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Chapter 20 - International Trade
Chapter 20 - International Trade
McConnell Brue Flynn 20e
DISCUSSION QUESTIONS
1. Quantitatively, how important is international trade to the United States relative to the
importance of trade to other nations? What country is the United States’ most important trading
partner, quantitatively? With what country does the United States have the largest trade deficit?
LO1
Answer: Our exports of goods and services are about 14 percent of GDP, which is small
relative to the proportion in many other industrialized nations. For example, the
2. Distinguish among land-, labor-, and capital-intensive goods, citing an example of each
without resorting to book examples. How do these distinctions relate to international trade? How
do distinctive products, unrelated to resource intensity, relate to international trade? LO1, LO2
Answer: Land-intensive commodities include agricultural products such as corn
and wheat. Labor-intensive commodities require much skilled labor in
These distinctions are important because if a nation has an abundant supply of
particular type of resources, it can produce items that are intensive in these
Distinctive products, those associated with a particular country (perhaps because
of a reputation for quality) can provide an export niche for a country. Even
3. Explain: “The United States can make certain toys with greater productive efficiency than can
China. Yet we import these toys from China.” Relate your answer to the ideas of Adam Smith and
David Ricardo. LO2
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Chapter 20 - International Trade
Answer: A country is said to have an absolute advantage over other producers of a
product if it is the most efficient producer of that product (by which we mean that it can
In the case of toys the United States may have an absolute advantage in producing toys
In 1776, Adam Smith used the concept of absolute advantage to argue for international
In the early 1800s David Ricardo extended, and modified, Smith’s idea by demonstrating
4. Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60
units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of
X and 60 units of Y. Assuming constant costs, in which product should each nation specialize?
Explain why. What are the limits of the terms of trade between these two countries? How would
rising costs (rather than constant costs) impact the extent of specialization and trade between
these two countries? LO2
Answer: To answer this question, we find the opportunity cost of the two goods.
The opportunity cost of good X (in terms of good Y) in Big Country is 3/4 (=
60/80) unit of Y for each unit of X. That is, Big Country needs to give up 3/4 unit
The limits of the terms of trade depend on the opportunity costs. For example, Big
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Chapter 20 - International Trade
5. What is an export supply curve? What is an import demand curve? How do such curves relate
to the determination of the equilibrium world price of a tradable good? LO3
Answer: The export demand curve for a particular country is the difference between
The import demand schedule works in the other direction, it is the difference between
quantity supplied and quantity demanded in the domestic market for a price below the
6. Why is a quota more detrimental to an economy than a tariff that results in the same level of
imports as the quota? What is the net outcome of either tariffs or quota for the world economy?
LO4
Answer: The reason why a quota is more detrimental to an economy than a tariff that
Tariffs and quotas impose costs on domestic consumers but provide gains to domestic
producers and, in the case of tariffs, revenue to the Federal government. The consumer
costs of trade restrictions are calculated by determining the effect the restrictions have on
7. “The potentially valid arguments for tariff protection—military self-sufficiency, infant industry
protection, and diversification for stability—are also the most easily abused.” Why are these
arguments susceptible to abuse? LO4
Answer: Each of these valid arguments is often misapplied. Dumping cases by
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Chapter 20 - International Trade
The protection of new “infant” domestic industries to allow them to develop
The argument relating to military self-sufficiency is questionable when applied to
sectors other than those directly related to defense. Almost all industries can
8. Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way
to achieve and maintain full employment throughout the U.S. economy. How might such policies
reduce unemployment in one U.S. industry but increase it in another U.S. industry? LO4
Answer: Artificial trade barriers may protect U.S. jobs that need to compete with the
foreign sector. This would tend to move the U.S. economy towards full-employment.
9. In 2012, manufacturing workers in the United States earned average compensation of $35.67
per hour. That same year, manufacturing workers in Mexico earned average compensation of
$6.36 per hour. How can U.S. manufacturers possibly compete? Why isn’t all manufacturing done
in Mexico and other low-wage countries? LO4
Answer: The United States can compete if the workers are more productive. That is, if
the productivity level for U.S. workers is higher. If this is the case, then some
10. How might protective tariffs reduce both the imports and the exports of the nation that levies
tariffs? In what way do foreign firms that “dump” their products onto the U.S. market in effect
provide bargains to American consumers? How might the import competition lead to quality
improvements and cost reductions by American firms? LO4
Answer: If a country imposes import tariffs other countries may follow with their own
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Chapter 20 - International Trade
If foreign firms dump their products on the U.S. market they are in effect selling them for
below cost. This provided the consumers in U.S. a bargain because they can purchase the
11. Identify and state the significance of each of the following trade-related entities: (a) the WTO;
(b) the EU; (c) the Euro Zone; and (d) NAFTA. LO6
Answer: a. The WTO oversees trade agreements reached by member nations and
arbitrates trade disputes among them.
