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macsg19 - 19[34 International Trade Comparative Advantage...

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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. B RAIN T EASER : 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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