978-0078021770 Chapter 9 Solution Manual

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Suggested answers to case study discussion questions

VERs: Two Examples: In 1981 the U.S. government forced the Japanese government to impose

a “voluntary” export restraint, so that total Japanese automobile exports in 1981 had to be 8

percent less than the total exports in 1980. The Japanese government told Honda (and each of the

other Japanese auto companies) the maximum number of cars that the company could export to

the United States. With quantity strictly limited, Honda raised the prices of the cars that they did

export. For the Civic, the increase was about $1,000. When your father went to the Honda dealer

to buy a new Civic, he saw and paid the higher price. Essentially, a slice of area c in a graph like

Figure 9.2 was the extra $1,000 that your father had to pay for the Civic in 1981 (above what he

would have paid for a new Civic in 1980).

Carrots Are Fruit, Snails Are Fish, and X-Men Are Not Humans: You may be able play the

same game that the U.S. importers described in the case study used, careful definition of the

product so that the import duty is as low as possible. Your woven textile could be either a rug or

a wall hanging. You should try to find out which product has the lower tariff rate. Then, you

should answer that your woven textile is the product with the lower tariff rate. Probably, a rug (a

manufactured product in the textile category) has a higher tariff rate than a wall hanging (a work

of art).

Suggested answers to end of chapter questions and problems

1. Import quotas are government–decreed quantitative limits on the total quantity of a product

that can be imported into the country during a given period of time. Here are three reasons

why a government might want to use a quota rather than a tariff: (1) Quotas ensure that

2. Voluntary export restraint (VER) agreements are nontariff barriers to imports. Despite

their name, the importing-country government coerces the exporting-country government

into allocating a limited quota of exports among its exporting firms. Import-country

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3. This would happen if the domestic product market were perfectly competitive and the

4. a. Product standards are imposed to ensure that products meet minimum requirements to

protect health, safety, or the environment. But they can be written to discriminate against

b. Domestic content requirements mandate that a minimum percentage of the value of a

product be domestic value added (wages of local workers and domestically produced

materials and components). This can provide protection to domestic producers of the

5. The tariff would be less damaging to the United States because it gives the United States

6. a. The U.S. government is deeply committed to assuring that food products are safe for

consumers to eat, and to protecting the health and safety of workers growing the food.

b. The U.S. government has no business forcing us to adopt its production standards. First,

our own governments are the best judges of the standards to apply to worker safety

within our own countries. Because work and environmental conditions vary from country

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7. a. The change in producer surplus is a gain of $0.02 per pound for the 120 million pounds that

are produced with free trade plus the producer surplus on the increased production of 40

b. The change in consumer surplus is a loss of $0.02 per pound for the 400 million pounds

that the consumers continue to purchase after the quota is imposed plus the loss of

c. The right to import is a right to buy sugar at the world price of $0.10, import it, and sell it

domestically at the price of $0.12. If the bidding for the rights is competitive, then the

d. The net loss to the country is $0.6 million. By limiting imports, the quota causes two kinds

of economic inefficiency. First, the increased domestic production is high-cost by world

8. With a price elasticity of demand for imports of 1, the 50 percent tariff rate has resulted in

a 50 percent reduction in imports. The net national loss of the tariff as a percentage of the

country’s GDP equals (½)0.500.500.20, or 2.5 percent. The increase in producer

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Before the demand increase, as shown in the graph above, the tariff and the quota are

essentially equivalent (domestic price P1, domestic production quantity S1, domestic

10. Free trade will bring the largest well-being for the entire world. The United States already

has few barriers against imports, and we believe that open competition has made the U.S.

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economy strong. But other countries often have protectionist policies. This hurts the

U.S.economy, because we lose export opportunities that would allow us to take

maximum benefits from our comparative advantages. Protectionist policies in foreign

11. a. Relative to free trade, the tariff gives the United States a terms-of-trade gain of $180

b. If the United States imposes the $80 tariff, Canada loses $180 million (area e) and $60

million (area f) for a total loss of $240 million. By contrast, if the United States and

c. For the world as a whole (United States plus Canada here), either the tariff or the VER

12. The perspective of the Ministry of the Economy is presumably the national interest and

the overall functioning of the economy, so your presentation will make the case that the

tariff would be better than the quota. The tariff will increase the domestic price of

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13. Partly disagree, partly agree. (a) The WTO has been less successful than the GATT at

completing rounds of multilateral trade negotiations. Under the GATT its member

countries reached eight multilateral trade agreements, culminating in the Uruguay Round

agreement that created the WTO. The WTO has started one round, the Doha Round, in

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