Module 12

Question 1

What is the PPF and what does it show?

Answer 1

Production Possibilities Frontier.
Combinations of goods possible to produce.

Question 2

How do we shift the PPF outwards?

Answer 2

Economic growth:
- Use resources to create more capital goods.
- Improve technology.

Question 3

What are the assumptions of the PPF?

Answer 3

• all resources are used effectively
• all other resources are fixed, especially technology

Question 4

Looking at a PPF, Which points are efficient?

Answer 4

Any point on it. Points outside it are impossible and points inside are inefficient.

Question 5

Why is the PPF curved?

Answer 5

Increasing marginal opportunity cost due to specialization of resources.

Question 6

Why does Comparative Advantage exist?

Answer 6

Differing opportunity costs.

Question 7

How does trade leave people better off?

Answer 7

• Allowing them to specialize where they have the lowest opportunity cost.
• This allows them to consume outside their PPF.

Question 8

What is comparative advantage?

Answer 8

Having a lower opportunity cost to produce a good or service than someone else.

Question 9

What is absolute advantage?

Answer 9

Being more efficient at producing a good or service (more production given same resources).

Question 10

Which is the basis for trade? Comparative or Absolute Advantage?

Answer 10

Comparative advantage is the basis for trade because it allows gains from specialization.

Question 11

If two producers have the same opportunity cost, does trade benefit them?

Answer 11

No

Question 12

What are the main sources of comparative advantage?

Answer 12

• Climate and natural resources
• Relative abundance of labour and capital
• Technology
• External economies

Question 13

What is autarky?

Answer 13

When a country refuses to have any trade partners.

Question 14

Why don’t we see complete specialization in trade?

Answer 14

• increasing marginal opportunity cost
• consumer tastes
• some goods / services are not traded

Question 15

Does everyone gain from specialization?

Answer 15

No - there are winners and losers but overall the economic surplus increases.

Question 16

What is Free Trade

Answer 16

no restrictions

Question 17

What happens to economic surplus under free trade?

Answer 17

• CS increases
• PS decreases
• Peq falls to Pworld

Question 18

What happens to economic surplus under tariffs?

Answer 18

• Loss of consumer surplus
• Increase in producer surplus
• Gov gets $
• DWL

Question 19

Which area represents the loss of consumer surplus with a tariff?

Answer 19

ACTD

Question 20

What is area T in this tariff diagram?

Answer 20

• Lost by consumers, gained by government

Question 21

What is area A in this tariff diagram?

Answer 21

lost by consumers, gained by local producers

Question 22

Where is the DWL for this tariff diagram?

Answer 22

DWL = C + D

Question 23

What is area C in this tariff diagram?

Answer 23

Area C is the DWL from consumers being forced to buy from less efficient producers.

Question 24

What is area D in this tariff diagram?

Answer 24

Area D is DWL from consumers buying less than they would have at the world price.

Question 25

What is a Voluntary Export Restraint / Voluntary Restraint Agreement?

Answer 25

A voluntarily negotiated trade restraint.

Question 26

What is area B in this quota diagram?

Answer 26

Area B is the loss by local consumers to foreign producers who are able to sell their product at the inflated local price.

Question 27

What is area A in this quota diagram?

Answer 27

Area A is the loss by local consumers to local producers.

Question 28

Does it make sense to unilaterally reduce tariffs and quotas?

Answer 28

YES - the net increase to economic surplus is significant, even if the trading partners don't also reduce tariffs and quotas.

Question 29

Do quotas and tariffs protect jobs?

Answer 29

NO - Some jobs are protected while jobs in industries to which the protected industry is a supplier are lost. - No studies have ever successfully linked employment rates to tariffs and quotas.

Question 30

How do we know what a price will be after a quota?

Answer 30

Software, or just visually see the size of a quota's quantity on the graph and match it to the same size gap between supply and demand.

Question 31

What are the possible trade restrictions?

Answer 31

- Tariffs - Quotas - Health & Safety requirements - National defence requirements

Question 32

What happened with trade in the 1930s?

Answer 32

Tariff war, tariffs in USA climbed as high as 60%.

Question 33

What happened with trade in 1945?

Answer 33

Trade opened up between allied countries, and closed down for many under-developed nations.

Question 34

What happened in 1948?

Answer 34

GATT - General Agreement on Tariffs and Trade Trade rounds - multilateral tariff and quota reduction negotiations.

Question 35

What was GATT?

Answer 35

1948 General Agreement on Tariffs and Trade. Only covered goods, not services and intellectual property. Agreement amongst members not to impose tariffs or quotas on goods.

Question 36

What happened with trade in the 1980s?

Answer 36

Globalization - many of the previously closed-off underdeveloped nations started opening up to trade and foreign investment.

Question 37

What happened in 1995?

Answer 37

WTO - World Trade Organization.

Question 38

What did the WTO cover?

Answer 38

- goods - services - intellectual property

Question 39

How strong is the WTO?

Answer 39

Pretty toothless - hasn't actually stopped a lot of treaty violations, even if the ruling is in favour of the victim country.

Question 40

What are some examples of violations the WTO has failed to adress?

Answer 40

- Trump: tariffs on imported washing machines - China: forcing foreign companies to share technology with local companies in order to do trade in China.

Question 41

What are some reasons people oppose the WTO?

Answer 41

- opposition to globalization - protectionism - concern that WTO may protect high-income countries at the expense of low-income countries.

Question 42

What happened in 2018 with trade?

Answer 42

Donald trump started a trade war. USA put tariffs on many items from many countries, who all retaliated. Cost consumers roughly $1.4B/month in DWL

Question 43

What's behind anti-globalization sentiment?

Answer 43

- desire to protect local culture and customs - producers from high-income countries come in and take advantage of looser safety/labour/environmental regulation.

Question 44

Are low-income countries OK with high-income countries' producers taking advantage of them?

Answer 44

Many local officials in low-income countries argue that it's a natural part of the development cycle, and that it still provides improved opportunities for their citizens.

Question 45

What are some of the reasons behind protectionism?

Answer 45

- shield local firms - perception that it protects jobs - infant industries - national security

Question 46

Which job impacts are easier to track - losses from trade or gains from trade?

Answer 46

Losses from trade are more obvious and easier to track. Gains must often be estimated and don't get much media attention.

Question 47

What is dumping?

Answer 47

- Foreign firms selling into the local market below their cost of production - A catch-all excuse for retaliatory tariffs

Question 48

How does the WTO define dumping?

Answer 48

Foreign firms selling into the local market at a cost below what they sell the item for in their home market. Even though this is actually just a sound business practice.