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74 ❖ Chapter 9/Application: International Trade
34. In a December 2007 New York Times column, Paul Krugman noted that
a.
it is difficult to find instances of trade between high-wage countries in the modern era.
b.
it is difficult to find instances of trade between high-wage countries and low-wage countries in the
modern era.
c.
the United States now imports more oil and other raw materials from other advanced countries than
from the third world.
d.
the United States now imports more manufactured goods from the third world than from other
advanced countries.
35. In recent years, which countries have taken a unilateral approach to the removal of trade restrictions?
a.
China and North Korea
b.
Chile and South Korea
c.
Russia and Japan
d.
the United States and Mexico
36. Which of the following is the most accurate statement?
a.
The one argument for restricting trade that almost all economists accept as valid is the infant-
industry argument.
b.
Almost all economists insist that it is never appropriate to protect “key” industries, even when there
are legitimate concerns about national security.
c.
The idea that one nation might want to threaten another nation with a trade restriction is associated
with the protection-as-a-bargaining-chip argument for restricting trade.
d.
The protection-as-a-bargaining-chip argument for restricting trade is also known as the infant-
industry argument.
37. Suppose Ukraine subsidizes Ukrainian wheat farmers, while Russia offers no subsidy to Russian wheat farm-
ers. As a result of the Ukrainian subsidy, sales of Ukrainian wheat to Russia
a.
may prompt Russian farmers to invoke the infant-industry argument.
b.
increase the consumer surplus of Russian buyers of wheat.
c.
decrease the total surplus of the Russian people.
d.
All of the above are correct.
38. A common argument in favor of restricting trade
a.
concerns the strategy of bargaining.
b.
is that efforts should be made to get new industries started.
c.
emphasizes the belief that all countries should play by the same rules.
d.
All of the above are correct.
Chapter 9/Application: International Trade ❖ 75
39. A common argument in favor of restricting international trade in good x is based on the premise that
a.
international trade reduces total surplus in countries that export good x.
b.
international trade reduces total surplus in countries that import good x.
c.
international trade is desirable only when countries with different domestic supplies of natural
resources play by different rules when trading with one another.
d.
trade restrictions can be useful when one country bargains with its trading partners.
CONCLUSION
1. In 2008, the Los Angeles Times asked members of the American public whether free international trade has
helped or hurt the economy. Of those surveyed,
a.
57 percent said free international trade helped the economy.
b.
26 percent said free international trade helped the economy.
c.
30 percent said free international trade hurt the economy.
d.
16 percent said free international trade hurt the economy.
2. Most economists view the United States’ experience with trade as
a.
one from which no firm conclusions about the virtues of free trade can be reached, due to the
relatively short history of international trade in the U.S.
b.
one from which no firm conclusions about the virtues of free trade can be reached, due to the lack
of trade within the U.S. throughout most of the early history of the U.S.
c.
an ongoing experiment that confirms the virtues of free trade.
d.
an ongoing experiment that calls into serious question the notion that free trade enhances the
economic well-being of a nation.
3. Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as
a.
confirmation of the virtues of free trade.
b.
confirmation of the infant-industry argument.
c.
confirmation that free trade agreements are not necessary.
TRUE/FALSE
1. The history of the textile industry raises important questions for economic policy.
2. Trade decisions are based on the principle of absolute advantage.
76 ❖ Chapter 9/Application: International Trade
3. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from
participating in a market.
4. According to the principle of comparative advantage, all countries can benefit from trading with one another
because trade allows each country to specialize in doing what it does best.
5. The world price of cotton is the highest price of cotton observed anywhere in the world.
6. If the world price of a good is greater than the domestic price in a country that can engage in international
trade, then that country becomes an importer of that good.
7. Without free trade, the domestic price of a good must be equal to the world price of a good.
8. The nation of Aviana soon will abandon its no-trade policy and adopt a free-trade policy. If the world price of
goose meat is $3 per pound and the domestic price of goose meat without trade is $2 per pound, then Aviana
should export goose meat.
9. If a country allows free trade and its domestic price for a given good is lower than the world price, then it will
import that good.
