advantages of a free trade zone?

tariffs can not be imposed on exported merchandise, or the value of labor,

overhead, and profit incured in zone processing in the US. Evenmore there

can be a decision on wether to pay tariff on the imported material or on the

final product shipped from the zone, depending on what will save more, while

scrap waste and obsolete materials can not be levied with tariffs. Last but

not least, cash flow improves through payment of duties at shipment out of

the warehouse or factory instead of on receipt at the facility.

1. A tariff is a tax (duty) levied on a product when it crosses national

boundaries. (True)

2. A revenue tariff is imposed for the purpose of generating tax revenues

and may be placed on either exports or imports.

3. Import tariffs have international repercussions that lead to reductions

in domestic imports. (False)

4. Level playing field in trade relates to all producers competing on equal

terms. (True).

5. What are the different types of tariffs and give example of each:

a. Specific tariff is one that is expressed in terms of a fixed amount of

money per physical unit. Example, a U.S. imported paying a set price of $50

for importing bicycles from Germany no matter the price of the bicycle.

b. An ad valorem tariff much like a sales tax, is expressed as a fixed

percentage of the value of the product imported. Example, paying a 20% on

the imports of Japanese cars.

c. A compound tariff is a combination of specific and ad valorem tariffs.

Example, an importer paying a set amount of $100 per computer plus a 5% of

the value of that computer.

1. A (Tariff) is simply a tax levied on a product when it crosses national Boundaries.

2. The effective tariff is an indicator of the actual level of protection that a nominal tariff provides the domestic import competing producers T

3. Producer surplus is the revenue producers receive over and above the minimum amount required to induce them to demand F

4. Sometimes small nations are price takers because they are not big enough to influence in the price of the good they supply T

5. What are the arguments for Trade restrictions? Explain.

Protectionists say that free trade is fine in theory, but that it does not apply in the real world. Modern theory assumes perfect competitive markets whose characteristics do not reflect real world market conditions. Moreover, even though protectionists may concede that economic losses occur with tariffs and other restrictions, they often argue that non-economic benefit such as national security more than offset the economic losses. In seeking protection from imports, domestic industry and labor unions attempt to secure their economic welfare. Over the years, a number of arguments have been advanced to pressure the president and congress to enact restrictive measures.

1) A tariff is a tax imposed on a product when it crosses national

boundaries, the most used tariff is the import tariff.

2) A specific tariff is expressed in terms of a fixed amount of money per

physical unit of the imported product? T

3) A Free Trade Zone is a site within the U.S. where merchandise can be

imported with no formal customs entry or taxes? T

4) The beggar-thy-neighbor policy will not cause any tensions and problems

among countries that trade certain products with each other? F

5) Please explain who tariffs can affect trade among countries?

The tariff level rises with the stage of processing. Tariffs tend to be

lowest on basic raw materials and highest on finished goods. The purpose of

this is to protect domestic manu-facturing industry while allowing for the

import of industrial raw materials. Tariffs may be seen as a mean of raising

revenue, their major use has been to protect domestic indus-tries that face

external competition.

1.what does deadweight welfare losses consist of?

2.what happens when a government allows raw materials and other intermediate

products to enter a country duty free?

3.__________ is the most enjoyed argument regarding significant economic

justification .

4.what are the differences between specific tariff, an ad valorem tariff, and

a compound tariff?

5.Protectionist import barriers tend to increase sales for domestic importing

companies.

1) When material inputs or intermediate products enter a country at a very low duty while the final imported commodity is protected by a high duty, the result tends to be a high protection rate for the domestic producers T.

2) Trade barriers consists only of tariff restrictions and not of nontariff trade barriers F.

Fill out the blank with the appropriate word/words within the parenthesis.

3. Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay.

4. It has been said that when nation imports constitute a very small portion of the market supply, this small nation will be price taker, facing a constant world price for its import commodities.

5) Explain the following statement.

Even though the free-trade argument has strong theoretical justification, trade restrictions are widespread throughout the world.

In spite of the fact that free-trade theory brings a bunch of benefits to nations, some people support reasons to impose trade restrictions for some specific cases. For instance, when an infant industry is being developed it may need official protection until it recovers its investment; in that case a trade barrier could be imposed to export goods in that segment. Also, there could be some industries considered ‘strategic" for a nation, so that imports will no be allowed or imposed trade barrier for national securities reasons. So that, there could be some reasons in which the free-trade theory is not applied.

1-a lower tariff on imported aluminum would most likly benefit domestic

consumer of aluminum.

2-when a country allows raw materials to enter a country duty free , its

tariff policy generally results in rise in both nominal and effective tariff

roles.

3-infant industry arguments enjoyed the most significant economic

justification in the tariff arguments.

4-an economic justification for trade restrictions is that they preserve the

nation's defece and culture.

5-what is domestic living standard argument?

1. (T/F) A large nation may gain from imposing a tariff if the tariff leads foreign producers to reduce significantly their export prices. (T)

2. (T/F) Foreign trade zones enable domestic companies to defer duties on imported inputs until they are processed and shipped to the market. (T)

3. The benefit that a tariff provides for domestic firms to compensate for their inefficiency relative to foreign producers is the PROTECTIVE EFFECT.

4. (T/F) The infant-industry argument supports temporary tariffs as a new industry achieves efficiency through experience. (T)

5. What is the meaning of an escalated tariff structure?

An escalated tariff structure means that the nominal tariff rates are low or zero on imported raw materials and are progressively higher at subsequent stages of processing or production.

1- (T) (F)The effective tariff rate measures the total increase in domestic

production that the tariff makes possible ,compared to free trade.(T)

2- (T) (F)Benefits of free trade come in the short term ,and are usually

spread widely across society.(F) The benefits come in the long period.

3- ------------------ is fixed monetary fee per a unit of the product.(F)

specific tariff

4- Effective and nominal rate of protection on the (finished) goods

are------- because only one rate is levied by Government. (not same)

5- Who pay for import restrictions ?

Domestic consumers :Domestic consumers face increased costs. Low income

consumers are specially hurt by tariffs.

Whole economy Overall net loss.

Export industries :Because Export industries used raw materials imported as

a input they have to pay higher price.

1-. What is tariff?

A tariff is a simple tax or duty charge on a product when it corsses

national boundries, the most common tariff is import tariffs, which is a tax

imposed on imported goods.

2-. Name and explain the different types of tariffs?

- Specific Tariff: Is a fixed monetary duty per unit of imported goods, it

is relatively easily to apply and administer.

- Ad Volarem: Usually lend it to manufacture products, because it can be

applied to products with a wide range of grade variations.

- Compound Tariff: Compound tariffs are applied to manufactured products

symbolize raw materials that are subject to tariffs.

- Tariff Escalation: Tariffs structure of industrialized countries that

have generally been characterized by rising rates that gives a grater

orientation to intermediate and finished products than primary commodities.

3-. What is production sharing?

Production sharing occurs when certain aspects of product's manufacture

are performed in more than one country.

4-. What is the free-trade argument?

Is the principle, which states that each nation produces what it does

best and permits trade, and over the long run it will enjoy lower price and

high level of consumption.

5-. What is one of the most common arguments to impose tariffs on import

goods?

One o f the most common arguments on the imposition of tariffs on import

goods, is to defend domestic jobs against cheap foreign labor.

1)One advantage of an ad valorem tariff is that it tends to maintain a

constant degree of protection for domestic producers during periods of

changing prices. (T or F)

2)Under offshore-assembly provision(OAP), the cost of the US component is not

included in the dutiable value of the imported assembled article into which

it has been incorporated. (T or F)

3)No tariff owed on the value of the labor, overhead, and profit incurred in

zone processing in the United States. This is the financial advantage of an

FTZ(foreign-trade zone). (T or F)

4)When the small nation's welfare decreases by an amount equal to the

protective effect and consumption effect, the so-called dead weight losses

due to a tariff. (T or F)

5)Can government officals independently choose to protect import-competing

producers without imposing significant cost burdens on domestic exports? Why?

How a tariff burdens exports?

1. A protective tariff is designed to insulate import-competing

producers from foreign competition.

Ans. True

2. A ____________ tariff is expressed in terms of a fixed amount of

money per physical unit of the imported product.

Ans. Specific

3. The two types of ways a US importer can postpone and prorate their

duties is through a _____________ or a _____________.

Ans. Bonded warehouse, Free Trade Zone

4. ____________ refers to the difference between the amount that a

buyer would be willing and able to pay for a good and the actual amount they

do pay.

Ans. Consumer surplus

5. Please give one example from the chapter reading of an import

tariff.

An example of the luxury car market in Japanese would be an example of how

the US government threatened to increase a tariff against luxury cars coming

from Japan. The US in an attempt to pressure Japan into opening their

markets for US auto and auto part threaten to increase the tariff from 2.9

percent to fully 100 percent. The end result of this was no increase in

tariff and the Japanese opening its automotive market to the US

1) True or False. An ad valorem tariff is expressed in terms of a fixed

amount of money per physical unit of the imported product. (False)

2) True or False. Production sharing occurs when certain aspects of a

product’s manufacture are performed in more than one country and could be

designed to penetrate foreign markets where high tariffs or other trade

barriers restrict direct export of finished goods. (True)

3) True or False. When a tariff is imposed a net welfare loss for the

economy because not all of the loss of the consumer surplus is transferred

as gains to domestic producers and government. (True)

4) The national security argument contends that a country may be put in

jeopardy in the event of international crisis if it is heavily dependent on

foreign sells. (False)

5) Which are the costs of protectionism within the society?

· The losses of consumer surplus because of higher prices and the resulting

deadweight losses as import volume is reduced

· Lost economies of scale as opportunities for further trade are foregone

· Loss of incentive for technological development provided by import

competition.

1- A Tariff is a tax put on a product when it crosses national boundaries.

2- A Protective tariff is designed to insulate import-competing producers

from foreign competition.

3- Consumer surplus refers to the difference between the amount that buyers

would be willing and able to pay for a good and the actual amount they do

pay. TRUE

4- The welfare of a tariff can be measured by its, protective effect,

consumption effect, distributive effect, revenue effect and terms of trade

effect. TRUE

5- List and explain o two of the arguments for trade restriction.

One of the most important arguments for trade restrictions, is Job

protection. It is perceived that cheap foreign goods undercut domestic

production, which in turn result in loss of domestic jobs to foreign labor.

Another argument is the maintenance of the domestic standard of living. It

is argued that by reducing the level of imports, tariffs encourage home

spending, which stimulates domestic economic activity.

Question 1

Define "ad valorem" tariff.

An ad valorem tariff is expressed as a fixed percentage of the value of

the imported product.

Question 2

Nominal tariff rate is also called as effective tariff rate.

True FALSE

Question 3

Consumer surplus refers to the difference between the amount that buyers

would be willing and able to pay for a good and the actual amount they pay.

