macsg19 - 19 [34] International Trade, Comparative...

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489 19 [34] International Trade, Comparative Advantage, and Protectionism C hapter objectives: 1. Distinguish between an open and a closed economy. Distinguish between a trade surplus and a trade deficit. 2. Distinguish between absolute advantage and comparative advantage and explain the logic behind the theory of comparative advantage. Given a particular two- country, two-good situation, calculate which country will trade which good and indicate the feasible range for the terms of trade. 3. Calculate the limiting values of the exchange rate in a given example and relate the exchange rate to the notion of comparative advantage. Describe how changes in the exchange rate can affect trade flows. 4. Provide an intuitive explanation of the Heckscher-Ohlin theorem. 5. Define a tariff, an export subsidy, and a quota. Outline, using a demand and supply analysis, the costs involved in the imposition of a tariff. 6. Give the arguments advanced for and against protection. Describe the costs involved in permitting free trade. BRAIN TEASER: Choose some locally produced goods or, if nothing appropriate is available, beer, cigarettes, paper clips, and chewing gum. Suppose that the government has announced that it will protect only goods that are essential for national defense. What arguments can you come up with that would support each industry’s claim for protection? Be creative! Remember that arguments that sound plausible may be difficult to refute.
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490 Study Guide to Principles of Macroeconomics OBJECTIVE 1: Distinguish between an open and a closed economy. Distinguish between a trade surplus and a trade deficit. In open economies such as the United States, aggregate expenditures are affected by the presence of exports and imports. We have seen international trade steadily increase in importance throughout the last several decades, as goods and services have moved across borders. If exports exceed imports, the country runs a trade surplus . In the oil-expensive years of the 1970s and 1980s, the value of imports into the United States swelled to over 12% of GDP (gross domestic product), and the United States began to experience trade deficits —that is, its imports exceeded its exports. Deficits have been recorded annually ever since. (page 354 [666]) ±±± LEARNING TIP: Learn the difference between exports and imports. Imports are foreign-produced goods consumed here. Exports are domestically produced goods sold to customers overseas. Imports and exports are not opposites; they are determined by different factors. ² Comment: The two terms, “balance of payments” and “balance of trade,” are not synonymous. The balance of trade refers only to exports and imports of goods, while the balance of payments includes all international transactions. Practice
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macsg19 - 19 [34] International Trade, Comparative...

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