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Suggested answer to case study discussion question
Trade Is Important: For most countries during the past several decades, trade has become
more important in the economy. A country’s total international trade (exports and imports) has
risen as a percentage of national GDP for most countries. Whatever the effects of international
trade, they have probably become larger or more pronounced. As discussed in this chapter (and
subsequent chapters), some people in the country benefit from international trade, while other
people in the country tend to be harmed by international trade. If trade often creates winners and
losers, then trade has probably become more controversial as it has become more important in
the economy.
Suggested answers to end of chapter questions and problems
1. Consumer surplus is the net gain to consumers from being able to buy a
product through a market. It is the dierence between the highest
2. Producer surplus is the net gain to producers from being able to sell a product through a
market. It is the difference between the lowest price at which some producer is willing to
3. The country’s supply of exports is the amount by which the country’s
domestic quantity
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4. The country's demand for imports is the amount by which the country's domestic quantity
demanded exceeds the country's domestic quantity supplied. The demand-for-imports
5. There is no domestic market for winter coats in this tropical country, but
there is a domestic supply curve. If the world price for coats is above
6. If there were no exports of scrap iron and steel, the domestic market would clear at the
price at which domestic quantity demanded equals domestic quantity supplied. But the
7. It is true that opening trade bids prices into equality between countries.
With a competitive market this also means that marginal costs are
8. a. With free trade at $100 per barrel:
(billions of barrels)
b. With no imports, domestic quantity supplied must equal domestic quantity demanded
(both equal to QN) at the domestic equilibrium price PN:
c. Domestic producers of oil would gain, receiving an increase of producer surplus shown
9. The demand curve DUS shifts to the right. The U.S. demand-for-imports curve
Dm shifts to the right. The equilibrium international price rises above
10. The supply curve SUS shifts down (or to the right). The U.S. demand-for-imports curve
11. For the first country, for any world free-trade equilibrium price above $2.00
per kilogram, the country will want to export raisins. For the other
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
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12. We can still use the basic analysis from this chapter, but changes in consumer surplus
count for more than changes in producer surplus. We can examine this case as a deviation
from the one-dollar, one-vote metric.
13. a. With no international trade, equilibrium requires that domestic quantity
demanded (QD) equals domestic quantity supplied (QS). Setting the two
equations equal to each other, we can )nd the equilibrium price with no
trade:
b. At a price of 120, Belgium’s quantity demanded is 290 and its quantity
c. Belgian consumer surplus declines. With no trade it is a larger triangle
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
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14. a. In the graphs below, the free trade equilibrium price is PF, the price at which the quantity
of exports supplied by Country I equals the quantity of imports demanded by Country II.
B. Supply-oriented theories of trade
(special cases of the basic theory,
with the demand side neutral):
1. Absolute Absolute Competition in all markets
advantage productivities Constant marginal costs
(in Chapter 3) Only one factor (labor)
C. Additional theories of trade:
1. Monopolistic Product differentiation Imperfect competition
competition Moderate scale De-emphasize factor
(Krugman and economies supplies
others, in Chapter 6)
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
15