TRUE False

Question 4

Which of the following is NOT an argument for trade restrictions

a) job protection

b) fairness in trade

c) infant industry argument

d) FREE TRADE

Question 5

Which of the following is the correct formulation of the effective tariff

rate

a) e = P/Y

b) e = Y/P

c) e = (n - a) * (1 - a)

D) e = (n - ab) / (1 -a)

(T/F)

1- There are three types of tariffs, Specific tariffs,

measured in terms of a fixed amount of money per

physical unit of imported product, Ad valorem tariff,

measured in terms of fixed percentage of the value

imported product, finally compound tariff, a

combination of specific and ad valorem tariffs. (T)

2-Free-Trade Zone (FTZ) is intended to stimulate

international trade, attract industry, and create jobs

by providing area that gives users tariffs and tax

breaks. (T)

3-If the U.S unilaterally removed tariffs on imported

products, tariffs elimination lowers the price of the

affect imports, resulting in economic gains to the U.S

customers. On the other hand, the lower price to

import-competing producers results in profit

reductions, workers lose their jobs, and U.S

government loses tax revenues. (T)

4-Harley-Davidson case indicated that, temporary

relief for an industry (such as increase import

tariffs) would help the industry to improve itself.

(T)

ASSAY

5- What are the advantages or disadvantages of tariffs

for a nation?

There are some advantages of tariffs for a nation. For

example, tariffs protect import-competing industry

against the foreign competitors. Thus, workers who

work for this industry will not lose their jobs.

Second, government generates revenues from tariffs. As

for disadvantage of tariffs, domestic consumers have

to pay more for import goods. In addition to this,

they do not have a chance to buy a variety products.

At last, whole economy will lose because of dead

weight affects.

Q1: A tariff is simply a tax duty levied on product when it crosses

national boundaries. (T or F)

Ans. T

Q2: The ???. tariff rate published in a country's tariff schedule gives us

a general idea of the level of protection afforded the home industry.

Ans. Nominal

Q3: The welfare effect of a tariff can be measured by it's protective

effect, consumption effect, revenue effect, and terms of trade effect. (T

or F)

Ans. T

Q4: Tariffs are sometimes justified on the grounds that they protect

foreign employment and wages. (T or F)

Ans. F

Q5: What is consumer surplus?

Consumer surplus refers to the difference between the amount that buyers

would be willing and able to pay for a good and the actual amount they do

pay. For example assume that the price of a coke is $1.00. But since you

are so thirsty you are willing to pay up to $1.50 for all coke bought,

consumer surplus is $0.50. So consumer surplus is merely the sum of the

surplus for each unit.

1. True or false: consumer surplus refers to the difference between the

amount that buyers would be willing to pay for a good and the actual amount

they do pay (true)

2. True or false: Producer surplus is the revenue producers receive over and

above the minimum amount required to induce them to supply the good (true)

3. True or false: Bonded Warehouses are used to delay the delivery of

imported goods, and thus are a tool for protectionism (false)

4. Tariffs (raise/lower) the cost of living by (increasing/decreasing) the

price of imports

5. Explain some of the arguments for trade restrictions

Defendants of trade restrictions think that a restriction on imported goods

will protect jobs at home. Workers in the automobile industry have often

been favorable to trade barriers against Japanese automobiles. They argue

that cheap foreign goods undercut domestic production, resulting in a loss

of domestic jobs to foreign labor. Defendants of trade restrictions also

claim that trade barriers are necessary to defend domestic jobs against

cheap foreign labor. They believe that low wages abroad make it difficult

for U.S. producers to compete with producers using cheap foreign labor and

that unless U.S. producers are protected from imports, domestic output and

employment levels will decrease. Another argument in favor of trade barriers

is fairness in trade. Business firms and workers often argue that foreign

governments play by a different set of rules than the home government,

giving foreign firms unfair competitive advantages. Domestic producers

contend that import restrictions should be enacted to offset these foreign

advantages, thus creating a level playing field on which all producers can

compete on equal terms. Other arguments include maintenance of the domestic

standard of living, equalization of production costs, protection of

infant-industry, national security, or cultural and sociological

considerations.

1.--------------- is tariff that that design to insulate import-competing

producers from foreign competition.(protective tariff)

2.---------------is tariff that express in term of fixed amount of money

per physical unit of the imported product.(specific tariff)

3..----------------is much like sale tax , this tariff is expressed as a fix

percentage of the value of the imported product.( ad valorem tariff)

4.FOB valuation is the methods used to determine a commodity’s value,

whereby the tariff is applied to product’s value as it arrives at importing

country.( the answer is false)

5.What are a specific tariff, an ad valorem tariff .what are the advantages

and dis advantages of each?

A specific tariff is a fixed amount of money per physical unit of the

imported product . The advantages of specific tariff are 1. It is easy to

apply and administer, particularly to standardize commodities and stable

products where the value of dutiable goods cannot be easily observed. 2.

It provide domestic procedure more protection during a business recession,

when cheaper products are purchased. The disadvantage of a specific tariff

is that the degree of protection it affords domestic producers varies

inversely with changes in import prices.

Ad valorem tariff is expressed as a fix percentages of the value of the

imported product. The advantages of ad valoren are 1 the tariffs usually

lend themselves more satisfactorily to manufactured goods, because they can

be applied to products with a wide range of grade variations.2.It tends to

maintain a constant degree of protection for domestic producer during period

of changing prices. The disadvantage is in practice it has suffered from

administrative complexities. The main problem has been trying to determine

the value of an imported product, a process referred to as customs

valuation. Import prices are estimated by customs appraisers ,who may

disagree on product values .Moreover , import prices tend to fluctuate over

time, which makes the valuation process rather difficult.

1. Benefits of free trade come in the long term. (True)

2. A (tariff) , is a tax levied on products as they move between nations

3. Specific tariff is levied as a percentage of the value of the product.

(False)

4. The impact of a tariff is often different from its stated amount. (True)

5. What are the arguments for trade restrictions?

The arguments for trade restrictions are:

- Job protection

- Protect against cheap foreign labor

- Fairness in trade-level playing field

- Protect domestic standard of living

- Equalization of production costs

- Infant industry protection

- Political and social reasons

1. There is a --------- if a nation gives greater protection to

intermediate and finished goods than to primary commodities. (TARIFF

ESCALATION)

2. Consumption effect and protective effect of a tariff represents a real

cost to society, not a transfer to other sectors of the economy, and known

as ------------ of the tariff. (DEADWEIGHT LOSS)

3. There is no possibility that a tariff may lead to a reduction in

domestic exports. (F)

4. For a small nation, levying an import tariff necessarily lowers its

national welfare. (T)

5. Explain the difference between the concepts of nominal tariff rate and

effective tariff rate.

Nominal tariff rate apply only the total value of a finished

product. It may not always truly indicate the actual protection given to

the domestic industry. But, effective tariff rate shows how much the

domestic production activities are protected. It signifies the total

increase in domestic productive activities that an existing tariff

structure makes possible, compared with what would occur under free-trade

conditions.

1. A _______ is a tax levied on a product when it crosses national

boundaries.

Answer: tariff

2. A main objective of an import tariff is to:

a increase exports

b protect domestic products

c increase imports

d control market

Answer: b

3. Goods that are imported can be put in a ___________ in order to

postpone import duties.

Answer: bonded warehouse

4. The difference between the actual price of a goods and what a consumer

would be willing to pay for it is called:

a producer surplus

b price fixing

c price differenciating\

d consumer surplus

Answer: d

5. Why isn't the theory of free-trade accurate in todays global economy?

- The free-trade mentality that exists between the majority of countries

today can be seen on as a great tool for economical developments and

advancements. However, the global trade environment is one with many rules

and regulations that are developed by each country in order to make their

own products as competitve as possible. In other words, the tariffs,

protectionism, trade barriers and other agreements and internal deals,

makes free-trade not as accurate as it sounds. There are no perfect

free-trade existing, but rather a way for each country to engage in

activities that will benefit their own economy.

CHAPTER 6

6. True or False. During periods of growing demand an import tariff is more restrictive trade barrier than an equivalent import quota. (False).

7. A (tariff-rate) quota, allows a specific number of goods to be imported at one tariff rate, whereas any imports above this level face a higher tariff rate.

8. True or False. Governments grant export subsidies in the attempt to protect import-competing industries. (False).

9. True or False. A price-discriminating firm will charge a higher price in the less-elastic demand (less competitive) market and a lower price in the more-elastic demand (more competitive) market. (True).

10. Define International Dumping.

Anti dumping rules is one of the instruments used by governments to protect their industries. It is one of the non-tariff barriers.

Dumping means selling at a lower price than the fair value. This can be:

à Selling below the production cost.

à Selling at a lower price in the foreign country that in the home country.

When a country finds out that foreign goods are being dumped into the home economy, they often impose rigid penalties against these commodities.

Chapter 6

1.) An ______ is a physical restriction on the quantity of goods that may be

imported during a specific time period.

2.) What is a global quota? What is a selective quota? Give an example of

each.

3.) T/F Foreign sourcing occurs when domestic manufacturers purchase

resources or perform assembly functions outside the home country.

4.) T/F Domestic content requirements stipulate the minimum percentage of a

product's total value that must be produced domestically.

5.) _____________ occurs when a firm disposes of excess inventories on

foreign markets by selling abroad at a lower price than at home.

Q: A physical restriction on the quantity of imported goods that may be imported during a specific time period is called an …… .

A: Imported Quota

Q: National governments sometimes grant …… to domestic producers to help improve their trade position.

A: subsidies

Q: The imposition of a tariff on imported steel for the home country results in lower profits for domestic steel companies.

A: False

Q: Excess capacity is a reason for sporadic dumping.

A: True

Q: What is a disadvantage of import quotas?

A: It accelerates domestic imports and foreign exports in order to bring material (goods) into the country prior to reaching the limit.

============================================================

1. An import quota is a physical restriction on the quantity of goods that

may be imported during a certain time. It limits the imports to a little

above level that which could occur under free-trade conditions. FALSE

2. A typical orderly marketing agreement (a market-sharing pact negotiating

by trading partners) is a VER’s voluntary export restraints, which are

voluntary quotas applied to export. TRUE

3. A VER’s is mostly applies to the most important exporting nations. TRUE

4. An export subsidy is an exemption and a provision of capital at low

interest rate, that government offers to firms to increase the volume of the

exports. TRUE

5. What are the differences between a quota and a tariff?

An import quota is a more restrictive trade barrier than the import tariff.

In fact, under a quota the government impose a restriction of the quantity

of imports, under a tariff the domestic prices can rise above the world

prices only by the amount of the tariff. In this case the amount of the

imports is still unlimited, the only limit is determined by how much the

domestic consumers are willing to pay. If we consider the administrative

aspect, the quotas are much easier to manage compared to the tariffs.

Despite that, the quotas do not provide government tax revenues.

Question 1: What are the differences between tariffs and quotas?

Answer: Quotas and tariffs differ in the sense that import quotas and tariffs

differ in respect to revenue effect and also in the impact they have on the

volume of trade. In addition, quotas are administratively easier to manage

than tariffs, but they normally do not provide government tax revenues.

