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40-801
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
D
E
F
Tobacco
20
16
12
8
4
0
Corn
0
4
8
12
16
20
WEST WAKOVIA’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
D
E
F
Tobacco
15
12
9
6
3
0
Corn
0
5
10
15
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?
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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
D
E
F
Sheep
25
20
15
10
5
0
Hogs
0
5
10
15
16
25
MICRASTAN’S PRODUCTION POSSIBILITIES TABLE
Product
Alternative
(lbs)
A
B
C
D
E
F
Sheep
20
16
12
8
4
0
Hogs
0
3
6
9
12
15
(a) In Macro, the cost of producing:
5 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.
(b) In Micra, the cost of producing:
4 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.
(c) Which country has the comparative advantage in sheep production and which country has the
comparative advantage in hog 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 sheep unit?
(e) If the nations do not specialize and trade but remain at alternative D in Macrostan and D in Micrastan,
the combined production of Macro and Micrastan will be how many sheep and how many hogs?
(f) However, if the two nations specialize, the combined production of Macro and Micrastan will be how
many sheep and how many hogs?
(g) What will be the total gain of sheep and hogs if the countries specialize and trade?
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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
D
E
Soup
60
45
30
15
0
Nuts
0
15
30
45
60
GALACIA PRODUCTION POSSIBILITIES:
A
B
C
D
E
Soup
20
15
10
5
0
Nuts
0
15
30
45
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.
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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?
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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)?
For the United States, there will be domestic supply and demand and export supply and import demand for
aluminum. The price and quantity of aluminum are determined by the intersection of the domestic demand
40-806
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.
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30. Answer the following questions based on graph.
(a) What is the domestic equilibrium level of quantity and price of jelly beans in the United States?
(b) Fill in the U.S. Export Supply curve and U.S. Import Demand curve on the graph provided.
(c) Suppose the world price of jelly beans is currently $1.00. Will the United States face a shortage,
surplus, or neither?
(d) Suppose the world price of jelly beans is currently $2.25. Will the United States face a shortage,
surplus, or neither?
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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?
(c) Suppose the countries decide to trade. Use the third graph to determine the world price. Determine
which country will export, import, and the quantity that will be traded.
32. Why might a country seek to protect an industry, even when the benefits are greatly outweighed by the
cost?
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.
A tariff increases the price of the imported product. First, consumers are hurt. Some consumers will not be
38. What are the similarities and differences in the economic effects of tariffs and quotas?
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39. “Unless a tariff is prohibitive, it does not inhibit competition as much as a quota.” Evaluate.
A tariff raises the price of an import, but it does not limit the quantity imported. It is also possible that the
price of the import will not rise by the full extent of the tariff imposed. The foreign manufacturer can
40. What are the net costs of tariffs and quotas on consumption and income distribution?
The cost to society is that protectionism raises product prices by raising the imported price of the product.
41 . Do protectionist policies benefit producers, consumers, workers, or the government? Explain.
Protectionism in the form of tariffs or quotas reduces the total supply (domestic plus foreign) of the good.
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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?
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
(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
$6?
(b) If the world price was $4 and a tariff of $2 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 $4, what would be the difference in the total revenue received by foreign
producers with a $2 per unit tariff compared with a quota of 20,000 units?
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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.
(a) How much total revenue would go to domestic producers if the market were closed to international
trade compared to a market open to international trade? Explain.
(b) If the economy is open to trade, but a $2 per unit tariff were applied, what would be the total revenue
going to domestic producers, foreign producers (after-tax revenue), and to the government? Explain.
(c) What would be the difference in revenue with a tariff of $2 per unit versus a quota of 80 units?
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.
(a) How much total revenue would go to domestic producers if the market were closed to international
trade compared to a market open to international trade? Explain.
(b) If the economy is open to trade, but a $3 per unit tariff were applied, what would be the total revenue
going to domestic producers, foreign producers (after-tax revenue), and to the government? Explain.
(c) What would be the difference in revenue with a tariff of $3 per unit versus a quota of 20 units?
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46. Explain and evaluate the validity of the military self-sufficiency argument for trade protection.
The basic argument is that domestic industries that are vital to national defense should be protected against
47. What are the limitations to the diversification for stability argument for trade protection?
There may be a legitimate reason for a nation to protect certain industries until they become viable. The
best case would be in nations that have one basic resource or export and are seeking to diversify their
48. Evaluate the validity of the argument that a new industry in a nation needs protection from foreign
competition if it is to prosper.
The infant-industry argument is based on the idea that new industries need time to become mature and
sufficiently strong and large to compete with more mature industries from other nations. These new
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49. What is the problem with protecting industries in the United States from the dumping of foreign products
on the domestic market?
50. Evaluate the statement: “Tariffs and quotas are needed to protect American products from dumping.”
Dumping is a form of price discrimination that might be practiced by foreign producers who sell their
51. Explain four problems with the argument that trade protection is needed to protect American jobs.
There are several problems with using trade protection to “save American jobs.” First, imports may
eliminate some jobs, but they create others in those industries that import products. Second, there is a
52. Evaluate the argument: “Restricting imports from other nations will save U.S. jobs.”
The argument is a flawed one for several reasons. First, imports may eliminate some U.S. jobs, but they
create others in those sectors that import products. Import restrictions change the composition of
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53. Why might trade barriers be a highly ineffective technique for increasing domestic employment?
First, trade barriers lower living standards by making consumer goods more expensive. This means that
consumers have less to spend on everything including domestic goods. Second, trade barriers invite
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?
56. Evaluate this argument for a trade barrier: “The U.S. needs protection from cheap foreign labor.”
The argument is flawed on several grounds. First, U.S. consumers benefit from being able to purchase a
product at a lower price than they would have if they had to buy a domestically produced product. Second,
U.S. workers earn a high wage because they are productive. Gains from trade are based on comparative
57. Why do governments often intervene in international trade to restrict imports and expand exports?
Governments may intervene in trade between nations because they mistakenly think of exports as helpful
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58. If tariffs contribute to inefficiency in the international allocation of resources and lower output and income,
why have nations enacted tariffs?
59. How do you account for the widespread use of tariffs and import quotas internationally but the virtual
absence of such trade barriers among the 50 states?
Domestic and international political considerations are usually the primary reason for the presence or
absence of tariffs between areas of the globe. The framers of the constitution in the United States viewed
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?
62. List the major outcomes from 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
example?
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?
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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.
72. (Last Word) What is the point of the “Petition of Candlemakers, 1845? How is the point made?
This satire explains the absurdity of arguments for trade protection by taking them to their extreme. The
