Economics_Chapter_8_Study_Guide

Economics_Chapter_8_Study_Guide - Economics Chapter 8 Study...

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Economics Chapter 8 Study Guide 1) An Overview of International Trade a) Over the past 50 years many governments have changed policies to facilitate international trade. i) Tariff rates have fallen b) A tariff is a tax imposed by a government on imports of a good into a country i) Imports are goods and services bought domestically but produced in other countries ii) Exports are goods and services produced domestically but sold to other countries. c) The Importance of Trade to the U.S Economy i) Both exports and imports have been steadily increasing over the past 50 years ii) About 20% of U.S manufacturing jobs depend directly or indirectly on exports. iii) About two-thirds of U.S manufacturing industries depends on exports for at least 10% of jobs. d) U.S International Trade in a World Context i) The U.S is the largest exporter in the world ii) International trade remains less important to the US than it is to most other countries e) Making the Connection (Has Outsourcing Hurt the U.S Economy?) i) Outsourcing occurs when a domestic firm uses workers in a foreign country to produce a good or service that is then sold to domestic consumers. ii) Outsourcing and in sourcing are not major factors in the employment situation in the U.S iii) The lower prices that outsourcing makes possible are spread widely among consumers, but the costs of outsourcing are concentrated among workers who lose their jobs. 2) Comparative Advantage: The Basis of All Trade a) People trade because it makes them better off b) Governments are more likely to interfere with international trade than they are with domestic trade (more political than economical) c) A Brief Review of Comparative Advantage i) Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers. ii) Opportunity cost is the highest valued alternative that must be given up to engage in an activity. iii) Specialize in activities where they have comparative advantage. 3) Comparative Advantage in International Trade a) Countries are better off if they specialize in producing the goods for which they have a comparative advantage. They can then trade for the goods for which other countries have a comparative advantage. b) Example: Consider Japan and United State. Japan can make 12 cell phones and 6
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MP3 players in an hour whereas the U.S can only make 2 cell phones and 4 MP3 plays in an hour. i) Japan has the absolute advantage over U.S (1) Absolute advantage is the ability to produce more of a good or service than competitors when using the same amount of resources. ii) Japan has the comparative advantage over the U.S in producing cell phones and U.S has the comparative advantage of Japan in producing MP3 players. 4) The Gains from Trade
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Economics_Chapter_8_Study_Guide - Economics Chapter 8 Study...

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