International Economics Exam 1

As countries engaged in trade with other countries, merchants became a major economic player. Hence, we have the term called _________.

mercantilism

They believed that a country can gain from trade only at the expense of its trading partners. So, it is a _______________.

zero-sum activity.

Based on this belief, free trade would be ___

bad

Then what should the government do about it? It should ________ exports. To do so, the government should ________ domestic exporters' activities. In contrast the government needs to __________ imports. To do so, the government should ________ imports.

encourage, subsidize, discourage, restrict

Wait, doesn't this sound familiar to you? This idea of "free trade is not good" is still alive today in the U.S. But how can it be when accumulating gold and silver is no longer a major source of economic activity? People who believe in the idea now focus on _________. We call them ______________. Their argument is that exports ______ jobs whereas imports _________ jobs. Sounds pretty convincing, right? So, export-oriented trade policies, such as providing _________ to the domestic aluminum industries, while increasing ______ on foreign products, are still in place.

employment, neo-mercantilists, creates, take away, subsidies, taxes

Critics of the aforementioned philosophy argue that free trade is good for the domestic and global economies. The main first and main critic of the philosophy was _________. He lays out some criticisms in his famous publication, _________________.

Adam Smith, The Wealth of Nations.

He believed that free transactions between countries lead to gains for all countries. Therefore, trade is a ___________ activity. So, we should promote free trade. According to him, countries should trade a product when they are the categorically most efficient producer of that product. We call this a theory of ________________, What do we mean by the most efficient producer?

positive-sum, absolute advantage

He wondered what is the number of units of output a worker can produce in _______. We call this idea as ______________. He argued that a country that is the categorically most efficient producer of a product should export that product. In the early 1800s, an economist named ____________ argued that beneficial trade can still occur even when one country is categorically worse at producing all products. We call this a theory of ________________. We base this theory on one simple concept that we learned in our intro class-the _____________.

one hour, labor productivity, David Ricardo, comparative advantage, opportunity cost

When should a country engage in trade? When it has a _______________ in producing a product

comparative advantage

The government can increase ________ as argued by ___________

trade barriers, mercantilists

Two policy options are 1) giving a _______ to domestic industries and 2) imposing _____ on imports.

subsidy, taxes

When the government imposes a tax on imports, we call this a ______

tariff

When a tariff is stipulated as a money amount per unit of import, we call it a ________ tariff.

specific

When a tariff is stipulated as a percentage of the estimated market value of the imported good when it reaches the importing country, we call it an _________ tariff

ad valorem

In contrast, when the government limits the total quantity of imports of a product allowed into the country, we call this the ________

import quota

Producer surplus will…

increase

Consumer surplus will…

decrease

Governemnt tax revenue will..

increase

As a whole, the economic well being of the country will

decrease

In all who bears the cost of the tariff and quota?

consumers

Producer surplus will ______ by area _

increase, a

Consumer surplus will _______ by area ____

decrease, a+b+c+d

Area c goes to benefit firms with the ____

license

If fixed favoritism is used, the net national loss from a quota is area

b+d

If resource-using procedures are used, the net nation loss from a quota is area ___________

b+d+some area c

So, the loss to the society is greater when ____________ is used.

resource-using procedures