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CHAPTER 20
1.1 The data in the following table is from 2014. As the data shows, the United States ran a trade
deficit with all five countries in 2014.
Country
Exports (millions of
U.S. dollars)
Imports (millions of
U.S. dollars)
Balance of Trade
(millions of U.S. dollars)
Canada 374,864 384,428 −9,564
y
Answers regarding the main products and services exported to and imported from these countries
will vary, but may include the following:
2.1 (a)
303
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Solutions to Problems 304
(b) Yes. The opportunity cost of a tractor in Latvia is 3 bobsleds. The opportunity cost of a tractor
(c) As long as the agreement specifies between 2 bobsleds and 3 bobsleds per tractor,
2.2 (a) You cannot tell from the information given which country has an absolute advantage because
(b) If resources are fully mobile between sectors, the opportunity cost of a pound of cheese is 4/7
(c) At $1 = 1 BRL, both goods in Brazil are cheaper to everyone. That means that there was a big
2.3 (a) Illinois would have an absolute advantage in both wheat and soybeans.
(b) In Illinois, taking 1 acre out of wheat and moving it into soybeans sacrifices 48 bushels of
(c) Based on the calculations in (b), Kansas has a comparative advantage in wheat and Illinois
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Solutions to Problems 305
(d) Yes, the data are consistent with the conclusions in (c). Kansas has more acreage devoted to
2.4 (a) The opportunity cost of a pound of blue cheese is 1.5 pounds of cheddar cheese in the United
(b) No, at the current exchange rate, both blue cheese and cheddar cheese are cheaper in Great
(c) In this situation, we would expect the price of the dollar to decrease until U.S. blue cheese
(d) In the long run, we would expect exchange rates to adjust until Americans were exporting
2.5 These nations can still benefit by trading with each other. Even with an absolute advantage in
2.6 While lower exchange rates do make a nation’s exports more attractive, they also make a nation’s
3.1 Clearly, apparel is produced with cheap labor, and we buy most of our apparel from abroad
3.2 Answers will vary depending on the state in which the student resides.
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Solutions to Problems 306
3.3 Often times, countries differentiate their products to please a wide variety of tastes that exist
4.1 According to the document:
Economic growth has increased in all three countries: 30% in Mexico, 30.9% in Canada, and 38%
Total trade volume among the three countries grew from $289.3 billion in 1993 to $623.1 billion
From 1993-2003, productivity increased 28% in the United States, 55% in Mexico, and 23% in
4.2 (a) Without trade, the equilibrium price is $55 per ton and the equilibrium quantity is 180 million
tons.
4.3 If a quota is set at 90 million tons of Indonesian coal, the price will still rise to $50 per ton,
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Solutions to Problems 307
4.4 Both the United States and Cuba would see benefits from this action. Consumers in Cuba will
5.1 Some of the political arguments against CAFTA-DR include:
Industries in the United States opposed to CAFTA-DR include the sugar, textile, and agriculture
Answers comparing the arguments of these industries to those of the candle makers will vary, but
the arguments of both groups revolve around protection from more efficient, lower-priced rivals.
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