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CHAPTER 40
International Trade
A. Short-Answer, Essays, and Problems
1. Define trade deficit and a trade surplus. Does the United States have a trade deficit or surplus in goods?
Service?
2. What are the major imports and exports of the United States?
3. Cite three important reasons why nations trade.
4. “The international flow of goods helps compensate for the international immobility of resources.” Analyze
5. What insights about international trade came from Adam Smith and David Ricardo?
6. Production of goods and services require different mixes of resources. Discuss the three different
7. Determine which of the productive resource intensities each of the following goods fall under. Why?
8. Why should Japan not make its main production sector agriculture?
9. Explain the principle of comparative advantage in nontechnical terms.
10. (Consider This) In both the case of the CPA painting her house and the painter filing his taxes, what is the
determining factor that causes them to use professional services? What is the benefit of this specialization?
11. (Consider This) Think of a personal example similar to the one in the text where someone you know can
perform many tasks better than others, but still should specialize in what he /she does best according to the
12. What does it mean to have an absolute advantage in the production of two goods?
13. If the United States has the absolute advantage in the production of agriculture and electronics. This means
14. Does having an absolute advantage in producing both goods mean that you’re guaranteed to have a
15. Suppose there are only two planets in the universe, Zenope and Zuranda. On each planet, its inhabitants
consume two products—coffee and fried chicken. Each planet has an equal population. Producing solely
coffee, Zenope can produce 50 units of coffee, while Zuranda can produce 80 units of coffee. Producing
solely fried chicken, Zenope can produce 25 units, while Zuranda can produce 30 units.
(a) Which planet has the absolute advantage in coffee? In fried chicken?
(b) Which planet has the comparative advantage in coffee? In fried chicken?
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16. Given the data in the graph below, which nation should specialize in steel production and which nation in
18. Suppose that by devoting all of its resources to the production of rice (R), Japan can produce 40 units. By
devoting all of its resources to corn (C), it can produce 20 units. Comparable figures for Mexico are 15
units of rice (R) and 15 units of corn (C). Explain why each nation will specialize in which product. What
are the limits to the terms of trade?
19. Use the extreme points from a production possibilities schedule below to draw two straight line production
possibilities curves for two nations, A and B using the below graphs. Assume constant costs.
Nation
Food
Clothing
A
4
4
B
2
8
20. “The possibility for gains trade is due to the fact that different countries face different resource
endowments, production costs and geographical locations.” Interpret and expand with examples.
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21. The countries of East Wakovia and West Wakovia have the production possibilities tables for tobacco and
corn shown below. Without trade East would produce at alternative C and West would produce alternative
D. Note that the costs of producing tobacco and corn are constant in both countries.
EAST WAKOVIA’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
E
F
Tobacco
20
16
12
4
0
Corn
0
4
8
16
20
WEST WAKOVIA’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
E
F
Tobacco
15
12
9
3
0
Corn
0
5
10
20
25
(a) In East Wakovia, the cost of producing:
4 units of tobacco is ______ corn units.
1 unit of tobacco is ______ corn units.
(b) In West Wakovia, the cost of producing:
3 units of tobacco is ______ corn units.
1 unit of tobacco is ______ corn units.
(c) Which country has the comparative advantage in corn production and which country has the
comparative advantage in tobacco production?
(d) If each nation specializes in the product where it has a comparative advantage and trades with the other,
what will be the limits to the terms of trade for each tobacco unit?
(e) If the nations do not specialize and trade but remain at alternative C in East and D in West, the
combined production of East and West Wakovia will be how much tobacco and how much corn?
(f) However, if the two nations specialize, the combined production of East and West Wakovia will be how
much tobacco and how much corn?
(g) What will be the total gain of tobacco and corn if the countries specialize and trade?
22. The countries of Macrostan and Micrastan have the production possibilities tables for sheep and hogs
shown in the tables below. Without trade Macro would produce at Alternative D and Micra would also
produce Alternative D. Note that the costs of producing sheep and hogs are constant in both countries.
MACROSTAN’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
E
F
Sheep
25
20
15
5
0
Hogs
0
5
10
16
25
MICRASTAN’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
E
F
Sheep
20
16
12
4
0
Hogs
0
3
6
12
15
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23. Answer the questions based on production possibilities data for Francia and Galacia. All data are in tons.
FRANCIA PRODUCTION POSSIBILITIES:
A
B
C
E
Soup
60
45
30
0
Nuts
0
15
30
60
GALACIA PRODUCTION POSSIBILITIES:
A
B
C
E
Soup
20
15
10
0
Nuts
0
15
30
60
(a) If trade occurs between Francia and Galacia, which nation should export what product? Why?
(b) What are the limits of the terms of trade between Francia and Galacia?
(c) Assume that prior to specialization and trade, Francia and Galacia chose production possibility “C.”
Now each specializes according to comparative advantage. What will be the resulting gains from trade?
Explain your answer.
24. Answer the next three questions on the basis of the following production possibilities data for Narnia and
Somosa. All data are in 1000s.