Quotas are relatively easy to enact for emergency purposes, whereas enactment

of tariffs is a time consuming process requiring Congress to enact

legislation.

Question 2: A_______-_______ ________ allows a specific number of goods to be

imported at one tariff rate (the within-quota rate), whereas any imports

above this level face a higher tariff rate (the over-quota rate). (Answer:

the tariff-rate quota).

Question 3: There are two types of subsidies: a _______subsidy, which is

sometimes granted to producers of import-competing goods, and an

______subsidy, which goes to producers of goods that are to be sold oversees.

(Answer: domestic, export).

Question 4: Dumping is a form of domestic price discrimination and it occurs

when domestic buyers are charged lower prices than foreign buyers for an

identical product. (True/False) Answer: Dumping is a form of international

price discrimination and it occurs when foreign buyers are charged lower

prices than domestic buyers for an identical product, after allowing for

transportation costs and tariff duties.

Question 5: Social Regulation attempts to correct undesirable side effects in

an economy such as environmental quality, and affects the behavior of firms

in many industries i.e. automobiles, steel etc. (True/False).

Q1: It is generally agreed that the U.S. economy has become increasingly

separated from the world economy (become a close economy) in recent

decades.(T or F)

Ans. F

Q2: For the U.S. an Increased openness makes the domestic economy

vulnerable to disturbances initiated overseas, but increased openness also

helps to dissipate the disturbance that occur in the domestic economy. (T

or F).

Ans. T

Q3: According to the principal of ????. Advantage, as long as relative

costs of two goods differ in two nations, there are gains to be made from

specialization and trade.

Ans. Comparative

Q4: Because of its wide economic diversity, the United States remains among

the countries for which exports constitute a small fraction of national

input. (T or F)

Ans. T

Q5: What are some of the consequences of an open economy?

Opening the economy to foreign trade and increased openness makes the

domestic economy vulnerable to disturbance initiated overseas, as seen in

the oil crisis of the 1970s. But in the same time increased openness also

helps to dissipate the disturbances that occur in the domestic economy, for

example during periods of domestic recession, the rest of the world may

operate somewhat like a sink into which excess domestic output can be

poured.

1. An import quota is quantitative restriction on the import products. (T)

2. Selling a product at a lower price in export markets than at home is called dumping. (T)

3. Export firms that practice international price discrimination are engaging in predatory dumping. (F)

4. A corporate income tax is a nontariff barriers. (F)

5. A quota does not cause the domestic price of the imported product to rise. (F)

Essay: What are differences between tariff and quota?

Revenue effect of a tariff and a quota is different. The revenue from tariffs goes to government while revenue of the quota goes to domestic producers.

When the demand is increasing the implication of the quota is much more efficient than that of the tariff restriction.

1. A physical restriction on the quantity of goods imported during a time

period is called:

a limit import

b volume restriction

c import quota

d import size

Answer: c

2. A ____________ allows a specified number of goods to be imported at one

tariff rate, whereas any imports above this level face a hgher tariff

rate.

Answer: tariff-rate quota

3. A way to make sure that less efficient domestic producers have a chance

to participate in markets that would otherwies been lost to foreign

producers are done by an:

a orderly marketing agreement (OMA)

b trade agreement

c protectionism policy

d non of the above

Answer: a

4. When a company purchases resources or perform assembly functions

outside the home country, this practice is called:

a joint venture

b foreign sourcing

c international assembly

d foreign investments

Answer: b

5. What is international price discrimination?

- International price discrimination occurs when a domestic company sells

a product at a higher price on its domestic market than to foreign

markets. This occurs in areas where domestic barriers reduces the foreign

competition allowing a company to maintain a consumer mass that are

willing to pay more for their products. On the other hand, in order to

compete on the global market, the company has to reduce their prices,

making the domestic market pay for the reduction to the global market.

This is a way for companies to maximize their profits and in the same way

take advantage of economies of scale.

1) An orderly marketing agreement is a market sharing pact negotiated by

trading partners. T/F true

2) A typical OMA consists of voluntary quotas applied to exports. These

control are known as ___ . VER's

3) The opposite of trade creation is trade diversion. T/F true

4) The margin of dumping is calculated as the amount by which the foreign

market value exceeds the US price. T/F true

5) How can governments influence trade partners?

A good way would be to promote exports though the use of export subsidies.

Those subsidies will in turn function as a negative tax on exports, shifting

the export supply curve down by the amount of the per unit subsidy. This

would result in a dual effect consisting of first lowering the export

products price, thus making the country as a whole more competitive in the

global economy, and second, it would give an export revenue effect, thus

increasing the nation's export revenue as long as of course demand remains

elastic.

1. An (import quota) is a physical restriction on the quantity of goods that may be imported during a specific time period.

2. The orderly marketing agreement does not allow less efficient producers to participate in markets that otherwise have been lost to foreign producers F

3. Sometimes nations negotiate orderly marketing agreements such as voluntary exports restraints to avoid more costly alternatives T

4. Subsidies are an indirect form of protection provided to home businesses to help improve their trading position T

5. What is the meaning of the term Dumping? It occurs when foreign buyers are charged lower prices than domestic buyers for an identical product are, after allowing transportation costs and tariff duties. Selling in foreign markets at a price below the cost of production is also considered dumping.

1. An import quota is a physical restriction on the quantity of goods that

may be imported during a specific time period; the quota generally limits

imports to a level below that which would occur under free trade conditions.

(True)

2. During periods of growing demand for a product, an import quota is a more

restrictive barrier than an equivalent import tariff.

3. Foreign sourcing (outsourcing) happens when domestic manufactures

purchase resources or perform assembly functions in the home country.

(False)

4. National governments often grant subsidies to domestic producers to help

improve their trade positions. (True)

5. What is an orderly marketing agreement (OMA), what is its main purpose

and who does it involve:

Is a market sharing pact negotiated by trading partners. Its main purpose

is to moderate the intensity of international competition, allowing less

efficient domestic producers to participate in markets that would otherwise

have been lost to foreign producers that sell a superior product a at lower

price. OMAs involve trade negotiations between importing and exporting

nations, generally for a variety of labor intensive manufactured goods.

1.how does voluntary export restraints differ from protective barriers?

2.consumers in the U.S. affected from the U.S.-Japan voluntary export

agreement in 1980's.

3.U.S.-Japan voluntary export agreement encouraged U.S. auto firms to locate

assembly plants in Taiwan.

4.______________ is a government -imposed limit on the quantity of a product

thats cac be imported .

5.quotas are imposed on a _______ basis or a selective ___________ basis.

1. An import quota, which is a physical restriction on the quantity of goods that may be imported during a specific period of time, is not considered a trade barrier F.

2. Governments often extend preferences to domestic supplier in the form of ‘buy-national’ T.

Fill out the blank with the appropriate word/words within the parenthesis.

3. An orderly marketing agreement (OMA) is a market-sharing pact negotiated by trading partners.

4. According to the priced-based definition, dumping occurs whenever a foreign a foreign company sells a product in the US market at a price below that for which the same product sells in the home market.

Explain the following statement.

5. With the decline in import tariffs in the past two decades, nontariff trade barriers have gained in importance as a measure of protection.

It has been proved that nontariff barriers are more ‘friendly’ instruments to control the free trade and the countries interests’. Nontariff trade barriers such as import quotas, orderly marketing agreements, subsidies, antidumping regulations, social regulations, sea transport and freight restrictions, are a better way to control free trade rather than tariff trade barriers. In some cases an agreement is set up between the country and the importer in order to protect a specific industry in the country and both agree to do it. That why nowadays, nontariffs barriers have gained importance as a measure of protection y the last two decades.

1-the imposition of a tariff on imported steel for the home country results

in improving terms of trade and rising volume of trade .

2-what is an orderly marketing agreement ?

3-local contint requirement stipulates the percentage of a product's total

value that must be produced domestically in order for that product to be sold

domestically.

4-US comsumer paid higher prices for imported autos because of he japaness

automobile export quotos of the 1980's.

5-what are justification for trade restrictions?

1. (T/F) Government export subsidies increase export volume, but also tend to reduce export prices and increase domestic tax burdens. (T)

2. A nation that reduces export prices to offset the effects of a domestic recession is engaging in SPORADIC DUMPING.

3. (T/F) A tariff contributes to more rapid price increases over time than would a quota, as domestic demand rises. (F)

4. What is dumping?

Dumping is recognized as a form of international price discrimination. It occurs when foreign buyers are charged lower prices than domestic buyers for the same product, after allowing for transportation costs and tariff duties.

A GLOBAL IMPORT QUOTA creates uncertainty about market access for individual exporting nations.

1- (T) (F)Selective quotas restrict the quantity of a good coming from a

particular country.(T)

2- (T) (F)One company sells a product at a lower price in foreign markets

because it has unwanted inventories and wants to clear its excess capacity.

Such a selling in the foreign market is not a kind of dumping.(F) this is

sporadic dumping.

3- Domestic content requirements are one of the types of---------- .(

non-tariffs)

4- --------- dumping means to undermine foreign competitors. (Predatory)

5- What is the tariff-rate quota

It is a two-tiered tariff. A specified number of goods(up to the quota

limit) may be imported at one (lowers) tariff rate ,while imports in excess

of the quota face a higher tariff rate.

1-. What is No Tariff Trade Barrier?

No tariff trade barriers are forms of trade restrictions. It encompasses

a variety of measures that are intended to reduce imports thus benefit

domestic producers.

2-. What is import Quota?

An import quota is a physical restriction on the quantity of goods that

may be imported over a specific period of time. An import quota may be

global, with no further imports permitted from any nation once the quantities

limit is reached.

3-. What is Voluntary Export Restraints (VERs).

An orderly marketing agreement (OMA) is a marketing share pact negotiated

by trading partners. Its main purpose is to moderate the intensity of

international competition, allowing less efficient domestic producers to

participate in markets that would be lost by foreign competitors by selling

it products at a lower price. A typical OMA are the VERs, which are

sometimes supplemented by backup import control to ensure that the restraints

are effective.

4-. What are Subsidies?

Subsidies are government granted help to domestic producers to improve

their trade position. These actions are an indirect form of protection price

to home business, weather there are import competing producers or exporters.

There are export subsidies and domestic subsidies.

5-. What is known as international price discrimination?

Damping, which occurs when foreign buyers are charged lower prices than

domestic buyers for an identical product.

1)Direct production subsidies for import-competing producers tend to involve

a bigger loss in economic welfare than do equivalent tariffs and quotas. (T

or F)

2)A firm sells its product abroad at a price that is less than that charged

to its home buyers of the same product, this violates antidumping laws. (T or

3)An import tariff is a more restrictive trade barrier than an equivalent

import quota. (T or F)

4)Economists have found empirical evidence to support the existence of

predatory dumping. (T or F)

5)What is meant by voluntary export restraints, and how do they differ from

other protective barriers?

1. An import quota is a physical restriction on the quantity of goods

that may be imported during a specific time period.

