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CHAPTER 10: INTERNATIONAL TRADE POLICY
Questions and Exercises
1. Because U.S. trade is a relatively small percent of total output, trade is less
2. The two greatest U.S. trading partners are Canada and Mexico. Trade with China
3. Tariffs and quotas have similar effects on limiting trade. A quota restricts the
quantity of imports. A tariff results in the same quantity of imports by raising the
4. Both voluntary restraint agreements and tariffs increase the price
of the imported good paid by consumers and reduce total
quantity demanded. The two, however, impact the government
and foreign firms differently. In the case of the tariff, the
domestic government collects tax revenue. In the case of
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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5. a. The gains to domestic producers are shown in the accompanying graph. Domestic
b. The revenue to the government is the quantity supplied by foreign producers, BC,
c. The cost to domestic producers to produce additional units is shown by area
d. The gain to domestic producers is greater than the cost to domestic producers by
6. a. It might be good or bad for the United States government. To the extent that it
b. A tariff by Germany on the U.S. produced chickens would lead to higher chicken
prices in Germany since the supply of imported chicken would shift up by the
c. U.S. chicken producers would be hurt because the quantity of chickens demanded
d. U.S. light truck producers would gain because light trucks imported from
e. Economists, in general, do not support any trade restrictions because they reduce
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© 2017 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.
7. a. With the quota, the quantity of clothes sold was
fixed. Suppliers charged the price (P0) consumers
b. Consumers benefited because they were able to
c. The short-run effect of the removal of the quota is that profits declined because
8. Countries restrict trade for many reasons. Any the three of the following are
correct answers:
1. Unequal internal distribution of the gains from trade.
2. Companies that feel they are not getting a good deal from trades will lobby
3. Countries want to make threats of trade restrictions for the purpose of
4. Learning by doing and economies of scale may reduce the cost of producing a
5. When a country is in a recession, it is not fully utilizing its resources. Exports
6. Sales of goods to foreign goods may threaten national security.
7. Countries may want to use trade restrictions as an international political tool.
8. Governments earn revenue from the tariffs that can be used to support
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© 2017 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.
9. A country would have trade adjustment assistance programs in an effort to
10. A credible threat of trade restrictions would lead to lower trade restrictions
because the other bargainer's belief that a country would implant trade restrictions
11. Economies of scale refer to the situation in which costs per unit of output fall as
output increases. If per unit costs fall sufficiently, the country that increases the
12. From a global perspective, free trade increases total output. International trade
13. Most-favored nations receive the lowest tariffs compared to all other countries.
14. The WTO is the successor to GATT. Both work toward agreements to reduce
Questions from Alternative Perspectives
1. Austrian
It depends. In some ways it is true; a tariff protects the income of people who produce
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2. Radical
The view that liberty is the only solution to problems of human relationship does not
3. Religious
When there is trade there is a blending of the economies that creates better
4. Post-Keynesian
The group that has been most helped by free trade are international traders and those
5. Radical
a. Some Radical economists would argue that they did not follow that strategy because
b. Some Radical economists would argue that it suggests that economists’ calls for free
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Issues to Ponder
1. While trade may increase output and income, trade will change the culture of that
2. a. Three assumptions are that the good is tradable, that transportation costs are
b. To the degree that production facilities and labor can move easily, the law of one
c. Since capital is more mobile than labor, the law of one price should have a greater
tendency to hold for capital. Financial capital is a great example. Interest rates
among countries tend to equate much faster than wages.
3. An equitable method might be to tax those who gain from the trade liberalization
a. Assuming the original distribution is equitable and the government is not trying to
b. The political problems with implementation include: (1) Everyone will try to
exaggerate the amount they are hurt and understate the amount they are helped.
4. With a price floor, there is a loss of consumer surplus, higher prices and lower
quantities.
5. There is no “right” answer to this question. To the extent that the chemicals
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6. a. Yes, if the deductions in lost taxes exceed the amount collected. This is indeed the
b. The natural suggestion would be to eliminate the tax, including the accompanying
c. It is likely that the companies want the tax because they benefit from it—in other
7. a. Economists opposed the tariff because it
b. The tariff shifts the supply curve of
c. The tariff would help the economy by
d. The macro economy would be worsened because a retaliatory tariff reduces the
8. The answer in part will depend on what advice is being given. Most economists
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© 2017 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.
S1
D0
P0
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© 2017 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.
