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Chapter 8 Study Guide

Chapter 8 Study Guide - 8 Comparative Advantage and the...

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Chapter 8 Comparative Advantage and the Gains from International Trade Chapter Summary Over the past 50 years, international trade has grown significantly as many governments reached agreements to reduce tariffs and other trade barriers . In Chapter 2, you learned about comparative advantage. Comparative advantage shows that individuals, firms, and countries will be made better off by producing goods and services for which they have a lower opportunity cost than competitors and trading for those goods and services for which they have a higher opportunity cost. Absolute advantage is the ability of an individual, firm, or country to produce more of a good or service than competitors when using the same amount of resources. Nations develop comparative advantages for different reasons including a favorable climate, the availability of natural resources, an abundance of labor or capital, and access to superior production technologies. On average, countries benefit from trade, but while some firms and workers benefit from international trade, others do not. When a country becomes more open to trade, the profits of firms that produce the same goods that are imported will fall and some of the firms’ workers may lose their jobs. Those harmed by trade often lobby their governments to impose import restrictions. Despite the gains that exist from free trade , nations still sometimes impose trade restrictions that result in higher prices for traded goods. Trade restrictions usually are in the form of tariffs, quotas, voluntary export restraints, and other non- tariff barriers. Although tariffs and quotas save jobs in the countries that impose them, the employment gains often are achieved at a high cost. After World War II, the United States and Europe negotiated treaties to reduce the high tariff rates imposed during the Great Depression. Recent discussions have focused on expanding trade in services and products that incorporate intellectual property, rather than trade in goods. The World Trade Organization (WTO) was established in 1995 to facilitate these negotiations. Opposition to liberalization of international trade and investment, also known as globalization , grew in the 1990s. Supporters of the anti-globalization movement want to protect domestic industries from competition and believe globalization unfairly favors the interests of high-income countries. The United States government has extended protection to some domestic industries due to allegations of dumping by foreign companies. Dumping refers to selling a product for a price below its cost of production. Multinational enterprises conduct operations in more than one nation. They may open offices in a foreign country to avoid tariffs on exports; to gain access to raw materials available in other nations; to
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CHAPTER 8 | Comparative Advantage and the Gains from International Trade 198 gain access to low-cost labor; to minimize foreign exchange risk; and/or to respond to competition from other firms in their industry.
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