Ans. True

2. A _______________ is a market-sharing pact negotiated by trading

partners.

Ans. Orderly marketing agreement

3. ___________ are sometimes granted by national governments in an

attempt to improve domestic producers trade position.

Ans. Subsidies

4. Because the government of the exporting nation administers an export

quota, its revenue effect tends to be captured by sellers of the exporting

nation.

Ans. True

5. What is dumping and why is it done?

Dumping occurs when a firm sells its product abroad at a price that is less

than the average total cost or less than that charged to domestic buyers of

the same product. Governments often impose stiff penalties against foreign

commodities that are believed to be dumped in the home economy. Many

countries dump goods on the market in an attempt to sell a large supply at

any cost. These countries flood the market with their cheap prices and

make it difficult to compete against.

1) A tariff-rate quota allows a country to apply a __(within-quota rate)__

on a specified number of imports and a _(over-quota rate)__ on imports over

the specified amount.

1) True or False. An imported quota is a percentage levied on goods that may

be imposed during a specific time period.(False)

2) True or False. Quotas are more difficult to manage than tariffs and they

provide government tax revenues. (False)

3) True or False. The subsidies are an indirect form of protection provide

to home businesses whether they are import-competing producer or exporters

(True)

4) True or False. Dumping is recognized as a form of international price

discrimination and occurs when foreign buyers are charged higher prices than

domestic buyers for an identical product, after allowing for transporting

cost and tariffs duties. (False)

5) Which are the types of dumping?

· Sporadic Dumping: occurs when a firm disposes of excess inventories on

foreign markets by selling abroad at lower prices than at home.

· Predatory Dumping: occurs when a producer temporarily reduces the prices

charged abroad to drive foreign competitors out of business.

· Persistent Dumping: goes on indefinitely.

1- An Import Quota is a physical restriction on the quantity of goods that

may be imported, usually at a level below free trade conditions.

2- Like a tariff, an import quota affects an economy's welfare. TRUE

3- A quota that is allocated to a specific country is known as a Selective

Quota.

4- A quota allocated to a specific number of goods that are allowed to be

imported into a country but does not specify where the goods come from is

called a Global Quota.

5- Define and explain the concept of OMA

OMA is the abbreviation for Orderly Marketing Agreement. It is a

market-sharing pact negotiated among trading partners. Its main purpose is

to moderate the intensity of international competition, allowing less

efficient domestic producers participate in markets that would otherwise be

lost to foreign producers that sell better products at lower prices.

Question 1

What is the domestic content requirement?

It is a way of limiting the practice of foreign sourcing. It requires

that a minimum percentage of a product's total value must be produced

domestically.

Question 2

When foreign buyers are charged higher prices than domestic buyers for

identical products, it is called dumping

True FALSE

Question 3

Non-tariff barriers improve welfare for a small open economy.

True FALSE

Question 4

VER stands for

a) vertical economic restrictions

b) volume-error ratio

C). VOLUNTARY EXPORT RESTRICTIONS

d) verbal error rate

Question 5

Which of the followings is NOT a nontariff trade barrier?

a) quota

b) VERs

c) Domestic content requirement

D). Ad-valorem import tariff

1.-------------is a physical restriction on the quantity of goods that may

be imported during a specific time period.( import quota)

2. ------------ is a market- sharing pact negotiated by trading partners.(

orderly marketing agreement)

3.-------------- is recognized as a form of international price

discrimination.(dumping).

4.A nation that uses an export subsidy will find that its export volume will

decrease . ( false)

5.Today nontariff trade barriers have gained in importance as protectionist

devices . What are the major nontariff trade barriers?

With the decline in import tariffs in the past two decades , nontariff trade

barriers have gained importance as measure of protection. Non tariff trade

barriers include such practice as 1 import qoutas, 2 orderly marketing

agreements 3 subsidies 4 antidumping regulations 5. Discriminatory

government procurement practices 6. Social reguationns and 7. Sea transport

and freight restrictions.

(T/F)

1-Qutos are administratively easier to menage than

tariffs, but they do not provide government tax

revenues. (T)

2-Despite Quotas do not provide government tax

revenues like tariffs, Quotas have less impact on

trade volume than tariffs. (T)

3-One of the dumping types is predatory dumping which

occurs because unforeseen changes in supply-demand

condition that can result in excess in inventories.

(F)

4-Government subsidies are sometimes granted as a form

of protection to domestic exporters and

import-competition companies. They may take the form

of direct cash bounties, tax concessions, or credit

extent at low interest rates. (T)

ASSAY

5-Could you briefly explain what the domestic content

requirements are? Do you think the U.S is gaining from

domestic content requirements against the Japanese

companies?

Sometimes, a country wants domestic of

foreign companies to use domestic components for their

products. The main purpose of this use less import

goods. That is to say, employ more workers in the

country. Domestic component will help to increase the

rate of employment in the country. For example, the

U.S wants Japan_s auto manufacturer in the U.S to use

domestic component.

Q1: An ???Quota is a physical restriction on the quantity of goods that may

be imported during a specific time period.

Ans. Import

Q2: International dumping occurs when a firm sells its product abroad at a

price that is less than average total or less than that charged to domestic

buyers of the same product. (T or F).

Ans. T

Q3: Government rules and regulations in areas such as safety and technical

standards and marketing requirements can have significant impacts on world

trade patterns. (T or F)

Ans. T

Q4: Orderly ???. Agreements are market-sharing pacts negotiated by trading

nations, which generally involve Quotas on exports and imports.

Ans. Marketing

Q5: Why do governments grant subsidies to domestic producers?

National government usually grant subsidies to domestic producers to help

improve their trade position, such aid is an indirect form of protection

provided to local businesses, whether they are import-competing producers

or exporters. By providing domestic firms a cost advantage, a subsidy

allows them to market their products at prices lower than warranted by

their actual cost or profit analysis.

The government's goal is to encourage that industry to expand and develop.

1. True or false: During periods of growing demand, an import quota is a

more restrictive trade barrier than an equivalent import tariff (true)

2. True or false: Because subsidies tend to reduce the foreign price of

home-nation exports, the home nation’s term of trade is worsened. This

situation comes about because, given a fall in export prices, a greater

number of exports must be exchanged for a given dollar amount in imports

(true)

3. Dumping occurs when foreign buyers are charged (lower/higher) prices than

domestic buyers for an identical product, after allowing for transportation

costs and tariff duties (lower)

4. Import quotas are considered (more/less) restrictive than tariffs (more)

5. Explain why buy-national policies are a barrier to free trade

Governments that extend preferences to domestic suppliers discriminate

against foreign suppliers, even though these suppliers are cheaper and offer

better products. In the meantime, domestic suppliers are given the leeway to

use less efficient production methods and to pay resource prices higher than

those permitted under free trade. This yields a higher cost for government

projects and deadweight welfare losses for the nation in the form of the

protective effect and consumption effect.

1. Quotas are a restriction on the quantity of a good that may be imported

in any one period. (True)

2. (Global quotas) restrict the total quantity of an import regardless of

origin.

3. (Selective quotas) restrict the quantity of a good coming from a

particular country.

4. (Dumping) is the practice of selling a product at a lower price in export

markets than at home.

5. What are domestic subsidy and export subsidy?

Domestic subsidy are payments made to import competing producers to raise

the price they receive above the market price.

Export subsidy are payments and incentives offered to export producers

intended to raise the volume of exports.

1. Domestic content requirements stipulate the -------- percentage of a

product's total value that must be produced domestically. (MINIMUM)

2. ---------dumping is a temporary reduction in prices charged abroad to

drive foreign competitors out of business. (PREDATORY)

3. Import quotas are considered less restrictive than an equivalent

tariff. (F)

4. An exporting nation's motivation to negotiate Orderly Marketing

Agreements is to avoid a more costly alternative. (T)

5. Explain export subsidy.

Export subsidy is a kind of non-tariff barrier. Its aim is to

encorage exporting by domestic exporters. Here, a government extends

loans to foreign customers, for private banks are unwilling to grant

credit to importing businesses because of their high riskiness. The

interest rates are generally lower than those demanded by private banks on

similar loans.

1. A tariff-rate quota permits a limited number of goods to be

imported at a lower tariff rate, whereas

any imports beyond this limit is not allowed.(F)

2. Proponents of Orderly marketing agreements are less disruptive of

international trade than

Unilaterally determined tariffs and quotas. (T)

3. Government subsides are granted as a form of direct cash bounties,

tax concessions, credit

extended at low interest rates, or special insurance arrangement.

4. International dumping occurs when a firm sells its products

abroad at a price that is

a. less that the price in the foreign country.

b. Less that that charged to domestic buyers of the same product.

(F)

5. What is subsidy, its forms. Why it has less economic loss than

tariff?.

National governments sometimes grant subsidies to domestic

producers to help improve their

trade position. Its form can be cash disbursement, tax

concessions, insurance arrangement, and

loans at below-market interest rates.

There are two kinds of subsidies: domestic subsidy and export

subsidy.

Domestic subsidy is better than tariff because tariffs distort

choices for domestic

Consumers (resulting n a decrease in the domestic demand for

imports), in addition to permitting

less efficient home production to occur.

1. . An import quota is a physical restriction on the quantity of goods that may be imported during a specific time period.

(The answer is correct.)

2. 2. A global quota permits a specified number of goods to be imported each year, but doesn’t specify where the product is shipped from or who is permitted to import.

(The answer is correct.)

3. 3. A tariff rate quota (a two-tier tariff), displaying both tariff-like and quota-like characteristics, allows a specific number of goods to be imported at one tariff rate (the within-quota rate), whereas any imports above this level face a higher tariff rate (the over-quota rate).

(The answer is correct.)

4. 4. Dumping is recognized as a form of international price discrimination. It occurs when foreign buyers are charged lower prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties.

(The answer is correct.)

5. 5. Explain nontariff trade barriers.

(Answer)

The post World War II success in international negotiations for the reduction of tariffs has made remaining nontariff barriers more visible. With the decline of tariffs in past 20 years, nontariff trade barriers have gained in importance as a measure of protection. Basically, nontariff trade barriers are;

- - Import quotas,

- - Orderly marketing agreements, (market sharing pacts negotiated by trading nations that generally involve quotas on exports and imports)

- - Domestic content requirements,

- - Subsidies,

- - Antidumping regulations,

- - Discriminatory governments procurements practices,

- - Safety standards.

CHAPTER 7

1. True or False. Because of the Smoot-Hawley Act, in 1930, US average tariffs were raised to 53% on protected imports. (True).

2. The (Uruguay) Round dealt with trade disciplines such as intellectual property rights, services and agriculture.

3. True or False. The purpose of antidumping and countervailing duty law is to protect consumers, rather than to discourage unfairly traded imports that cause harm to competing domestic industries and workers. (False).

4. True or False. Multilateral economic sanctions generally lead to superior economic pressure on the target country than unilateral measures. (True).

