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Chapter 20 - International Trade
20-14
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.
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.
Chapter 20 - International Trade
20-15
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)?
Chapter 20 - International Trade
20-16
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
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.
Chapter 20 - International Trade
20-18
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.
Chapter 20 - International Trade
20-19
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?
Chapter 20 - International Trade
20-20
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.
(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?
Chapter 20 - International Trade
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?
Chapter 20 - International Trade
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?
Chapter 20 - International Trade
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?
Chapter 20 - International Trade
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?
Chapter 20 - International Trade
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?
Chapter 20 - International Trade
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?
