AP Macroeconomic Terms - Chapter 18 Terms
Labour-Intensive Goods (pg. 341) Goods that require a large amount of labour to produce, usually highly
skilled workers are required (ex. cameras, video games)
Land-Intensive Goods (pg. 341) Goods that require large amounts of land to produce (ex. food)
Capital-Intensive Goods (pg. 341) Goods that require large amounts of capital to produce (ex. chemicals,
automobiles, agricultural equipment)
Opportunity-Cost Ratio (pg. 342) The domestic exchange ratio for two products (ex. coffee and wheat
and what each sacrifices to produce the other)
Principle Of Comparative Advantage (pg. 343) Principle that total output will be greatest when each
good is produced by the nation with the lowest domestic opportunity cost for that specific good
Terms of Trade (pg. 343) The exchange ratio of two goods between two countries
Trading Possibilities Line (pg. 343) A curve that shows the amount of two products a nation can obtain
by SPECIALIZING in one product and TRADING in the other
Gains From Trade (pg. 345) Bonus goods resulting from international trade due to specialization and
comparative advantage
World Price (pg. 346) Price resulting from the global quantities supplied and demanded
Domestic Price (pg. 346) The equilibrium price in a closed economy with no international trade
Export Supply Curve (pg. 347) Upwards sloping curve showing export supply
Import Demand Curve (pg. 348) Downwards sloping curve showing import demand
Equilibrium World Price (pg. 349) Equilibrium price of exports and imports due to world trade
Tariffs (pg. 349) Excise taxes on IMPORTED goods
Revenue Tariff (pg. 350) Tariff designed to raise money for the government
Protective Tariff (pg. 350) Tariff designed to protect/shield a domestic producer from foreign producers
Import Quota (pg. 350) Limit on how many of a good can be imported
Non-Tariff Barrier (NTB) (pg. 350) Licensing requirement that makes it difficult for exporters to meet
Voluntary Export Restriction (VER) (pg. 350) When exporters voluntarily limit their exports
Strategic Trade Policy (pg. 353) When governments specifically protect a young or important industry so
that they can dominate the world market, thus resulting in tariffs from other countries
Dumping (pg. 353) When exporters sell extra goods at prices below the cost of production. Two reasons
for dumping: a) to drive out domestic competition and thus obtain monopoly power, b) intentional price
discrimination so that they can lower overall production costs
Smoot-Hawley Tariff Act 1930 (pg. 354) Helped create Depression by reducing imports in US, so other
nations then retaliated
Trade Adjustment Assistance Act 2002 (pg. 355) US law helping workers hurt by international trade
Offshoring (pg. 355) Shifting work previously done in the US to workers located in other nations
World Trade Organization (WTO) (pg. 356) Previously known as GATT, WTO had 149 nations in 2006
and oversaw trade agreements and rules on disputes relating to them
Doha Round (pg. 356) Qatar 2001 with purpose of lowering further reducing tariffs and quotas
Also Remember:
A) Trade deficit occurs when more imports than exports. Trade surplus is when more exports than
imports
B) International trade (and finance) links world economies and economies can quickly affect one another
C) Why do nations trade? (See pages 340-1) a) Distribution of economic resources (natural, human, and
capital) among countries is different, b) Efficient production
D) Through FREE TRADE based on COMPARATIVE ADVANTAGE, the world economy can achieve a
more efficient allocation of resources and higher level of material well-being than it can without free trade
E) Government trade barriers lessen or eliminate gains from specialization
F) Benefits of free trade: 1) Free trade promotes competition and deters monopoly, 2) Free Trade links
national interests and breaks down national animosities
G) In a TWO COUNTRY WORLD MODEL, the EQUILIBRIUM world price and equilibrium quantities of
exports and imports occurs where one nation’s EXPORT SUPPLY CURVE intersects with the other
nation’s IMPORT DEMAND CURVE
H) ECONOMIC IMPACT OF TARIFFS (Both Direct & Indirect):
Direct Effects: a) Decline in consumption because fewer goods purchased, b) Increased domestic
production for the protected industry (but at the cost of taking resources away from more productive
industries), c) Decline in imports, d) Tariff revenue for the government (from consumers).
Indirect Effects: a) The more efficient exporting nation has less dollars, so they buy less products from the
less efficient protective country, b) Inefficient industries are promoted over efficient ones, thus efficient
industries weaken and contract, c) Tariffs reduce overall world efficiency
I) ECONOMIC IMPACT OF IMPORT QUOTAS: The impacts are the same as tariffs with ONE
DIFFERENCE, a quota transfers revenue to a foreign producer
J) Protective Trade action raises the price of products in 3 ways: 1) The price of the IMPORTED good
goes up, 2) The higher price causes domestic consumers to buy MORE EXPENSIVE domestically
produced goods, 3) The price of domestically produced goods goes up because competition is lowered
K) ARGUMENTS FOR TRADE PROTECTION (see pages 352-355):
1) Protection of military industries, 2) Diversification for Stability to ensure better economic growth over the
long term, 3) Infant Industry Argument (shielding young industries), 4) Protection Against Dumping, 5)
Increased Domestic Employment, 6) Cheap Foreign Labour Argument