chapter 18 macro - i want to actually kms

trade surplus

The situation when a country exports more than it imports.

put simply: You sell more to other people than you buy from them.

trade deficit

The situation when a country imports more than it exports.

put simply: You buy more from others than they buy from you.

you buy more, so the deficit is that you dont SELL as much as you BUY.

until the 1970’s….

the United States generally exported more than it imported.

corn laws 

The tariffs, subsidies, and restrictions enacted by the British Parliament in the early 19th century to discourage imports and encourage exports of grain

theory of comparative advantage

Ricardo’s theory that specialization and free trade will benefit all trading parties, even those that may be “absolutely” more efficient producers.

Comparative advantage means a country should specialize in producing the good it gives up the least to make, because doing so makes everyone better off through trade.

absolute advantage 

The advantage in the production of a good enjoyed by one country over another when it uses fewer resources to produce that good than the other country does.

Who can produce MORE of a good using the same resources.

comparative advantage 

The advantage in the production of a good enjoyed by one country over another when that good can be produced at a lower opportunity cost (in terms of other goods that must be foregone) than it could be in the other country

Who can produce a good at a LOWER OPPORTUNITY COST.

terms of trade

The ratio at which a country can trade domestic products for imported products. its the price of trade.

Example:
1 bushel of wheat ↔ 2 bales of cotton

This is a “1:2” terms of trade.

When do BOTH countries benefit from trading?

They BOTH gain if the terms of trade are between their two opportunity costs. Trade is beneficial when each country has a comparative advantage in a different good, meaning each has a lower opportunity cost in producing that good.

Exchange rates determine

• How expensive foreign goods are

• Whether trade is profitable

• Which country gains more from trade

factor endowments

The quantity and quality of labor, land, and natural resources of a country.

Heckscher-Ohlin theorem

A theory that explains the existence of a country’s comparative advantage by its factor endowments: A country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.

EXAMPLE: If a country has a lot of land, it will be good at producing agricultural products (wheat, cotton, corn).

biggest source of comparative advantage

factor endowments

Natural vs. Acquired Comparative Advantage

Natural Comparative Advantage

Comes from things you’re born with:

• Land

• Climate

• Oil

• Population

Acquired Comparative Advantage

Built through investment and learning:

• Education

• Technology

• Innovation

• Experience

• Reputation (brand loyalty)

protection

The practice of shielding a sector of the economy from foreign competition

three most common trade barriers

tariffs, export subsidies, and quotas.

soft trade barriers 

Regulatory standards and requirements that make foreign competition more difficult.

tariff

a tax on imports

export subsidies 

Government payments made to domestic firms to encourage exports.

trade barrier’s purpose

Trade barriers are mainly used to protect and support domestic industries, even if it means reducing trade or raising prices.

dumping

A firm’s or an industry’s sale of products on the world market at prices below its own cost of production.

qouta

a limit on the quantity of imports. Quotas can be mandatory or “voluntary,” and

they may be legislated or negotiated with foreign governments. 

smoot-hawley tariff

The U.S. tariff law of the 1930s, which set the highest tariffs in U.S. history (60 percent). It set off an international trade war and caused the decline in trade that is often considered one of the causes of the worldwide depression of the 1930s.

is the united states a high tariff nation?

yes it is, with average tariffs being over 50%. the highest were in effect during the Great Depression. the highest tarrifs were following the Smoot-Hawley tariff , which pushed the average tariff rate to 60 percent in 1930.

General Agreement on Tariffs and Trade (GATT)

An international agreement signed by the United States and 22 other countries in 1947 to

promote the liberalization of foreign trade.

world trade organzation (wto)

A negotiating forum dealing with rules of trade across nations

Doha development center 

An initiative of the World Trade Organization focused on issues of trade and

development.

economic integration

Occurs when two or more nations join to form a free-trade zone.

european union (EU)

The European trading bloc composed of 27 countries (of the 27 countries in the EU, 17 have the same currency—the euro). united states is not part of the EU. 

US-Canada free trade agreement

An agreement in which the United States and Canada agreed to eliminate all barriers to trade between the two countries by 1998.

North America Free Trade Agreement 

An agreement signed by the United States, Mexico, and Canada in which the three countries agreed to establish all North America as a free-trade zone

argument for protection: foreign competition costs Americans their jobs.

Claim:
Foreign goods → fewer sales for domestic firms → workers get laid off.

BUT reality:
Those workers can often be re-employed in other, growing industries.

Example:
US textile workers lost jobs due to imports, but high-tech jobs grew massively in the same states.

argument for protection: Foreign Companies Use “Unfair Practices”

Foreign Companies Use “Unfair Practices”

Claim: Some countries/firms dump goods (sell below cost) to destroy competition.

Example: U.S. accused China of dumping steel; EU accused China of dumping shoes.

Argument: If we don’t let U.S. companies do this, foreign countries shouldn’t be allowed either. -explain this

argument for protection: “Cheap Foreign Labor Is Unfair”

Claim:
Countries like China or India pay workers very low wages, so U.S. companies can’t compete.

Economists’ response:
Wages reflect productivity, not “fairness.”
The U.S. pays higher wages because workers have more equipment (capital) and higher skills.

argument for protection: national security

Claim:
A country must protect certain “critical” industries so it isn’t dependent on foreign suppliers during emergencies or war.

Example:
U.S. steel companies say the military needs reliable domestic steel for tanks, ships, and weapons.

Problem:
Almost every industry tries to use this argument (“we need domestic scissors!”)

argument for protection: Preventing Dependency

Claim:
If a small country depends too much on a powerful country for crucial goods, it could lose political independence.

Example:
A small country relying on a superpower for food or fuel might be pressured politically.

argument for protection: protecting the environment

Claim:
Free trade may cause pollution because countries with weak environmental rules may attract “dirty” industries.

Example:
Many goods made in China create pollution that mostly benefits U.S./EU consumers.

Counter-argument:
As countries get richer from trade, they often choose cleaner policies.

argument for protection: Protecting Infant Industries

Claim:
New industries need temporary protection until they grow strong enough to compete.

Risk:
Protection can backfire and hurt the very industry you’re trying to help.

Example:
1991: U.S. protected domestic makers of laptop screens with a huge tariff.
Result? Apple & IBM moved production overseas →
U.S. screen industry lost customers and collapsed anyway.

infant industries

A young industry that may need temporary protection from competition from the established industries of other countries to develop an acquired comparative advantage.

What the graphs show (super simple)Graph (a): Before Tariff

• World price = $2

• At $2:

  • U.S. makes 200

  • U.S. consumers want 700

• So the U.S. imports the difference:

👉 Imports = 500

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Graph (b): After a $1 Tariff

• New price = $3 (because tariff raises price from $2 to $3)

At $3:

• U.S. makes 300 (more than before)

• U.S. consumers want 600 (less than before)

👉 Imports = 300

Imports fall because:

• Higher price = people buy less

• Higher price = domestic firms produce more

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⭐ Shaded gray box

That is tariff revenue the government collects:

$1 × 300 million units

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✔ Bottom line

Tariff makes imports more expensive → fewer imports → more domestic production → government gets money.