NARNIA PRODUCTION POSSIBILITIES:
A
B
C
D
E
Computer chips
80
60
40
20
0
Fuel injectors
0
20
40
60
80
SOMOSA PRODUCTION POSSIBILITIES:
A
B
C
D
E
Computer chips
40
30
20
10
0
Fuel injectors
0
20
40
60
80
(a) If trade occurs between Narnia and Somosa, which nation should export what product? Why?
(b) What are the limits of the terms of trade between Narnia and Somosa?
(c) Assume that prior to specialization and trade, Narnia and Somosa chose production possibility “C.”
Now each specializes according to comparative advantage. What will be the resulting gains from trade?
Explain your answer.
25. Suppose two nations are considering specializing in either calculators or personal computers. If solely
producing calculators, country A can produce 300 and country B can produce 400. If solely producing
personal computers, country A can produce 150 and country B can produce 100. Assume their labor forces
are of equivalent size.
(a) Which country has the comparative advantage in calculators? In computers?
(b) It is predicted that current demand will yield an exchange of 3 calculators for every 1 computer. Will
trade occur? If not, is it because both countries are against trade?
26. State at least one economic benefit to increased international trade.
27. (Consider This) What does international trade do to a nation’s domestic production possibilities?
28. How can supply and demand analysis be used to explain the equilibrium price and quantity of exports and
imports for aluminum when there is trade between two nations (e.g., the United States and Canada)?
29. The table below lists the domestic supply, demand and price levels for sugar in Haiti and the Dominican
Republic. Use this information to answer the following questions.
Haiti
Dominican Republic
Price
SupplyH
DemandH
SupplyDR
DemandDR
$0
0
200
0
255
0.25
25
175
30
230
0.50
50
150
55
205
0.75
75
125
80
180
1.00
100
100
105
155
1.25
125
75
130
130
1.50
150
50
155
105
1.75
175
25
180
80
2.00
200
0
205
55
(a) What is the domestic equilibrium level of quantity and price of sugar in each country?
(b) Suppose the world price of sugar is currently $1.00. Will each country face a shortage, surplus or
neither for sugar?
(c) If the domestic markets for sugar of each country were combined, what would be the equilibrium
quantity and price of imports/exports? Which country will import sugar and which will export?
Support your answer graphically.
30. Answer the following questions based on graph.
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31. Suppose the United States and Brazil produce coffee. Answer the questions based on the graphs below.
(a) What is the equilibrium price in the United States? Brazil?
(b) What is the equilibrium quantity in United States? Brazil?
32. Why might a country seek to protect an industry, even when the benefits are greatly outweighed by the
33. (Consider This) Explain how the “Buy American” theme hurts Americans.
34. What are the major government policies that restrict trade?
35. Define the four basic types of trade barriers.
36. Which is more effective in blocking imports, a tariff or a quota?
37. Who gains and who loses from a protective tariff? Explain.
38. What are the similarities and differences in the economic effects of tariffs and quotas?
40. What are the net costs of tariffs and quotas on consumption and income distribution?
41. Do protectionist policies benefit producers, consumers, workers, or the government? Explain.
42. The next three questions refer to the information in the following table.
Quantity demanded
domestically
Price
Quantity supplied
domestically
700
$6
1100
800
5
1000
900
4
900
1000
3
800
1100
2
700
1200
1
600
(a) What would price and quantity be if the market were closed to international trade? What would the
domestic and foreign quantity supplied be if it were open to international trade and the world price was
$2?
(b) If the world price was $2 and a tariff of $1 were placed on the product, what would be the total revenues
going to domestic producers, foreign producers (after-tax), and the government? Explain.
(c) Given a world price of $2, what would be the difference in the total revenue received by foreign
producers with a $1 per unit tariff compared with a quota of 200 units?
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43. The next three questions refer to the information in the following table.
Quantity demanded
domestically (in
1000s)
Price
Quantity supplied
domestically (in
1000s)
60
$10
80
70
8
70
80
6
60
90
4
50
44. The next three questions refer to the below graph, where Sd and Dd are the domestic supply and demand for
a product. The world price of the product is $6.
45. The next three questions refer to the below graph, where Sd and Dd are the domestic supply and demand for
a product. The world price of the product is $12.
46. Explain and evaluate the validity of the military self-sufficiency argument for trade protection.
47. What are the limitations to the diversification for stability argument for trade protection?
48. Evaluate the validity of the argument that a new industry in a nation needs protection from foreign
49. What is the problem with protecting industries in the United States from the dumping of foreign products
52. Evaluate the argument: “Restricting imports from other nations will save U.S. jobs.”
53. Why might trade barriers be a highly ineffective technique for increasing domestic employment?
54. What is a trade war and how can it erupt? What are the consequences?
55. How can the United States compete successfully with relatively low-wage nations such as India and China?
57. Why do governments often intervene in international trade to restrict imports and expand exports?
58. If tariffs contribute to inefficiency in the international allocation of resources and lower output and income,
59. How do you account for the widespread use of tariffs and import quotas internationally but the virtual
60. What was the General Agreement on Tariffs and Trade (GATT)?
61.What are the major principles of the General Agreement on Tariffs and Trade?
