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Chapter 9 Notes- International Trade

-The principle of comparative advantage tells us that we can all enjoy more goods and services
when each country produces according to its comparative advantage
-closed economy -an economy that does not trade with the rest of the world
-open economy – an economy that trades with other countries
-in an open economy, a society’s consumption possibilities are typically greater than (and
will never be less than) its production possibilities
-consumption possibilities – the combinations of goods and services that a country’s citizens
might feasibly consume
-autarky – a situation in which a country does not trade with other nations
-world price – the price at which a good or service is traded on international markets
-if the price of a good or service in a closed economy is greater than the world price, and that
economy opens itself to trade, the economy will tend to become a net importer of that
good or service
-if the price of a good or service in a closed economy is lower than the world price, and that
economy opens itself to trade, the economy will tend to become a net exporter of that
good or service.
-domestic consumers of imported goods benefit from free trade
-consumers enjoy larger quantity at lower price
-domestic producers of imported goods are hurt by free trade
-fall in prices to international level means some producers go out of business and lower
profits for those that remain in business, unemployment will rise and may persist
if not easy to move to a new industry
-domestic producers of a exported goods benefit from free trade
-raises domestic price to world price and domestic producers benefit from increased
market and from higher price of their product
-domestic consumers of exported goods are hurt by free trade
-domestic consumers will have to pay the higher world price of coffee and will consume
less
-protectionism – the view that free trade is injurious and should be restricted
-tariff – a tax imposed on an imported good
-quota – the legal limit on the quantity of a good that may be imported
-outsourcing – a term increasingly used to connoted having services performed by low-wage
workers overseas