5. Explain the necessary conditions for Section 201 or Escape Clause Petition.

A firm to the International Trade Commission (ITC) formulates the petition. The ITC studies the situation, and if all of the following conditions are met, then it will grant import relief to the industry. Conditions:

à Demonstrate that there is an increase on the imports of the competition of the same good.

à The domestic industry that is producing the like or competitive good is being injured.

à Demonstrate that there is a relationship between the increase on imports and the injury of the business, that is, to reveal that the raise on imports is causing damage to the domestic industry.

Only if all of the above conditions prove to exist, then the ITC will grant escape-clause relief to the industry.

Chapter 7

1.) What does the Smoot-Hawley Tariff Act state?

2.) _____ is an agreement between two nations to apply tariffs to each other

at rates as low as those applied to any other nation.

3.) T/F Intellectual property does not include copyrights, trademarks,

and patents.

4.) The _______ clause provides temporary protection to the U.S. producers

who desire relief from foreign imports that are fairly traded.

5.) T/F An economic sanction is a government-mandated limitation placed on

customary trade or financial relation among nations.

===========================================================

Question 1: According to the Most-Favored-Nation clause, a nation has the

right to apply lower tariffs to another nation that the former does business

with more frequently than other nations (True/False). Answer: The MFC clause

is an agreement between two nations to apply tariffs to each other at rates

as low as those applied to any other nation, otherwise the less favored

nation can investigate the tariff policies and call for equal treatment

against the other nation.

Question 2: The GATT was the forerunner of WTO hence WTO embodies the main

provisions of GATT, but its role was expanded to include a mechanism intended

to improve GAAT's process for resolving trade disputes among the member

nations. (True/False)

Question 3: What does Section 301 of the Trade Act of 1974 do?

Answer: Section 301 of the Trade Act of 1974 gives the United States Trade

Representative authority, subject to the approval of the president, and means

to respond to unfair trading practices by foreign nations. Included among

these unfair practices are foreign trade restrictions that hinder U.S.

exports and foreign subsidies that hinder U.S. exports to third-country

markets. The USTR responds when he/she determines that such practices result

in "unreasonable" or "discriminatory" burdens on U.S. exporters.

Question 4: To implement its industrial policies in manufacturing (high-tech

industry), the Japanese government has created the ______. ( Answer: the

Ministry of International Trade and Industry)

Question 5: ______ ______ _____ is an invention, idea, product or process

that has been registered with the government and that awards the inventor

exclusive rights to use the invention for a given time period. (Answer:

Intellectual Property Rights).

1. The most-favored-nation clause is an agreement between two nations to

apply tariffs to each other at rates as low as those applied to any other

nation. TRUE

2. The importance of the Uruguay Round is its extension of the trade

disciplines to three areas: intellectual property, service and agriculture.

TRUE

3. The escape clause intends to provide relief to US companies and employees

who want protection from fairly traded imports. TRUE

4. Intellectual property includes copyrights, trademarks and patents. TRUE

5. How come Japan has become an economic leader in the post-World War II

era?

The Japanese strength that made Japan a major world competitor is its

technological level. In fact Japan shifted from a low-tech nation to a

high-tech nation. One and probably the most important reason is the

industrial policy that the government implemented through the MITI (Ministry

of International Trade and Industry). The MITI assisted the firms and the

sectors that needed supports. It invested in R&D and it targeted specific

industries that thought will be successful.

In addition, the high saving rate, the educated and skilled labor force, a

shift of labor from low-productivity sectors to high-productivity

manufacturing were also some other elements for the success of this country.

Q1: It is generally agreed that the U.S. economy has become increasingly

separated from the world economy (become a close economy) in recent

decades.(T or F)

Ans. F

Q2: For the U.S. an Increased openness makes the domestic economy

vulnerable to disturbances initiated overseas, but increased openness also

helps to dissipate the disturbance that occur in the domestic economy. (T

or F).

Ans. T

Q3: According to the principal of ????. Advantage, as long as relative

costs of two goods differ in two nations, there are gains to be made from

specialization and trade.

Ans. Comparative

Q4: Because of its wide economic diversity, the United States remains among

the countries for which exports constitute a small fraction of national

input. (T or F)

Ans. T

Q5: What are some of the consequences of an open economy?

Opening the economy to foreign trade and increased openness makes the

domestic economy vulnerable to disturbance initiated overseas, as seen in

the oil crisis of the 1970s. But in the same time increased openness also

helps to dissipate the disturbances that occur in the domestic economy, for

example during periods of domestic recession, the rest of the world may

operate somewhat like a sink into which excess domestic output can be

poured.

1. Tokyo Round transformed the GATT into the WTO. (F)

2. Smoot-Hawley Tariff Act was a trend toward trade liberalization. (F)

3. Strategic trade policy involves government targeting of key industries in export encouraging. (T)

4. Countervailing tax designed to generate revenue to offset a budget deficit. (F)

5. Nationalization of steel industry is a US industrial policy. (T)

Essay: List the US industry policy?

Broad policies to foster economic growth,

Tariff protection of declining sectors,

Aid to targeted sectors,

Tax incentives for investment,

Export promotion and financing.

1) Intellectual property rights provide 5 years of protection for

trademarks. T/F false-7

2) The escape clause is intented to rpovide relief to US firms and workers

desiring protection from fairly traded imports. T/F false- not only US

firms, there are other countries which hold the right to use escape clauses.

3) The MITI attempts to facilitate the shifting of resources into high-tech

industries by targeting specific industries for support. T/F true

4) Economic sanctions are government-mandated tariffs placed on customary

trade or financial relations among nations. T/F False, limitations

5) How and in what situation, can a country gain from the use of a strategic

trade policy?

When perfect competition exists, usually firms which have comparative

advantage are the ones that prevail. However, governments have the ability

to alter the competition conditions, in cases of limited number of firms

within an industry, by offering subsidies which result in lower unit costs

and scale economies, thus resulting in a larger market share than the

competitors'. That will bring revenues to the country and in the same time

it will strengthen those industries that were not part of the game before.

1. The "most favored nation clause" is an agreement that:

a allows one country to favor another

b allows for two countries to agree upon certain trade tariffs

c allows for discrimination of other MFN members

d allows countries to trade without tariffs

Answer: b

2. The Tokyo Round is known for its:

a Vast reduction in tariffs

b High increase in tariffs

c Trade policy between U.S and Japan

d GATT membership of Japan

Answer: a

3. What is a tool for American producers in order to protect the domestic

market in times when foreign products threatens the industry?

a protection clause

b escape clause

c trade clause

d non of the above

Answer: b

4. Describe strategic trade policy.

- The strategic trade policy works in areas where the government can

assist domestic companies in capturing economic profits from foreign

competitors. This is typical of industries which is important for the

nation to be ahead in. The high- tech world is such industry, and

U.S puts a lot of effort into maintaining an edge compared to the rest of

the world. As the government can subsidiese and protect domestic companies

over foreign companies, the essence is to create an envorinment that the

American people can take great advantage of in the future.

5. A way to preasure a countries political behavior can be done through:

a Trade cut

b Political sanctions

c Economic sanctions

d Trade barriers

Answer: c

1. The General Agreement on Tariffs and trade was crafted as an agreement among contracting parties, the member nations, to decrease trade barriers and to place all nations on equal footing in trading relations T

2. The World Trade Organization (WTO) embodies the main provisions of GATT, but its role was expanded to include a mechanism intended to improve GATT’s process for resolving trade disputes among members T

3. The export-import bank is an independent agency of the U.S. government established to finance U.S. Imports F

4. A knowledge base growth policy recognizes that knowledge is king in the world economy; those nations that excel at crating new knowledge and transforming it into new technologies and products will prosper in the years ahead T

5. What is the most favored nation clause?

This clause is an agreement between two nations to apply tariffs to each other as low as those applied to any other nation. According to the provisions of the World Trade Organization there are two most favored nation clause: (1) Industrial nations can grant preferential tariffs to imports from developing countries that are nit granted to imports from other industrial nations. (2) Nations belonging to a regional arrangement can eliminate tariffs applied to imports of goods coming from other members while maintaining tariffs on imports from nonmembers.

1. The General Agreement on Tariffs and Trade (GATT) was the first major WW

II postwar step toward liberalization of world trade. (True)

2. GATT was transform into the World Trade Organization (WTO) on January 1,

2000. (False)

3. Intellectual property rights (IPRs) protect certain industries and

products from known targets of pirates, counterfeiters, and other

infringers. (True)

4. Many industrial nations in recent years have enacted programs for giving

trade adjustments assistance to those who incur short-run hardships because

of displaced domestic production.

5. What are the intentions of the U.S. antidumping duties:

The U.S antidumping duties are intended to neutralized two unfair trading

practices:

a. Export sales in the United States at prices below average total cost;

b. International price discrimination, in which foreign firms sell in the

United States at a price lower than that charged in the exporter's home

market.

1.talk briefly about trade remedy laws?

2.Duties which offset commercial dumping on the part of foreign firms are

results from U.S. commercial policy.

3.there are organization that makes loans to foreign buyers of U.S.

manufactured goods.

4.tarrifs were cut up to _________ because of the Reciprocal Trade Agreements

Act.

5.talk briefly about intellectaul property.

1) The theory behind strategic trade policy is that government can assist domestic companies in capturing economic profits from foreign competitors T.

2) According to the world trade organization there is not exemptions to the most-favored-nations clause F.

Fill out the blank with the appropriate word/words within the parenthesis.

3) Economic sanctions are government-mandated limitations placed on customary trade or financial relations among nations.

4) The essential notion underlying strategic trade policy is imperfect competition.

Explain the following statement.

5) How have the US and other nations done to rule foreign competition and protect business and workers?

The have initiated programs of trade adjustment assistance involving governments aid to adversely affected business, workers and communities. Thus, government does not stop trading but can regulate it to benefit involving entities. By assisting those affected entities, government can perform a better management about the trade effects and educate people in that issue in order to provide them a better understanding of the trade impact and how to survive from them.

1) An agreement signed on 1947 among member nations aimed to decrease trade

barri-ers and to help to increase trading activity is called General

Agreement of tariffs and Trade (GATT).

2) A clause that is intended to provide relief to U.S firms and workers

desiring protec-tion from fairly traded imports is called the escape clause.

3) The Export-Import Bank (Eximbank) is an independent agency of the U.S

govern-ment established to finance U.S exports? T

4) Export sanctions are implemented in order to promote and increase product

availabil-ity in the country were it is being imposed? F

5) Export subsidies are considered unfair competition by the WTO, importing

countries can retaliate from this by implementing a countervailing duty?

1-what is imported quotas?

2-adjustment assistance is sometimes used to assists foriegn firms hurt by

our quotas.

3-the smoot-howley tariff act of 1930 has generally been assosiated with

falling tariff.

4-what is beggar -thy-neighboor policy?

5-what is export subsidy?

