CLASS HOURS: 7 – 9:50 PM
1.What does the domestic price that prevails without international trade tell us about a
nation’s comparative advantage?
The price prevailing in world markets is called the world price. The world price determines
whether a producer will participate in international trade as an importer or exporter. If the
domestic price is low, the cost of producing goods is low, suggesting a comparative
advantage. Vice Versa.
2. When does a country become an exporter of a good? An importer?
If the world price of a good is higher than the domestic price then the producer will
become an exporter. If the world price of a good is lower than the domestic price, then the
producer will become an importer.
3. Draw the Supply – and – Demand diagram for an importing country. What is consumer
surplus and producer surplus before trade is allowed? What is consumer surplus and
producer surplus with free trade? What is the change in total surplus?
4. Describe what a tariff is and its economic effect.
Tariff: tax on goods produced abroad and sold domestically. Tariffs reduce the quantity of
imports and move the domestic market closer to its equilibrium without trade.
5. List five arguments often given to support trade restrictions. How do economists
respond to these arguments?
Job argument: trade with other countries destroys domestic jobs
National security argument: Industry is vital to national security. Steel is used to make