International Trade Comic Book

 

 

  1. According to mercantilism how does a country increase its wealth?

By accumulating large quantities of gold and by exporting more than importing.

  1. Why were colonies important to the concept of mercantilism?

They provided resources and a market for manufactured goods.

  1. Which philosopher challenged mercantilism in his book “Wealth of Nations”?

Adam Smith, who said that wealth should be measured not in gold but in the goods and services that citizens can consume

  1. What is an absolute advantage?

When a country can produce a good or service at least cost. The country is more efficient at producing it.

  1. How are absolute advantage and comparative advantage different?

Absolute advantage is producing at least cost; comparative advantage is producing at least opportunity cost.

  1. How does opportunity cost help explain the concept of comparative advantage?

A country may not be able to produce a good cheaper, but they can still benefit from trade by specializing in those goods that “cost them the least amount in other goods.” This means that they give up less, have a lower opportunity cost, and can still benefit from trade.

  1. According to economists, are trade barriers a good idea? Why or why not?

From an economic standpoint, trade barriers are always BAD. They restrict trade, which leads to less efficient use of resources and a lower standard of living.

  1. Explain two types of trade barriers?

Tariff – a tax on imports.

Quota – a limit on the quantity of imports.

  1. List three ways that countries around the world have lowered trade barriers.

NAFTA – reduced trade barriers between US, Canada, Mexico

EU – reduced trade barriers in Europe

WTO – reduced trade barriers world-wide

  1. List three reasons why most countries refuse to remove all trade barriers.

National Security – countries should have the ability to produce its own military goods

Infant Industries – countries may feel the need to protect “baby” industries from competition until they grow up and can compete in the big bad world. The problem is that companies protected from competition grow up to be inefficient and unable to compete when they grow up.

Domestic Employment – Politicians may want to protect workers from cheap foreign labor and promote domestic workers. The problem with this approach is that consumers are hurt when domestic goods cost more than imported ones and the industries protected become even more inefficient, hurting economic growth.

  1. How big is the foreign exchange market?

$1.5 trillion dollars DAILY

  1. Why do retail foreign exchange rates differ from wholesale exchange rates?

Retail transactions cost more because they are not usually electronic and small in volume.

Wholesale transactions cost less because they are large, electronic transactions that have low transaction fees.

  1. Why is the foreign exchange market important to international trade?

Without the foreign exchange market, international trade would have to be based on barter, which is highly inefficient.

  1. What is a spot transaction?

Takes place now.

  1. What is a forward contract?

An agreement is made today to trade in the future and an agreed upon exchange rate.

  1. What does it mean when the dollar/yen exchange rate goes from 1:120 to 1:100?

The dollar has DEPRECIATED, which means that you get fewer yen for each dollar exchanged.


  1. Why are forward contracts important to international trade?

They reduce uncertainty in international trade and make it possible for businesses to agree on the terms of trade. More trade possible, a higher standard of livin occ

  1. What factors explain why exchange rates differ between countries?

Usually because interest rates differ between countries.

  1. What role do central banks play in the foreign exchange market?

Central banks want STABILITY in the foreign exchange market. They don’t want the dollar to either appreciate or depreciate strongly, they want the exchange rates to remain stable so that trade is easier to conduct.

  1. Why is stability in the foreign exchange market important to the domestic economy?

When exchange rates are stable, more trade takes place, and the standard of living goes up.

  1. How important are imports to the U.S. economy?

The make up over 14% of the goods and services consumed in our country and this percentage is growing.

  1. The U.S. has a trade deficit. What does this mean?

We import more than we export.