1. (T/F) Economic sanctions are most successful if imposed unilaterally by one nation. (F)

2. (T/F) The rationale for a scientific tariff is to provide revenue for the government. (F)

3. A COUNTERVAILING DUTY protects firms from injury caused by foreign export subsidies.

4. (T/F) The initial tariff laws in the United States were established primarily to raise revenue. (T)

5. What is an escape clause?

The escape clause is intended to provide relief to US firms and workers desiring protection from fairly traded imports. It allows the president to terminate or make modifications in trade concessions granted foreign nations and to levy restrictionson imports of any product that causes or threatens serious injury to the domestic industry manufacturing a like or directly competitive product. Relief provided by the escape clause is temporary.

1- (T) (F)Success of sanctions does not depend on number of nations imposing

sanctions.(F) depending on strictly to the their number.

2- (T) (F)Some restrictions on textiles was removed as a result of GATT

Uruguay Round negotiations.(T)

3- ---------------are very dependent on the developed industrial countries

as export markets and sources of imports.(Developing nations’ trade)

4- ---------- is attempt to restrict competition among producers and

support higher prices for their product.( Cartel )

5- Which strategy did East Aisian newly industrialized countries use in

order to develop and catch up developed countries.?

They used "Export-led Growth Strategy for that. This strategy encouraged

industries in which developing countries are likely to have a comparative

advantage –such as labor –intensive manufactures.

1-. What is the Reciprocal Trade Agreement Act?

It is the stage for trade liberalization. Also known as to the principle

that two countries should charge them the same tariffs as low as these

applied to the rest of the nations.

2-. What is an Industrial Policy?

It is a policy to promote the domestic industry. It involves the use of

specific incentives such as tax reductions, low interest government loans,

and subsidies to fund research and development.

3-. What is trade policy?

It is a variant of industrial policy. This relates to industries with

imperfect competition, rather than perfect competition. It is the policies

that a government implies to protect the domestic industries against foreign

competitors. It also gains market share from foreign competitors and

captures benefits for themselves and for the nation.

4-. What is known as the organization that establishes a framework and

promote nondiscrimination among nations in international trade?

GATT (General Agreement on Tariffs and Trade).

5-. What is WTO?

The WTO is know as the World Trade Organization, which was formed in

Uruguay in January, 1995 after the ratification of the nations members of

GATT. It is a more formal membership organization with a wider scope and

greater authority.

1)The Smoot-Hawley Tariff Act of 1930 raised US tariff to an all-time high,

with disastrous results. (T or F)

2)The purposes of the General Agreement on Tariffs and Trade were to decrease

trade barriers and to place all nations on an equal footing in trading

relationships. (T or F)

3)When trade disagreements cannot be successfully resolved, Section 301 of

the 1974 Trade Act allows the US government to levy trade restrictions

against nations that are practicing unfair competition. (T or F)

4)If the United States is a net importer of a product that is being

subsidized or dumped by Japan, not only do US consumers gain, but they gain

more than US producers lose from the Japanese subsidies or dumping. (T or F)

5)What is the purpose of economic sanctions? When are sanctions most

successful in achieving their goals?

1. The Reciprocal Trade Agreements Act, which set the stage of trade

liberalization, contains two feature ___________ reductions and ___________

authority.

Ans. Generalized, negotiating

2. ______________ was the most extensive and comprehensive trade

agreement concluded under the GATT.

Ans. The Uruguay round

3. The Smoot-Hawley Tariff Act of 1930 raised US tariffs to an all-time

high and resulted in disastrous results.

Ans. True

4. Section 301 of the 1974 Trade Act allows the US government to levy

trade restrictions against nations that are practicing unfair competition.

Ans. True

5. What is the purpose of the GATT?

The purpose of the GATT was to decrease trade barriers and to place all

nations on an equal footing in trading relationships. In 1995 GATT was

transformed in the WTO. The WTO embodies the main provisions of GATT and

provides a mechanism intended to improve the process of resolving trade

disputes among member nations.

1. True or False. One of the exceptions of the most-favored-nation clause is

that nations belonging to a regional trading arrangement can eliminate

tariffs applied to imports of goods coming from other member while

maintaining tariffs on imports from nonmembers. (True)

2. True or False. The General Agreement of Tariffs and Trade, signed in

1947, obligated its members to use just quotas as many as possible to

protect their domestic industry (False)

3. True or False. The Uruguay Round called for eliminating over 10 years the

Multi-fiber Agreement, a system of quotas that limited imports of textiles

and apparel to the United States and other developed countries (True)

4. True or False. The strategic trade policy is when a government can assist

international companies in capturing economic profits from nationwide

competitors because those industries are important to future domestic

economic growth and that provide widespread benefits to society. (False)

5. What is the escape clause and why it’s relief is considered temporary?

The escape clause is intended to provide relief to US firms and workers

desiring protection from fairly traded imports. Its temporary because trade

restrictions can be enacted for a five-year period and are to be phased down

over this period in the transition to open markets.

Question 1

State the idea behind "strategic trade policy" concept.

Government can assist domestic companies against international ones in

capturing economic profits from these rivals. The classic example for the

theory is provided by Airbus. Airbus was supported by four European countries

heavily in order to steal economic profit from American giant Boeing Company.

Question 2

MITI stands for Ministry of International Trade and Industry

TRUE False

Question 3

The number of nations imposing economic sanctions is among the most

important factors determining the success of sanctions.

TRUE False

Question 4

GATT signed in

a) 1789

b) 1999

C) 1947

d) 2000

Question 5

Which of the following industry has created the trade disputes between

Japan and the US governments since early 1970s

A) AUTO

b) agriculture

c) Wine

d) None of the above

(T/F)

1-Smoot-Hawley Tariff act in 1930, under which the U.S

average tariffs were raised to 53 percent on protected

import. Results of the Tariff act show us that if a

country raise the tariff world trade will decrease

dramatically because of the retaliation. And finally

any country will get benefit raising tariffs. (T)

2-The Uruguay around under the GATT achieved

significant liberalization in the trade, and after

this meeting GATT transformed as a permanent

international organization, WTO. (T)

3-The most important determinants of success of

economics sanctions are, the number of nations

imposing sanctions, the degree to which the target

nation has economic and political ties to the imposing

nations, the extent of political opposition in the

target nation, and cultural factors in the target

nation. (T)

4-A country can impose either quota on imports from

the target nation or a quota on export to target

nation. This called as Trade sanction. (T)

ASSAY

5-Could you briefly discuss what the main goals of

imposing economics sanctions?

The main goal of economic sanctions is to alter of

target country_s policy in terms of sender_s best

interest. There are varieties of reasons to employ

economic sanctions on a country. For example, impair

military aggression, hamper illegal drug trafficking,

halt support for terrorism, discourage proliferation

of weapon, and promote human rights, protect

environment, oust governments.

Q1- Protectionism in the U.S reached its peak when the Smoot-Hawley Tariff

act was passed in 1930. (T or F)

Ans. T

Q2- The escape ???. Is intended to provide relief to U.S firms and workers

desiring protection from fairly traded imports.

Ans. Clause

Q3- ?????.. property includes copyrights, trademarks, and patents.

Ans. Intellectual

Q4- Countervailing duties are intended to offset any unfair competitive

advantage that foreign producer might gain over domestic producers because

of foreign subsidies. (T or F)

Ans. T

Q5- Please define the direct effect of dumping for the importing country.

The direct effect of dumping is to lower import prices, this effect provide

both benefits and cost for the importing country. There are benefits to

consumers if the imports are finished goods and to consuming industries

that use imports as intermediate inputs into their own production, on the

other hand there are cost to the import-competing industry, it's workers.

1. True or false: in 1930, the United States systematically lowered trade

barriers in order to stimulate the demand for domestic goods and lower the

level of unemployment (false)

2. True or false: Unlike the GATT, the World Trade Organization is a

permanent international institution (true)

3. True or false: Dumping products at prices below fair market value and

subsidizing exports are allowed under international trade law if the

producers of these countries are the victims of unacceptable trade barriers

form the countries to which they export their products (false)

4. True or false: The Japanese Ministry of International Trade and Industry

(MITI) provides financial assistance to any industry that needs help. It is

conscious that the government is less able to pick and support winners than

the private sector, and it is very careful not to target a specific industry

for support (false)

5. What are some of the factors influencing the success of economic

sanctions

Among the most important determinants of the success of economic sanctions

are the number of nations imposing sanctions. If a large number of nations

impose sanctions, the target country will be more isolated than if only a

limited number of countries impose these sanctions. To be most effective,

sanctions require the participation of all nations against the target

nation. The degree to which the target nation has economic and political

ties to the imposing nations is also an important factor in the success of

economic sanctions. The tighter the ties are, the more effective the

sanctions will be. Finally, political opposition and cultural factors in the

target nation can also play an important role in the outcome of economic

sanctions.

1.-------------- is intended to provide relief U.S. firm and workers

desiring protection from fairly tradeed imports.( escape clause)

2.--------------- is an invention , idea, product,or process that has been

registerd with government and that awards the inventor exclusive right to

use the invention for given time period.( intellectual property)

3.---------------- are government –mandated limitations placed on customary

trade or financial relation among nations.( Economic sanction)

4.GATTestablish in 1947 ,remains the primary international forum for

negotiating trade agreement. ( true)

5.What is GATT AND WTO ?What are their purpose?

GATT is General Agreement on Tariffs and Trade , sign in 1947 .GATT was

crafted as an agreement among contracting parties , the member nations , to

decrease trade barriers and to place all nation s on an eqaul footing trade

relationship.

In 1995 GATT was transformed into WTO which is World Trade Organization .

WTO embodies the main provision of GATT , but its role was expanded to

inculde a mechanism intended to improve GATT’s process for sesolveing trade

disputes among member nations. The Tokyo Round and Uruguay Round of

multilateral trade negotiation went beyond tariff reductions to liberalize

various nontariff trade barriers.

1. The reciprocal trade agreements act introduced "most favored nation"

(MFN) clause. (True)

2. Mention two U.S. trade remedy laws: escape clause, anti-dumping duties.

3. The Ministry of International Trade and Industry (MITI) target aid to

promising sectors. (True)

4. Subsidies can give the advantage to domestic manufacturers over foreign

one. (True)

5. What are the factors sanctions depend on to be a success?

Success of sanctions depends on:

- Number of nations imposing sanctions

- Nature of ties between target and imposing nations

- Extent of political opposition in target nation

- Cultural factors in target nation

1. Under the -------------- principle of GATT, member nations must treat

other nations ' industries no less favorably than they do their own

domestic industries. (NATIONAL-TREATMENT)

2. Non-tariff barriers were addressed as a first time during ---------

from 1973 to 1979. (TOKYO ROUND)

3. According to the provisions of the WTO, industrial nations can grant

preferential tariffs to imports from developing nations that are not

granted to imports from other industrial nations. (T)

4. Escape Clause of the United States is intended to provide relief to the

US firms and workers desiring protection from unfair trading practises by

foreign nations. (F)

5. What were the main accomplishments of the Uruguay Round?

The Uruguay Round between 1986-1993 was the most extensive and

comprehensive trade agreement concluded under GATT. It dealt more

directly and extensively with non-tariff barriers than any agreement

concluded before. It brought several major product sectors and trade

issues under international trade for the first time, including services,

agriculture, and intellectual property. Significant tariff cuts were also

achieved. Tariffs were eliminated entirly in several sectors, including

steel, medical equipment, construction equipment, pharmaceuticals, and

paper. Finally, it created the WTO, responsible for governing the conduct

of trade relations and having a dispute resolution mechanism.

