chapter 9 vocabulary

chapter 9 vocabulary - tariff A tax on goods produced...

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tariff A tax on goods produced abroad and sold domestically. world price The price of a good that prevails in the world market for that good. Chapter Recap: Summary o The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer. o When a country allows trade and becomes an exporter of good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses. o A tariff–a tax on imports–moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains. o There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have some merit in some cases, economists believe that free trade is usually the better policy. Chapter Recap: Questions for Review 1. What does the domestic price that prevails without international trade tell us about a nation's comparative advantage? 2. When does a country become an exporter of a good? An importer? 3. Draw the supply-and-demand diagram for an importing country. What is consumer surplus and producer surplus before trade is allowed? What is consumer surplus and producer surplus with free trade? What is the change in total surplus? 4. Describe what a tariff is and its economic effects. 5. List five arguments often given to support trade restrictions. How do economists respond to these arguments? 6. What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each. Chapter Recap: Problems and Applications 1. Mexico represents a small part of the world orange market.
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a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus.
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