Free Trade and Protectionism Flashcards

International Trade

Trade that involves the exchange of goods and services between countries

Specialization

When individuals, firms, or countries focus their resources on producing a specific good or service in which they have an advantage, rather than producing a wide variety

World Trade Organization (WTO)

An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations

Absolute Advantage

where a country is able to produce more output than other countries using the same input of factors of production

Comparative Advantage

where a country is able to produce a good at a lower opportunity cost of resources than another country

Free Trade

International trade that takes place without any barriers, such as tariffs, quotas, or subsidies

Protectionism

Economic policy where a government restricts imports to protect domestic industries

Dumping

The selling of a good in another country at a price below its unit cost of production

Balance of Payments

A record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time

3 Types of Protectionism

Tariffs, subsidies, and quotas

Embargo

A government-imposed restriction on trade with another country, either by banning all trade or restricting specific goods like arms or technology

Tariff

A duty (tax) that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the governmen

Subsidy

An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competition

Quota

Import barriers that set limits on the quantity or value of imports that may be imported into a country

Who benefits from free trade? (3 entities)

-Domestic consumers

-Domestic businesses

-World economy

How do domestic consumers benefit from free trade?

-greater range of products

-lower price level

How do domestic businesses benefit from free trade?

-increased competition

-drives down prices

-forces up efficiency

-businesses can sell their products internationally

How does the world economy benefit from free trade?

-nations can make best use of their resources

-stabilizes price level

What are the general benefits for free trade? (7 benefits)

1. Lower Prices

2. Greater Choice

3. Differences in resources

4. Economies of Scale

5. Increased competition

6. Most efficient allocation of resources

7. Source of foreign exchange

How do consumers benefit from the lower price caused by free trade?

-can buy goods for a lower price than the domestic one

-can purchase less expensive products

How do producers benefit from the lower price caused by free trade?

-lower prices means that raw materials are cheaper so costs of production decrease

How is greater choice a benefit for free trade?

-consumers can have a wide range of products from different countries

-allows consumers to purchase certain goods that are not domestically produced -ex. Ireland doesn't produce cocoa, citrus fruits, coffee and must import it through free trade

How is differences in resources a benefit for free trade?

-countries have different natural resources, so they produce specific goods

-free trade allows countries to specialize in what they have an advantage in but still have access to goods that they cannot produce themselves

what are economies of scale?

-cost advantages a company (or economy) gets from producing goods in large qualities

-lowers the average production cost per item

how are economies of scale a benefit of free trade?

-free trade causes businesses to produce for both domestic and international markets so the size of the market increases

-increases demand

-increases specialization in specific sectors/industries

how does free trade increase competition?

foreign markets can enter domestic markets and compete with domestic producers

how is increased competition a benefit of free trade?

-increased competition between domestic and foreign producers encourages all producers to produce at the lowest possible cost per unit

-encourages efficiency and innovation

What economic situation has the most efficient allocation of resources?

Free trade

Why do smaller nations require foreign currency?

-the currency of small countries is usually undesirable in international markets

-foreign currency helps to stabilize their society

How does free trade provide foreign currency to smaller nations?

-they acquire it through international trade when governments open themselves to other countries

-the foreign currency is held by the central bank and kept as a stabilizer (the foreign currency is more stable than the domestic currency)

What factors does trade between nations depend on? (5 factors)

-Demand for a country's good or services

-Political stability / level of govt trustworthiness

-Interest rates and exchange rates

-Trade agreements and barriers

-Transportation + communication costs

Why is the theory of comparative advantage the reason countries trade internationally?

-comparative advantage shows which countries have advantages in producing certain goods

-helps determine which goods countries should specialize in producing

-allows countries to trade with each other at the lowest cost for the greatest gains

What is the limitation of comparative advantage theory?

It is based upon many assumptions that make it difficult to apply to real life

Why is there negativity towards the WTO?

-it is run by the people who also dominate the united nations

-work to serve the purposes of the most powerful countries

-obvious by the discrepancies between the needs of powerful vs. less powerful countries

Why do more powerful countries tend to want free trade, while smaller countries lean towards protectionism?

-powerful countries have more influence on trade can use that power to get what they want from smaller nations

-smaller countries have difficulty competing with larger countries and want trade barriers to protect their domestic industry

What are the six general functions of the WTO? (6 general)

1. Hold trade agreements

2. Be a forum for trade negotiations

3. Handle disputes between member countries

4. Monitor national trade policies

5. Provide technical assistance and training to developing countries

6. cooperate with other international organizations

How do protective tariffs help to protect domestic industry?

-places taxes on imported goods and services and resources

-increases foreign costs of production, decreasing supply and increasing the price for domestic consumers

-allows domestic producers to produce at a higher quantity and gain more revenue

How do protective subsidies help to protect domestic industry?

-government gives money to specific domestic industries to lower production costs, which increases supply

-helps increase domestic consumption or exports to the rest of the world

How do protective quotas help to protect domestic industry?

-places a physical limit on how many goods can be imported

-shortage of imports (in the short-run) increases the domestic price so domestic consumers can increase their quantity supplied

What negative effects do all protectionist policies cause? (2 effects)

-Misallocation of resources

-loss in total welfare

What are the 9 arguments for protectionist policies?

1. Protect domestic employment

2. Protect the economy from low-cost labor

3. Protect sunrise industries

4. Avoid the risks of over-specialization

5. Strategic reasons

6. Prevent dumping

7. Protect product standards

8. Raise government revenue

9. Correct balance of payments deficit

How does free trade create domestic unemployment?

-domestic industries cannot compete with foreign ones at lower prices, so they are in decline

-lowers the demand in domestic industries, creating unemployment (structural unemployment)

Why would a country want to prevent low-cost labor in countries they import from?

-if an exporting country has lower labor costs, they can produce at a lower cost, and sell at a lower price

-protectionist policies help to protect domestic producers who cannot compete with the cheaper imports

What is an infant/sunrise industry?

a developing industry that doesn't have the economies of scale advantages that larger industries in other countries have

How can over-specialization be dangerous to an economy?

-there is little flexibility and adaptation for workers