1. World Trade Organization (WTO) was founded in 1947.

(It is wrong. The WTO was founded in 1995)

2. Which one isn’t among the results of GATT Uruguay Round results?

a. Protection of intellectual property rights,

b. Opened markets for trade in services,

c. Removed some restrictions on textiles,

d. Enabled faster action on dumping disputes,

e. Removed World Trade Organization (WTO)

(The answer is "e". Actually, GATT was transformed into the WTO at the Uruguay Round.)

3. Economic sanctions consist of trade sanctions and financial sanctions.

(The answer is correct.)

4. GATT was based on several principles designed to foster more liberalized trade.

(The answer is correct.)

5. How different is the WTO and GATT?

(Answer)

GATT is the old form of the WTO. The WTO is a full-fledged international organization, while the old GATT was basically a provisional treaty serviced by an as hoc secretariat. The WTO has a far wider scope than the GATT, bringing into the multilateral trading system, for the first time, trade in services, intellectual property and investment. The WTO also administers a unified package of agreements to which all members are committed; in contrast, the GATT framework included many side agreements whose membership was limited to few nations. Moreover, the WTO reverses policies of protection in certain sensitive areas (for example textile and agriculture) that were more or less tolerated in old GATT.

The WTO is not a government; individual nations retain their right to determine how they will make national laws conforming to their international obligations.

1- The high point of US protectionism occurred with the passage of the

Smoot-Hawley Tariff Act of 1930, which raised tariffs an average of 80

percent. FALSE

2- The MFN or Most Favored Nation clause is an agreement between two

countries to apply tariffs to each other at rates as low as any other nation.

TRUE

3- The Reciprocal trade agreement act was passed by congress in 1934 and set

the stage for trade liberalism in.

4- The escape clause is intended to provide relief to US firms and workers

desiring protection from fairly traded imports. TRUE

5- List and explain the 3 criteria that must be met by an American industry

in order for the International Trade Commission to recommend that import

relief should be extended.

a) Imports in that sector are increasing, either actually or relative to

domestic product.

b) A domestic industry that is producing a good like or directly competitive

with the imported good is being seriously hurt or threatened by the import.

c) The increased imports are a significant cause of serious injury or threat

to the domestic industry producing a like or directly competitive article.

CHAPTER 8

1. True or False. Finished goods characterize developing-nations exports composition. (False).

2. True or False. The Buffer Stocks are viewed as a means of providing primary producers more stability than is allowed by the free market. (True).

3. True or False. The import substitution strategy gives the industries an incentive to improve their efficiency. (False).

4. MFN can be granted to a non-market economy nation if that country permits free and unrestricted emigration. (True).

5. Which are the advantages of an export oriented strategy over an import substitution strategy?

First of all, export oriented policies provide a larger market in which to sell, and therefore, it helps producers to reach and benefit from economies of scale. Additionally, as it allows foreign competition, it forces the domestic industries to improve their efficiency in order to be more competitive and to survive the threat of foreign goods. Finally, an export-oriented strategy encourages domestic industries that have a comparative advantage.

#1) TRUE/FALSE ICAs (international commodity agreements) are typically

agreements between leading producing and consuming

nations about matters such as stabilizing commodity

prices, assuring adequate supplies to consumers, and

promoting the economic development of producers.

ANSWER: TRUE

#2) When a producers' association (or international agency) buys and sells a

commodity in large amounts, this is known as a ____________.

ANSWER: BUFFER STOCK

#3) TRUE/FALSE A cartel attempts to support prices higher than they

would be under more competitive conditions, thus

increasing the profits of its members.

ANSWER: TRUE

#4) _______________________ is known as a group of nations that sells

petroleum on the world market. It attempts to support prices higher than

would exist under more competitive conditions to maximize member-nation

profits.

ANSWER: THE ORGANIZATION OF PETROLEUM EXPORTING

COUNTRIES (OPEC)

#5) Discuss the reasons for why China has not been accepted as a member of

the World Trade Organization (WTO).

ANSWER: Many trade officials in WTO member nations believe

that China's trade regime is incompatible with the

multilateral system. The principles which underlie the

WTO - nondiscrimination, natural treatment, and adherence

to negotiated tariff rates at fixed maximum levels - imply

trade based on market forces rather than central planning

in which government directly regulates what is produced,

exported and imported. Therefore, in the past, the

centrally planned economic systems of China and other

non-market-economy nations have been considered incompatible

with the WTO.

Moreover, China lacks the legal system necessary to

support a market economy, a shortcoming that has created

uncertainty in the enforcement of contracts and an

environment conducive to corruption and criminal

influence in business.

In short, China must be willing to reform its economy

further before it will be accepted as a member of the

World Trade Organization.

==============================================================

1.One characteristic of developing nation exports is that they are primary products T

2. Developing nations have been plagued with problems of unstable exports markets and worsening terms of trade T

3. Export controls destabilize export revenues F

4. Under the generalized system of preferences, major industrial nations temporarily (reduced) tariffs on designated manufactured imports from developing nations.

5. What was the import substitution strategy? Explain.

It was a strategy very popular on developing countries, which involves extensive use of trade barriers to protect domestic industries from import competition. The strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market.

1-international commodity agreement dont levy export cutbacks so as to offset

rising commodity prices.

2-what is the primery goal of international commodity agreements?

3-substitute product exist for many commodities is a factor that has

prevented the formation of cartels for producers of commodities.

4-importing-substitution policies include ,tariff and quotas applied to goods

entering a country.

5-the export of developing countries have consisted of from products and raw

materials.

1. Developing nations are most of those in Africa, Asia, the Middle East and

Latin America.

2. Primary products are the exports of developing countries and include

products like agricultural, raw materials and fuel. (true).

3. A Cartel attempts to support lower prices than they would be under more

competitive conditions, as to lower profits for its members. (false)

4. Could OPEC be considered a Cartel. (true)

5. International commodity agreements are, and give example?

Agreements between leading producing and consuming nations about things like

stabilizing commodity prices, assuring adequate supplies to consumers, and

promoting the economic development of producers. Example is an export

control which is use to stabilize export revenues if an ICA accounts for a

large share of total world output of a commodity.

1. The bluffer stock is a technique used to limit the swing of the prices of

the commodities. TRUE

2. A cartel attempts to support prices lower than they would be under a more

competitive condition. FALSE

3. The larger the number of the seller the less difficult is it to form a

cartel. FALSE

4. High rates of investments and high endowments of human capital due to the

excellent level of education are the secrets of the East Asia economic

growth. TRUE

5. What are the strategies to increase the economic growth of a nation?

One is the import substitution strategy. With this strategy the goal of the

industries is to furnish supply primarily to the domestic market, the

foreign trade has a secondary less important goal.

The export-led strategy encourages the industries in which the country has a

comparative advantage and as a consequence it rely strongly in those foreign

countries purchases. The goal is therefore increasing the production of

exportable goods.

1) developing nations usually emphasize on industrial products. false

2) In an attempt to attain export market stability, developing nations have

pressed for international commodity agreements. true

3) in order to limit commodity price swings producers use the strategy known

as ____ ____. buffer stock

4) A _____ attempts to support prices higher than they would be under more

competitive conditions, thus increasing the profits of its members. Cartel

5) How can nations use multilateral contracts, and what are their

potentials?

Importing nations commit to buying guaranteed quantities at a minimum price

and exporting nations commit to selling quaranteed quantities at a specified

maximum price. Such international agreements offer the potential for

moderating the price fluctuations of internationally traded commodities, but

conflicting interests between producers and consumers as well as management

problems in setting and achieving target prices have made it difficult to

sustain succesfull commodity agreements over extended periods of time.

1.) __________ (International commodity agreements) are typically agreements

between leading producing and consuming nations about matters such as

stabilizing commodity prices, assuring adequate supplies to consumers, and

promoting the economic development of producers.

2.) T/F (T) ICA’s, Export controls, Buffer stocks and multilateral

contracts are all ways of stabilizing commodity prices.

3.) Explain one of the ways to stabilize commodity prices in detail.

International commodity agreements are typically agreements between leading

producing and consuming nations about matters such as stabilizing commodity

prices, assuring adequate supplies to consumers, and promoting the economic

development of producers.

4.) T/F (T) A cartel attempts to support prices higher then they would be

under more competitive conditions, thus increasing the profits of its’

members.

5.) China decides to start producing coffee domestically because importing

it from Mexico is too expensive is an example of __________.

(Import Substitution)

1. Advanced nations are characterized by relatively high levels of gross product per capita. (T)

2. The purpose of buffer stocks is to reduce price fluctuations for primary commodities. (T)

3. Import substitution strategy use tariffs to protect domestic producers. (T)

4. A cartel use higher prices than they would be under more competitive conditions. (T)

5. Higher levels of trade protection in developing nations are generally associated with higher levels of economic growth. (F)

Essay: What are the disadvantageous of export-led growth strategies?

Main disadvantage to export-led growth is that it depends on the ability and willingness of industrial nations to absorb large quantities of manufactures from developing countries. In other words, it is sensitive to economic cycles and protections pressures in the export markets.

1. (T/F) UNCTAD is an organization that dramatically raised oil prices during the 1970’s. (F)

2. (T/F) The most common manner of distinguishing between developing and advanced nations is on the basis of per capita GDP. (T).

3. (T/F) Import substitution is a development strategy in which countries begin to import from each other rather than from advanced nations. (F)

4. EXPORT PROMOTION is a development strategy in which countries try to industrialize by supporting manufactured products in which they have a potential comparative advantage.

5. Why has import-substitution failed as an economic development strategy in South America while the same strategy succeeded in South Asia?

The reason why import substituting strategy was not successful in Latin American countries was because it began earlier, lasted too much and those countries sticked to just one model for too long, while Asian countries started the import substituting strategy to protect infant industries, however when they thought they were ready they shift their strategy to export oriented, so Asian NIC’s began their accelerated export of manufactured products during a period of extraordinary dynamism in the world economy.

Q1. What are the basic characteristics of developing countries?

1. The basic economic indicators show levels of GDP, life expectancy,

and level of adult literacy to be below a certain percentage

2. Developing countries are highly dependent on advanced countries since

most of their exports go to industrialized nations

3. Developing countries mainly export primary and labor intensive

products

Q2. Import substitution uses extensive trade barriers to protect

domestic industries from import competition. T/F (T)

Q3. OPEC’s main objective is to create a new international economic

order for the developing countries. T/F (F)

Q4. When industrialized nations temporarily reduce tariffs on designated

manufactured imports from developing nations below those levels applied

to imports from industrialized nations it is called generalized system

of preferences.

