Chapter 40 – International Trade
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Chapter 40 – International Trade
McConnell Brue Flynn 21e
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 production, such as
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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
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
produce more output of that product from any given amount of resource inputs than can
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
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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
quantity supplied and quantity demanded in the domestic market for a price above 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
results in the same level of imports (as the quota) is that the government loses revenue.
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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 foreign
firms in the United States are difficult to prove and rare. Often domestic producers will
claim their foreign competitors are dumping when the lower prices simply reflect a
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 2013, manufacturing workers in the United States earned average compensation of $36.34
per hour. That same year, manufacturing workers in Mexico earned average compensation of
$6.82 per hour. How can U.S. manufacturers possibly compete? Why isn’t all manufacturing
done in Mexico and other low-wage countries? LO4
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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
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
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
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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
14. LAST WORD What was the central point that Bastiat was trying to make in his imaginary
petition of the candlemakers?
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.
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.
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Feedback: Country A has a comparative advantage in making bicycles because Country
A has a lower opportunity cost of producing bicycles when we measure opportunity cost
in terms of the amount of alternative products that must be foregone in order to produce 1
bicycle.
To produce 1 bicycle, Country A only has to give up the production of 11 lamps. By
contrast, Country B has to give up the production of 15 lamps. Thus, if we had to decide
which country should be producing bicycles, we would go with Country A because it can
produce bicycles at a lower opportunity cost in terms of lamps foregone.
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
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.
Chapter 40 – International Trade
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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. The easiest way to see this is to begin by dividing both sides of California’s
opportunity-cost ratio by 2. That will give you ½S ≡ 1A. That version of California’s
opportunity-cost ratio makes it clear that for every ton of almonds that California
produces, it must forego ½ ton of sugar. By contrast, Hawaii’s opportunity-cost ratio of
4S ≡ 1A indicates that for every ton of
almonds that Hawaii produces, it must forego 4 tons of sugar. As a result, California has
a comparative advantage in producing almonds because it can produce them at a lower
opportunity cost as measured by the amount of sugar that must be foregone in order to
free up enough resources to produce one ton of almonds.
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.
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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.
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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.
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.
d. Promoting competition.
e. Deterring monopoly.
f. Reducing the threat of war.
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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
10. Suppose that the current international price of wheat is $6 per bushel and that the United
States is currently exporting 30 million bushels per year. If the United States suddenly became a
closed economy with respect to wheat, would the domestic price of wheat in the United States
end up higher or lower than $6? LO3
a. Higher.
b. Lower.
c. The same.
11. Suppose that if Iceland and Japan were both closed economies, the domestic price of fish
would be $100 per ton in Iceland and $90 per ton in Japan. If the two countries decided to open
up to international trade with each other, which of the following could be the equilibrium
international price of fish once they begin trading? LO3
a. $75.
b. $85.
c. $95.
d. $105.