63. What is the purpose of the World Trade Organization and its current activity?
64. What is the World Trade Organization and what is it seeking to get adopted?
65. Why have nations sought free-trade zones and economic integration with other nations? What is an
66. What are the results from the establishment of the European Union?
67. How has the European Union benefited member nations?
68. What is the euro? What was the goal in creating the euro?
69. What is NAFTA? What have critics and defenders said about it?
70. What is the Trade Adjustment Assistance Act? What do critics say about it?
71. Describe the economic reasons why businesses use offshoring.
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72. (Last Word) What is the point of the “Petition of Candlemakers, 1845? How is the point made?
B. Answers to Short-Answer, Essays, and Problems
1. Define trade deficit and a trade surplus. Does the United States have a trade deficit or surplus in goods?
Service?
2. What are the major imports and exports of the United States?
3. Cite three important reasons why nations trade.
4. “The international flow of goods helps compensate for the international immobility of resources.” Analyze
and explain.
5. What insights about international trade came from Adam Smith and David Ricardo?
6. Production of goods and services require different mixes of resources. Discuss the three different
production resource intensities and give examples of each.
40–795
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
are capital-intensive products. Germany and the United States have a comparative advantage in producing
most capital intensive products.
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7. Determine which of the productive resource intensities each of the following goods fall under. Why?
8. Why shouldn’t Japan make its main production sector agriculture?
Japan shouldn’t center its economy in agriculture because of the scarcity of land in the country. Japan is a
9. Explain the principle of comparative advantage in nontechnical terms.
If two nations do not have identical costs of production, then each nation should specialize in production of
the good or goods which it can produce at the relatively lower cost. The key term is “relative” since one
nation may be able to produce everything at an absolutely lower cost.
10. (Consider This) In both the case of the CPA painting her house and the painter filing his taxes, what is the
determining factor that causes them to use professional services? What is the benefit of this specialization?
The opportunity cost of doing the job themselves is the deciding factor of what is the most economical for
the CPA and the painter. It would cost $1500 (30 hr $50/hr) for the CPA to paint her own house, taking
11. (Consider This) Think of a personal example similar to the one in the text where someone you know can
perform many tasks better than others, but still should specialize in what he/she does best according to the
principle of comparative advantage.
For example, one may know of a female doctor who is also better at cooking, sewing, and housework than
40–797
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
production if they specialize in what they do relatively or comparatively the best. The total value of
production expands when specialization occurs.
12. What does it mean to have an absolute advantage in the production of two goods?
13. If the United States has the absolute advantage in the production of agriculture and electronics. This means
the U.S. also has the comparative advantage in the production of both goods. Evaluate this statement.
14. Does having an absolute advantage in producing both goods mean that you’re guaranteed to have a
comparative advantage in both goods? Explain your answer.
15. Suppose there are only two planets in the universe, Zenope and Zuranda. On each planet, its inhabitants
consume two products—coffee and fried chicken. Each planet has an equal population. Producing solely
coffee, Zenope can produce 50 units of coffee, while Zuranda can produce 80 units of coffee. Producing
solely fried chicken, Zenope can produce 25 units, while Zuranda can produce 30 units.
(a) Which planet has the absolute advantage in coffee? In fried chicken?
(b) Which planet has the comparative advantage in coffee? In fried chicken?
16. Given the data in the graph below, which nation should specialize in steel production and which nation in
wheat production? Why?
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17. Suppose that by devoting all of its resources to the production of A, the nation of Econia can produce 50 A.
By devoting all of its resources to the production of B, Econia can produce 25 B. The comparable figures
for the nation of Optima are 5 A and 5 B. According to the principle of comparative advantage, which
nation will specialize in which product? What are the limits to the terms of trade?
In Econia, the cost of producing 1 B is 2 A (25 B = 50 A) given the stated cost conditions. In Optima, the
18. Suppose that by devoting all of its resources to the production of rice (R), Japan can produce 40 units. By
devoting all of its resources to corn (C), it can produce 20 units. Comparable figures for Mexico are 15
units of rice (R) and 15 units of corn (C). Explain why each nation will specialize in which product. What
are the limits to the terms of trade?
In Japan, the cost of producing 1 C is 2 R (20 C = 40 R) given the stated cost conditions. In Mexico, the
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19. Use the extreme points from a production possibilities schedule below to draw two straight line production
possibilities curves for two nations, A and B using the below graphs. Assume constant costs.
Nation
Food
Clothing
A
4
4
B
2
8
(a) What is the cost ratio for the two products?
(b) If each nation specializes according to comparative advantage, who should produce and trade each
product? Why?
(c) What will be the range for the terms of trade? If the terms are set at 1 food = 2 clothing, show how the
trading possibilities lines will change in the graph. Explain.
20. “The possibility for gains trade is due to the fact that different countries face different resource
endowments, production costs and geographical locations.” Interpret and expand with examples.
This statement is correct. Each country has a different combination of resources (i.e., land and mineral
deposits), skilled and unskilled labor forces, capital development, and geographical advantage or