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Microeconomics - Chapter 7.docx

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Marketing and Consumer Studies
MCS 1000
Linda Hunter

Microeconomics Chapter 7 Imports – goods and services that we buy from other countries Exports – goods and services that we sell to people in other countries Comparative Advantage is the fundamental force that drives international trade. Comparative Advantage – situation in which a person can perform an activity or produce a G or S at a lower opportunity cost than anyone else National Comparative Advantage – situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation ex. “Opportunity cost of producing a T-Shirt is lower in China than in Canada, so China has a comparative advantage in producing T-Shirts” “China can buy airplanes from Canada at a lower opportunity cost than at which the Chinese firms can produce them.” Lower cost in world price than domestic price = world market has a comparative advantage Importing country: Winners are those who whose surplus increases and the losers are those whose surplus decreases “One Countries Exports are Another Countries Imports” (Win-Win!) International Trade Restrictions Governments use four sets of tools to influence international trade and protect domestic industries from foreign competition: 1. Tariffs 2. Import Quotas 3. Other Import Barriers 4. Export Subsidies Tariffs – tax on a good that is imposed by the importing country when an imported good crosses its national boundary -out of self-interest for income -decrease gains from trade and are not in social interest If tariff is set: -price in Canada rises by however much the tariff is -quantity bought decreases -quantity produced in Canada increases -quantity imported decreases -Canadian Government collects tariff revenue When Tariff is imposed: -consumers of the good lose -domestic producers of the good gain -consumers lose more than domestic producers gain -Society loses: A deadweight loss arises Import Quotas – restriction that limits the maximum quantity of a good that may be imported on a given period When government imposes an important quota: -consumers of the good lose -domestic producers of the good gain -importers of the good gain -Society loses: A deadweight loss arises Tariff brings in revenue for the government while a quota brings profit for the importers. Other Import Barriers -Health, Safety, and Regulation Barriers -Voluntary Export Restraints -quota allocated to a foreign exporter of a good (not common) Export Subsidies – payment by the government to the producer of an exported good Subsidy – payment by the government to a producer Export Subsidies are illegal under a number of international agreements including NAFTA (North American Free Trade Agreement) and the rules of the World Trade Organization (WTO). Subsidies that Canadian and European Union governments pay to their farmers end up increasing domestic production, some of which gets exported. These exports of subsidized products make it harder for producers in other countries (notably Africa and Central and South America) to compete in global markets. Export subsidies bring gains to domestic products, but result in inefficient underproduction in the rest of the world, and create a deadweight loss. The Case Against Protection Free trade promotes prosperity for all countries; protection is inefficient. Two classi
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