Q5. The Asian Tiger economies are those that have strong economic growth

rates. T/F (T)

1. Q: in the past three decades, developing countries adopting export

promotions policies have generally prospered.

A: True

2. Q: Exports of most developing countries have traditionally consisted of

high technology goods.

A: False

3. Q: UNCTAD stands for …… .

A: United Nations Conference on Trade and Development

4. Q: OPEC nations during the 1970’s manifested their market power by

utilizing export tariffs levied for revenue purposes.

A: True

5. Q: Give an example for a claim of developing nations under today’s

international trading system.

A: Developing nations claim their terms of trade are deteriorating since the

prices they have to pay for imports rise faster than the unstable prices

achieved for their exports.

1. Exports are heavily weighted toward primary goods and labor intensive

manufacturers. (True)

2. Import substitution became more common starting in 1970's. (False)

3. Low level of trade restrictions forces domestic firms to remain

competitive. (True)

4. Developing nations face problems of unstable export markets. (True)

5. What are the remedies for development nation problems?

The remedies for developing nation problems are:

- Stabilizing commodity prices-international commodity agreements

-Production and exports controls

-Buffer stocks

-Multilateral contracts

- Generalized system of preferences (GSP)

Q1- In general advanced nations are characterized by relatively high levels

of gross domestic product per capita, longer life expectancies, and higher

level of adult literacy. (T or F)

Ans. T

Q2- The theory of ??.. ??.. maintain that all nations can enjoy the

benefits of free trade if they specialize in the production of those goods

in which they have a ????? and exchange some of these goods for goods

produced by other nations.

Ans. Comparative advantage (For Both)

Q3- According to the world Bank, East Asia has realized a remarkable record

of high and sustained economic growth from the 1970's to 1996, in fact they

grew more rapidly than the rich industrial countries. (T or F)

Ans. T

Q4- To help developing nations gain access to world markets, many

industrial nations offer assistance known as a ??.. ???. .of preferences.

Ans. Generalized system

Q5- Please Define a Multilateral contracts

A multilateral contracts are another method of stabilizing commodity

prices. These contracts usually indicate a minimum price at which importers

will purchase guaranteed quantities from the producing nations and a

maximum price at which producing nations will sell guaranteed amounts to

the importers. Such purchases and sales are intended to hold prices within

a target range.

1. True or False. The developing nations’ imports are concentrated in only

one or a few primary products from the advanced nations. (False)

2. The buffer stock, which is a producers’ association prepared to buy and

sell a commodity in large amounts buys from the market when supplies are

tight at high prices and hold the good until the prices are normal to sell

it at acceptable levels to producers and customers. (False)

3. One of the main and principal advantages of the multilateral contract is

that it results in less distortion of the market mechanism and the

allocation of resources. (True)

4. In terms of international trade, developing countries tend to have higher

ratios of exports to GDP than do most advanced countries. (True)

5. What is a cartel and what are the main problems to create it.

Cartels involved unilateral attempts by the exporting nations to stabilize

or increase the price of a product by exerting their collective power. The

principal difficulties of these kinds of agreements are: Cheating among

members, numbers of sellers, cost and demand differences, potential

competition, economic downturn and substitute goods.

1. The UNCTAD is a permanent agency of the United Nations and conducts

meetings every four years to address the trading relations of developing and

industrialized nations.

Ans. True

2. ___________ are agreements between leading producing and consuming

nations about matters such as stabilizing commodity prices, assuring

adequate supplies to consumers and promoting economic development.

Ans. International commodity agreements

3. A technique for limiting commodity price swings is the

_______________

Ans. Buffer stock

4. A multilateral contract stipulates a maximum price at which

importers will purchase and a minimum price at which producing nations will

sell amounts to importers.

Ans. False, minimum/maximum

5. What is OPEC?

OPEC is a cartel. A cartel attempts to support prices higher than they

would be under more competitive conditions, thus increasing the profits of

its members. OPEC stands for the organization of petroleum exporting

countries. OPEC was established in 1960 in reaction to the control that the

major international oil companies exercised over the posted price of oil.

OPEC has used production quotas to support prices and earnings above what

could be achieved in more competitive conditions.

Question 1: What are the characteristics of developing nations?

Answer: We find that developing-nations are highly dependent on the advanced

nations. A majority of developing-nation exports go to the advanced nations,

and most developing-nation imports originate in the advanced nation. Trade

among the developing nations is relatively minor. Another characteristic is

the composition of developing-nation exports, with its emphasis on primary

products (agricultural etc). In addition, developing nations are mostly labor

intensive however this had started to change during the last couple of

decades and many of those countries such as Hong-Kong and South Korea have

become newly industrialized nations, but only few developing nations have

turned towards that direction.

Question 2: A way to stabilize commodity prices is through Multilateral

contracts according to which the minimum price for an importer to buy and the

maximum price for an exporter to sell, should be set (True/False).

Question 3: A ______ attempts to support prices higher than they would be

under more competitive conditions, thus increasing the profits of its

members. (Answer: cartel).

Question 4: _____ _____ involves extensive use of trade barriers to protect

domestic industries from import competition. (Answer: Import substitution).

Question 5: To help developing nations gain access to world markets, many

industrial nations offer assistance known as a generalized system of

preferences. (True/False).

1. T/F The developing nation are most of those in Africa, Asia, Latin

America, and the Middle East. True

2. T/F Most developing nations concentrate in finished and high skilled

products. False

3. _________ __________ ____________ are typically agreements between

leading producing and consuming nations about matters such as stabilizing

commodity prices, assuring adequate supplies to consumers, and promoting the

economic development of producers. International commodity agreements (ICA)

4. T/F OPEC is an example of an ICA. False

5. What are cartels like OPEC trying to achieve?

They are attempting to support prices higher than they would be able

under more competitive conditions, thus increasing the profits of its

members. Rather than engage in cutthroat price competition, suppliers decide

to collude and form a cartel behaving like a profit-maximizing monopolist:

restrict output and drive up the price.

1-international commidity agreemants do not increase the supply of

commodities.

2-what is buffer stocks?

3-whats is the primary goal of international agreement commodity?

4-developing countries adopted __________ in the last 3 decades.

5-developing countries tend to be located in the middle east & northern

europe.

CHAPTER 9

#1) TRUE/FALSE Economic integration is a process of eliminating

restrictions

on international trade, payments, and factor mobility.

ANSWER: TRUE

#2) TRUE/FALSE The primary objective of the EU has been to create an

economic union in which trade and other transactions take

place freely among member nations.

ANSWER: TRUE

#3) What does EMU stand for: __________________.

ANSWER: ECONOMIC AND MONETARY UNION

#4) ___________ will be the single currency in circulation throughout the

monetary union in the year 2002?

ANSWER: EURO

#5) What is NAFTA? Has it been successful?

ANSWER: NAFTA is known as the North American Free Trade

Agreement. It was expected to provide each member nation

better access to the others' markets, technology, labor and

expertise.

Concerning U.S. - Mexican trade, U.S. exports are

estimated to have grown faster than they would have had there

not been a trade agreement. NAFTA appears to have increased

both imports and exports for the two nations according to the

principle of comparative advantage. NAFTA has been a

success for the United States and Mexico.

In short, it is in politics, not economics that NAFTA

has had its biggest impact. The trade agreement has come

to symbolize a close and perhaps irreversible embrace

between the United States and Mexico.

===============================================================

1-the european community is to have free movement of resources and products

among members .

2-what is economic integration?

3-the 1992 goal of european community was to become common market.

4-GATT have generally decreased trade barriers on multinational basis.

5-uruguay round was the most recent round of GATT.

1) A --- --- --- is an association of trading nations whose members agree to

remove all tariff and no-tariff bariers among themselves. Free trade area

2) the best example for a customs union is the European Union. true

3) A customs union brings only trade-creation. false

4) European Union includes coordination and synchronization of member-nation

monetary and fiscal policies. true

5) What is a common agricultural policy and how can it be used?

European community which consists of 15 countries uses a system of variable

levies or import tariffs to domestic agriculture, with the levies adjusted

to equal the difference between domestic target prices and the -usually-

lower world market prices for agricultural commodities. In other words it

is an excellent strategy of subsidizing its farmers and making their prices

more competitive in the global economy.

1. The economic integration evolves to the stage of economic union. Here,

beside the national, social, fiscal policies harmonized together, a

supranational institution is required to administrate the countries

involved. TRUE

2. A free-trade area, a custom union, a common market can all benefit of the

use of a common currency. FALSE

3. The goals of NAFTA were to divert the trade within the three nations, to

increase the competitiveness and to increase the export penetration. TRUE

4. There were not environmental laws for any type of abuse in any of the

three countries that belong to the NAFTA. TRUE

5. What were the criteria established in the Maastricht treaty in 1991?

In the first place the price stability which involved the inflation rate has

to be no more than 1.5% above the average of inflation rates in three

countries with low inflation rate.

The long-term interest rates have to be no more than 2% above the average

interest rate.

The exchange rate has to be stable which means within the target bands of

the EMS.

Finally the budget deficit of every member has to be at most 3% of the GDP.

1. The economic integration evolves to the stage of economic union. Here,

beside the national, social, fiscal policies harmonized together, a

supranational institution is required to administrate the countries

involved. TRUE

2. A free-trade area, a custom union, a common market can all benefit of the

use of a common currency. FALSE

3. The goals of NAFTA were to divert the trade within the three nations, to

increase the competitiveness and to increase the export penetration. TRUE

4. There were not environmental laws for any type of abuse in any of the

three countries that belong to the NAFTA. TRUE

5. What were the criteria established in the Maastricht treaty in 1991?

In the first place the price stability which involved the inflation rate has

to be no more than 1.5% above the average of inflation rates in three

countries with low inflation rate.

The long-term interest rates have to be no more than 2% above the average

interest rate.

The exchange rate has to be stable which means within the target bands of

the EMS.

Finally the budget deficit of every member has to be at most 3% of the GDP.

1.) A _____ (free-trade area) is an association of trading nations whose

members agree to remove all tariff and nontariff barriers among themselves.

2.) Explain the dynamic effects of a regional trading agreement.

Th effects of a regional trading agreement are good within the regionas that

are making the agreemnt. For example, the members of the EU benefit from

that particular partnership.

3.) T/F (T) In a market economy, the commercial decisions of independent

buyers and sellers acting in their own interest govern both domestic and

international trade.

4.) T/F (T) In a nonmarket economy, state planning and control govern

foreign and sometimes domestic trade.

5.) ______ (Countertrade) refers to all international trade in which goods

are exchanged for goods.

1. A regional trading arrangement is a second approach to trade

liberalization and is when a group of small nations get together and agreed

on trade matters. (true)

2. The convergence criteria for the for Europe's Economic and Monetary Union

(EMU) in 1999, were price stability, low long term interest rates, sound

public finances and stable exchange rates.