Chapter Review: Key Points

Date: 2015-10-07; view: 496.

Chapter Objectives

INTERNATIONAL TRADE

Chapter 4(36) Module 5

After you have studied this chapter, you should be able to explain why the gains from free tradegenerally outweigh any losses from free trade; describe the major influences on the composition

of a country's imports and exports; and distinguish valid arguments againstfree trade from arguments that are invalid or abused.

1. International trade is important to people throughout the world. The smaller and less diversified an economy is, the greater is the importance of its international trade.

2. The law of comparative advantage suggests that there will be net gains to all trading parties whenever their pretrade relative opportunity costs and price structuresdiffer between goods.

3. A country's consumption possibilities frontier (CPF) expands beyond its production possibilities frontier (PPF) with the onset of trade, or with the removal of trade restrictions.

4. The terms of trade are the prices of exports relative to the costs of imports. An adverse change in the terms of trade lowers the country's CPF, while a favorable change in the terms of trade expands it.

5. Gains from trade arise because international transactions (a) provide unique goods that would not otherwise be available, (b) allow highly specialized industries to exploit economies of scale, (c) speeds the spread of technology, and facilitates capital accumulation and entrepreneurial innovation, (d) encourages peaceful international relations, and (e) facilitates specialization according to comparative advantage.

6. Domestic producers of imported goods and domestic consumers of exported goods may suffer short term losses from trade. However, their losses are over­shadowed by the specialization gains to consumers of imports and producers of exports. Gainers could always use parts of their gains to compensate the losersso that, on balance, no one loses. Moreover, uniqueness, scale, dynamic, and political gains from trade make it unlikely that anyone loses from tradein the long run.

7. Even the most valid of the arguments against free trade are substantially overworked. The arguments that are semi-valid include the ideas that: (a) the income redistributions from trade are undesirable; (b) desirable diversity within a narrow economy is hampered by free trade; (c) national defenserequires restrictions to avoid dependence on foreign sources, and (more validly) export restrictions to keep certain technologies out of the hands of potential enemies; and (d) major exporters of a commodity can exercise monopolistic power by restricting exports, while important consuming nations can exercise monopsonistic power exercise monopolistic power through import restrictions.

8. Any exercise of international monopoly/monopsony powerinvites retaliation and causes worldwide economic inefficiency. Those who lose because of trade restrictions will lose far more than is gained by the "winners."

9. If trade is to be restricted, tariffs are preferable to quotas because of the higher tax revenues and the smaller incentives for bribery and corruption.

10. Trade adjustment assistance is one way that gainers from trade might compensate the losers so that all would gain. However, difficulties in identifying losers and the lack of adequate funding have resulted in mounting pressures for trade restrictions. (2799 digits)