10. “Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed
the losses of the losers.” This statement is correct for a nation that exports manufactured goods, but it is not
correct for a nation that imports manufactured goods.
11. The nation of Loneland does not allow international trade. In Loneland, you can buy 1 pound of beef for 2
pounds of cheese. In neighboring countries, you can buy 2 pounds of beef for 3 pounds of cheese. If Lone-
land were to allow free trade, it would export cheese.
Chapter 9/Application: International Trade ❖ 77
12. If Argentina exports oranges to the rest of the world, Argentina's producers of oranges are worse off, and Ar-
gentina's consumers of oranges are better off, as a result of trade.
13. If a country’s domestic price of a good is lower than the world price, then that country has a comparative ad-
vantage in producing that good.
14. When a country allows international trade and becomes an importer of a good, domestic producers of the good
are better off, and domestic consumers of the good are worse off.
15. If the United Kingdom imports tea cups from other countries, then U.K. producers of tea cups are better off,
and U.K. consumers of tea cups are worse off, as a result of trade.
16. If Belgium exports chocolate to the rest of the world, then Belgian chocolate producers benefit from higher
producer surplus, Belgian chocolate consumers are worse off because of lower consumer surplus, and total
surplus in Belgium increases because of the exports of chocolate.
17. In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the los-
ers.
18. Suppose the Ivory Coast, a small country, imports wheat at the world price of $4 per bushel. If the Ivory Coast
imposes a tariff of $1 per bushel on imported wheat, then, other things equal, the price of wheat in Ivory Coast
will increase, but by less than $1.
19. The small-economy assumption is necessary to analyze the gains and losses from international trade.
20. The greater the elasticities of supply and demand, the smaller are the gains from trade.
78 ❖ Chapter 9/Application: International Trade
21. If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of the
tariff.
22. When a government imposes a tariff on a product, the domestic price will equal the world price.
23. A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade.
24. When a country abandons no-trade policies in favor of free-trade policies and becomes an importer of steel,
then the domestic price of steel will increase as a result.
25. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse
off.
26. When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off
and sellers of shoes in that country become better off.
27. Deadweight loss measures the decrease in total surplus that results from a tariff or quota.
28. If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the gov-
ernment will gain tariff revenue, and domestic consumers will gain consumer surplus.
29. Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports.
30. The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity of
wine imported, and increase the quantity of wine produced domestically.
Chapter 9/Application: International Trade ❖ 79
31. Suppose that Australia imposes a tariff on imported beef. If the increase in producer surplus is $100 million,
the increase in tariff revenue is $200 million, and the reduction in consumer surplus is $500 million, the
deadweight loss of the tariff is $300 million.
32. Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, the
reduction in consumer surplus is $150 million, and the deadweight loss of the tariff is $30 million, then the tar-
iff generates $130 million in revenue for the government.
33. Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium
without trade, thus reducing the gains from trade.
34. Import quotas and tariffs both cause the quantity of imports to fall.
35. Import quotas and tariffs make domestic sellers better off and domestic buyers worse off.
36. If a country allows free trade and imports cars, then it is the case that the gains to domestic producers out-
weigh the losses to domestic consumers.
37. The nation of Cranolia used to prohibit international trade, but now trade is allowed, and Cranolia is exporting
furniture. Relative to the previous no-trade situation, buyers of furniture in Cranolia are now better off.
38. The nation of Spritzland used to prohibit international trade, but now trade is allowed, and Spritzland is ex-
porting wristwatches. Relative to the previous no-trade situation, total surplus in the market for wristwatches
in Spritzland has increased.
39. Free trade allows firms to realize economies of scale, resulting in higher costs of production.
80 ❖ Chapter 9/Application: International Trade
40. For a given country, comparing the world price of aluminum and the domestic price of aluminum before trade
indicates whether that country’s demand for aluminum exceeds the demand for aluminum in other countries.
41. For Country A, the world price of soybeans exceeds the domestic equilibrium price of soybeans. As a result,
international trade allows buyers of soybeans in Country A to experience greater consumer surplus than they
otherwise would experience.
42. For Country A, the world price of textiles exceeds the domestic equilibrium price of textiles. As a result, in-
ternational trade allows sellers of textiles in Country A to experience greater producer surplus than they oth-
erwise would experience.
