Trade Basics
This term describes a nation's self-sufficiency — producing everything domestically with no international trade.
Autarky
This type of advantage focuses on opportunity cost — producing a good at a lower opportunity cost than other nations.
Comparative Advantage
tax on imported goods
tariff
For a small importing country under free trade, if the world price is below the autarky price, the country becomes this.
importer
For every import quota, there exists one of these that produces the exact same quantity and price outcome.
equivalent import tariff
A nation has this when it can produce more of an item than other nations using the same resources.
Absolute advantage
Nation A can make 400 cameras or 40 computers. Nation B can make 360 cameras or 10 computers. The opportunity cost of 1 computer for Nation A is this many cameras.
10 cameras
A legal maximum on the quantity of a good that can be imported.
import quota
When a small country imposes a tariff, this group gains while this group loses — and the net effect is a welfare loss.
domestic producers (gain) and domestic consumers (lose)
The key difference between a quota and a tariff: under a quota, this goes to importers as rents rather than to the government as revenue.
quota rents
These are the three types of trade policy tools covered in this lecture.
import tariffs, import quotas, and export subsidies
Nation A can make 400 cameras or 40 computers. Nation B can make 360 cameras or 10 computers. What good does nation B have a comparative advantage in?
B
This occurs when a government pays domestic firms to help them sell exports more cheaply abroad.
export subsidy
The two deadweight loss triangles from a tariff represent these two types of loss.
production loss and consumption loss
This balance of payments account records exports and imports of goods and services, net interest paid abroad, and net transfers.
current account
This is the ratio of a country's export prices divided by its import prices.
terms of trade
Even if a country has an absolute advantage in all goods, it can still benefit from trade because of this principle.
Comparative Advantage
What is one key reason developing countries apply tariffs even though they cause welfare loss
- they may have no other source of this.
government revenue
For a large country that imposes a tariff, if the terms-of-trade gain exceeds the deadweight loss, this is the result for the importing country.
net welfare gain
A country that borrows more from the rest of the world than it lends is called this.
net borrower
International trade makes it possible to consume goods at a lower opportunity cost than producing them domestically because of this.
specialization and comparative advantage (trading for goods produced more cheaply abroad)
When Country A specializes in wheat and Country B in coal and both benefit from trade, what must be true?
each country has a comparative advantage in its respective good (Country A in wheat, Country B in coal)
This is the political reason tariffs persist: the benefits to these groups are concentrated while the costs to consumers are spread nationwide.
domestic producers and their workers
The tariff imposed by a large country that extracts welfare from the foreign exporter is sometimes called this.
optimal
The current account balance equals net exports, which equals the sum of these two sector balances.
government sector balance (T − G) and the private sector balance (S − I)