b. The EU is a trading bloc of 28 European countries who have agreed to abolish tariffs
c. The euro is the common currency that is used by 17 of the EU countries (known as the
d. NAFTA is a trade bloc made up of the United States, Canada, and Mexico whose
12. What form does trade adjustment assistance take in the United States? How does such
assistance promote political support for free trade agreements? Do you think workers who lose
their jobs because of changes in trade laws deserve special treatment relative to workers who lose
their jobs because of other changes in the economy, say, changes in patterns of government
spending? LO6
Answer: The Trade Adjustment Assistance Act of 2002 introduced some new
novel elements to help those hurt by shifts in international trade patterns. Such as:
13. What is offshoring of white-collar service jobs and how does that practice relate to
international trade? Why has offshoring increased over the past few decades? Give an example
(other than that in the textbook) of how offshoring can eliminate some American jobs while
creating other American jobs. LO6
Answer: The off-shoring of white collar service jobs refers to jobs relating to data
entry, book composition, and software coding. This reflects a growing
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Chapter 20 - International Trade
14. LAST WORD What was the central point that Bastiat was trying to make in his imaginary
petition of the candlemakers?
Answer: Bastiat’s objective was to discredit the arguments in favor of
REVIEW QUESTIONS
1. In Country A, a worker can make 5 bicycles per hour. In Country B, a worker can make 7
bicycles per hour. Which country has an absolute advantage in making bicycles? LO2
a. Country A.
b. Country B.
Feedback: Country B has an absolute advantage in making bicycles because Country B
Please note that the definition of absolute advantage focuses on the efficiency with which
2. In Country A, the production of 1 bicycle requires using resources that could otherwise be used
to produce 11 lamps. In Country B, the production of 1 bicycle requires using resources that
could otherwise be used to produce 15 lamps. Which country has a comparative advantage in
making bicycles? LO2
a. Country A.
b. Country B.
Feedback: Country A has a comparative advantage in making bicycles because Country
To produce 1 bicycle, Country A only has to give up the production of 11 lamps. By
3. True or False: If Country B has an absolute advantage over Country A in producing bicycles, it
will also have a comparative advantage over Country A in producing bicycles. LO2
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Chapter 20 - International Trade
Feedback: This statement is false because the possession of an absolute advantage does not
necessarily imply that a country will also have a comparative advantage.
A country can have an absolute advantage but not a comparative advantage because the
By contrast, comparative advantage focuses on costs as measured by the amounts of other
products that a country has to forego in order to free up the resources necessary to make single
4. Suppose that the opportunity-cost ratio for sugar and almonds is 4S ≡ 1A in Hawaii but 1S ≡ 2A
in California. Which state has the comparative advantage in producing almonds? LO2
a. Hawaii.
b. California.
c. Neither.
Feedback: California has the comparative advantage in producing almonds.
This is true because California has to give up less sugar in order to produce a ton of
almonds that Hawaii produces, it must forego 4 tons of sugar. As a result, California has a
5. Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in
Iceland. Then should specialize in producing fish while should specialize in producing lumber.
LO2
a. Canada; Iceland.
b. Iceland; Canada.
Feedback: The correct answer is that Iceland should specialize in producing fish while
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Chapter 20 - International Trade
To see that Iceland has a comparative advantage in producing fish, divide both sides of its
A similar analysis demonstrates that Canada has the comparative advantage in
6. Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡1W in Switzerland but
1C ≡4W in Japan. At which of the following international exchange ratios (terms of trade) will
Switzerland and Japan be willing to specialize and engage in trade with each other. LO2
Select one or more answers from the choices shown.
a. 1C = 3W.
b. 1C = 1/2 W.
c. 1C = 5W.
d. ½ C = 1W.
e. 2C = 1W.
Feedback: These are the only two correct answers because they are the only two international
exchange ratios (terms of trade) that will be advantageous to both countries.
For a deeper understanding of why that is true, recall that specialization and trade will
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Chapter 20 - International Trade
For similar reasons, Japan will also find this international trade ratio attractive. To see
why, note that if Japan did not trade, its domestic opportunity-cost ratio of 1C ≡ 4W
Finally, note that international trade will not take place if the international exchange ratio
lies outside of the range that lies between each country’s own domestic opportunity cost
7. We see quite a bit of international trade in the real world. And trade is driven by specialization.
So why don’t we see full specialization—for instance, all cars in the world being made in South
Korea, or all the mobile phones in the world being made in China? Choose the best answer from
among the following choices. LO2
a. High tariffs.
b. Extensive import quotas.
c. Increasing opportunity costs.
d. Increasing returns.
Feedback: The correct answer is that we don’t see full specialization because of
increasing opportunity costs.
International trade is indeed driven by specialization, but the benefits of specialization
At some point, the price will rise so high that foreigners will no longer want to buy any
more because it will be cheaper for them to produce additional units domestically or
8. Which of the following are benefits of international trade? LO2
Choose one or more answers from the choices shown.
a. A more efficient allocation of resources.
b. A higher level of material well-being.
c. Gains from specialization.
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Chapter 20 - International Trade
d. Promoting competition.
e. Deterring monopoly.
f. Reducing the threat of war.
9. True or False: If a country is open to international trade, the domestic price for a homogeneous
good can differ from the international price for the same good. LO3
Feedback: If a country is open to international trade, the domestic price for a
homogeneous good will always be equal to the international price. That is because
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