Chapter 20 – International Trade
20-1
CHAPTER 20
International Trade
A. Short-Answer, Essays, and Problems
1. What are the major imports and exports of the United States?
2. Cite three important reasons why nations trade.
3. “The international flow of goods helps compensate for the international immobility of resources.” Analyze
and explain.
4. What insights about international trade came from Adam Smith and David Ricardo?
5. Why shouldn’t Japan make its main production sector agriculture?
6. Explain the principle of comparative advantage in nontechnical terms.
7. (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?
8. (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.
9. What does it mean to have an absolute advantage in the production of two goods?
10. 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.
11. 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?
12. Given the data in the graph below, which nation should specialize in steel production and which nation in
wheat production? Why?
13. 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?
Chapter 20 – International Trade
20-2
14. 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?
15. 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.
16. “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.
17. 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
ProductAlternative
(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
ProductAlternative
(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
Chapter 20 – International Trade
20-3
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?
18. 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
ProductAlternative
(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
ProductAlternative
(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?
19. Answer the next three questions on the basis of the following 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.
Chapter 20 – International Trade
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20. 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 chips80 60 40 20 0
Fuel injectors 0 20 40 60 80
SOMOSA PRODUCTION POSSIBILITIES:
A B C D E
Computer chips40 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.
21. 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?
22. State at least one economic benefit to increased international trade.
23. (Consider This) What does international trade do to a nation’s domestic production possibilities?
24. 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)?
25. 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.
26. Why might a country seek to protect an industry, even when the benefits are greatly outweighed by the
cost?
27. (Consider This) Explain how the “Buy American” theme hurts Americans.
Chapter 20 – International Trade
20-5
28. What are the major government policies that restrict trade?
29. Define the four basic types of trade barriers.
30. Which is more effective in blocking imports, a tariff or a quota?
31. Who gains and who loses from a protective tariff? Explain.
32. What are the similarities and differences in the economic effects of tariffs and quotas?
33. “Unless a tariff is prohibitive, it does not inhibit competition as much as a quota.” Evaluate.
34. What are the net costs of tariffs and quotas on consumption and income distribution?
35. Do protectionist policies benefit producers, consumers, workers, or the government? Explain.
36. 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?
37. 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?
38. 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.
Chapter 20 – International Trade
20-6
(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?
39. 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?
40. Explain and evaluate the validity of the military self-sufficiency argument for trade protection.
41. What are the limitations to the diversification for stability argument for trade protection?
42. Evaluate the validity of the argument that a new industry in a nation needs protection from foreign
competition if it is to prosper.
43. What is the problem with protecting industries in the United States from the dumping of foreign products
on the domestic market?
44. Evaluate the statement: “Tariffs and quotas are needed to protect American products from dumping.”
45. Explain four problems with the argument that trade protection is needed to protect American jobs.
46. Evaluate the argument: “Restricting imports from other nations will save U.S. jobs.”
47. Why might trade barriers be a highly ineffective technique for increasing domestic employment?
48. What is a trade war and how can it erupt? What are the consequences?
49. How can the United States compete successfully with relatively low-wage nations such as India and China?
50. Evaluate this argument for a trade barrier: “The U.S. needs protection from cheap foreign labor.”
51. Why do governments often intervene in international trade to restrict imports and expand exports?
52. If tariffs contribute to inefficiency in the international allocation of resources and lower output and income,
why have nations enacted tariffs?
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53. 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?
54. What was the General Agreement on Tariffs and Trade (GATT)?
55. What are the major principles of the General Agreement on Tariffs and Trade?
56. List the major outcomes from the General Agreement on Tariffs and Trade.
57. What is the purpose of the World Trade Organization and its current activity?
58. What is the World Trade Organization and what is it seeking to get adopted?
59. Why have nations sought free-trade zones and economic integration with other nations? What is an
example?
60. What are the results from the establishment of the European Union?
61. How has the European Union benefited member nations?
62. What is the euro? What was the goal in creating the euro?
63. What is NAFTA? What have critics and defenders said about it?
64. What is the Trade Adjustment Assistance Act? What do critics say about it?
65. Describe the economic reasons why businesses use offshoring.
66. (Last Word) What is the point of the “Petition of Candlemakers, 1845? How is the point made?
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B. Answers to Short-Answer, Essays, and Problems
1. What are the major imports and exports of the United States?
2. Cite three important reasons why nations trade.
3. “The international flow of goods helps compensate for the international immobility of resources.” Analyze
and explain.
4. What insights about international trade came from Adam Smith and David Ricardo?
5. Why shouldn’t Japan make its main production sector agriculture?
6. Explain the principle of comparative advantage in nontechnical terms.
Chapter 20 – International Trade
20-9
7. (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?
8. (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.
9. What does it mean to have an absolute advantage in the production of two goods?
10. 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.
11. 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?
Chapter 20 – International Trade
12. Given the data in the graph below, which nation should specialize in steel production and which nation in
wheat production? Why?
13. 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?
14. 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?
Chapter 20 – International Trade
15. 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.
16. “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.
Chapter 20 – International Trade
20–12
17. 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
ProductAlternative
(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
ProductAlternative
(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?
Chapter 20 – International Trade
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18. 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
ProductAlternative
(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
ProductAlternative
(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?
19. Answer the next three questions on the basis of the following production possibilities data for Francia and
Galacia. All data are in tons.