1. Briefly explain what the term \"balance of trade\" refers to from a macroecon

Question

1. Briefly explain what the term "balance of trade" refers to from a macroeconomic perspective and include a brief description of how exports and imports influence the balance of trade.

2. What benefits are to be gained from countries producing according to the concept of comparative advantage? What if a country is absolutely more productive in all goods?

3. What are the effects of a tariff, and who benefits and who loses when tariffs are imposed? What are the effects of a quota, and who benefits and who loses when quotas are imposed?

Explanation / Answer

1. Balance of trade is the difference between a country's imports and its exports. It has two sides: debit and credit. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

A country has a trade deficit if it imports more than it exports and a trade surplus is when it exports more than it imports.

2. Countries producing according to the concept of comparative advantage would specialize in the production of the goods for which they have the lowest opportunity cost which will lead to increased productivity thereby increasing the aggregate output.

If a country is absolutely more productive in all goods, it will still gain from trade, because it is the comparative advantage and not the absolute advantage that determines which country should produce which good.

3. A tariff is a tax that is imposed by a government on imported or exported goods. When the tariff is imposed, the domestic price of the good rises. Now, more of the good is provided domestically and imports of the good fall. With the higher prices, domestic producers experience a gain in producer's surplus. In contrast, because of the higher prices, domestic consumers experience a loss in consumer's surplus. Also, as tariff is a tax, the government gains some revenue.

A quota also raises the price but the government does not earn any revenue. Both domestic and foreign producers gain producer's surplus at the expense of domestic consumer's surplus.

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