43. William and Jamal live in the country of Dumexia. As a result of Dumexia’s legalization of international trade
in bananas, William becomes better off and Jamal becomes worse off. It follows that William is a seller, and
Jamal is a buyer, of bananas.
44. William and Jamal live in the country of Dumexia. When Dumexia legalized international trade in bananas,
the price of bananas in Dumexia increased. As a result, William became better off and Jamal became worse
off. It follows that William is a seller, and Jamal is a buyer, of bananas.
45. Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because
of foreign competition.
46. Free trade causes job losses in industries in which a country does not have a comparative advantage, but it also
causes job gains in industries in which the country has a comparative advantage.
47. Most economists support the infant-industry argument because it is so easy to implement in practice.
48. If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low pric-
es, the Swedish economy would be worse off.
Chapter 9/Application: International Trade ❖ 81
49. Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors.
50. GATT is an example of a successful unilateral approach to achieving free trade.
51. NAFTA is an example of a multilateral approach to achieving free trade.
52. The rules established under the General Agreement on Tariffs and Trade (GATT) are enforced by an interna-
tional body called the World Trade Organization (WTO).
53. A multilateral approach to free trade has greater potential to increase the gains from trade than a unilateral
approach, because the multilateral approach can reduce trade restrictions abroad as well as at home.
54. Economists feel that national security concerns never provide a legitimate rationale for trade restrictions.
55. Economists view free trade as a way to raise living standards both at home and abroad.
56. The results of a 2008 Los Angeles Times poll suggest that a significant majority of Americans believe that free
international trade helps the American economy.
57. The results of a 2008 Los Angeles Times poll suggest that the percentage of Americans who believe trade is
harmful to the economy exceeds the percentage of Americans who believe trade is beneficial to the economy.
58. Most economists view the United States as an ongoing experiment that raises serious doubts about the virtues
of free trade.
82 ❖ Chapter 9/Application: International Trade
SHORT ANSWER
1. Use the graph to answer the following questions about CDs.
a.
What is the equilibrium price of CDs before trade?
b.
What is the equilibrium quantity of CDs before trade?
c.
What is the price of CDs after trade is allowed?
d.
What is the quantity of CDs exported after trade is allowed?
e.
What is the amount of consumer surplus before trade?
f.
What is the amount of consumer surplus after trade?
g.
What is the amount of producer surplus before trade?
h.
What is the amount of producer surplus after trade?
i.
What is the amount of total surplus before trade?
j.
What is the amount of total surplus after trade?
k.
What is the change in total surplus because of trade?
Chapter 9/Application: International Trade ❖ 83
2. Using the graph below, answer the following questions about hammers.
a.
What is the equilibrium price of hammers before trade?
b.
What is the equilibrium quantity of hammers before trade?
c.
What is the price of hammers after trade is allowed?
d.
What is the quantity of hammers imported after trade is allowed?
e.
What is the amount of consumer surplus before trade?
f.
What is the amount of consumer surplus after trade?
g.
What is the amount of producer surplus before trade?
h.
What is the amount of producer surplus after trade?
i.
What is the amount of total surplus before trade?
j.
What is the amount of total surplus after trade?
k.
What is the change in total surplus because of trade?
84 ❖ Chapter 9/Application: International Trade
3. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions
given this information.
a.
What is the domestic price and quantity demanded of hammers after the tariff is imposed?
b.
What is the quantity of hammers imported before the tariff?
c.
What is the quantity of hammers imported after the tariff?
d.
What would be the amount of consumer surplus before the tariff?
e.
What would be the amount of consumer surplus after the tariff?
f.
What would be the amount of producer surplus before the tariff?
g.
What would be the amount of producer surplus after the tariff?
h.
What would be the amount of government revenue because of the tariff?
i.
What would be the total amount of deadweight loss due to the tariff?
4. How does an import quota differ from an equivalent tariff?
Chapter 9/Application: International Trade ❖ 85
5. Characterize the two different approaches a nation can take to achieve free trade. Does one approach have an
advantage over the other?
6. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most
economists, do any of these arguments really justify trade restrictions? Explain.
