Chapter 17 – International Trade
CHAPTER 17
INTERNATIONAL TRADE
Chapter Overview
The chapter has taken a close look at one of the most powerful economic
insights: There can be big gains from specialization and exchange. This is
true for countries as well as individual people and companies.
Even though the total gains from trade are usually positive on a national
level, the distribution of those gains to di!erent people and industries
matters a lot in the real world. There are usually winners and losers from
trade, especially in the short run. The hope is that opening up to trade
eventually makes everyone better o!, but getting to that point requires
responsive political solutions.
Trade restrictions such as tari!s and quotas are used in varying degrees by
every country in the world to protect some groups and industries from
international competition. Some domestic policies, such as environmental
and labor standards, can also a!ect trade.
Because trade takes place across countries, the role of public policy in
shaping international trade is more obvious than in most of the domestic
topics we’ve covered so far. In upcoming chapters, we’ll tackle other ways
that public policy drives the economy, on both the domestic and
international levels.
Learning Objectives
LO 17.1: De,ne comparative advantage and list some root causes of
comparative advantage on a national level.
LO 17.2: Determine whether a country will become a net-importer or net-
exporter of a good when it moves from autarky to free trade.
LO 17.3: Calculate the change in surplus and the distribution of bene,ts
within a market when a country opens up to trade.
LO 17.4: Identify when and how an economy’s trade policies a!ect world
supply of and world demand for a good.
LO 17.5: Explain the e!ect of a tari! on quantity, price, and the distribution
of surplus.
LO 17.6: Explain the e!ect of an import quota on quantity, price, and the
distribution of surplus.
LO 17.7: Describe the e!ects of trade on the factor distribution of income.
LO 17.8: Discuss the challenges of establishing environmental or labor
standards in international markets.
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Chapter 17 – International Trade
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Chapter 17 – International Trade
Chapter Outline
MADE IN LESOTHO
Why Trade? A Review
Comparative Advantage (LO 17.1)
Gains from Trade
The Roots of Comparative Advantage
Incomplete Specialization
From Autarky to Free Trade
Becoming a Net-Importer (LO 17.2) (LO 17.3)
Becoming a Net-Exporter
Big Economy, Small Economy
Restrictions on Trade
Why Restrict Trade?
Tari!s (LO 17.5)
Quotas (LO 17.6)
Trade Agreements
International Labor and Capital (LO 17.7)
The WTO and Trade Mediation
Labor and Environmental Standards (LO 17.8)
BOX FEATURE: FROM ANOTHER ANGLE – ARE ENVIRONMENTAL REGULATIONS
BAD FOR THE ENVIRONMENT?
Embargoes: Trade as Foreign Policy
BOX FEATURE: WHAT DO YOU THINK? – LIFT THE EMBARGO ON CUBA?
Beyond the Lecture
Writing Assignment/Class Activity: Comparative Advantage (LO
17.1)
Split the class into teams and have each team choose a country. Then have
the each team research what their country produces and why the country
produces it. Also, have the teams try to determine which goods and services
their countries will trade with one another. You can show students this data
from the U.S. Census Bureau to see U.S. trades with other countries.
Class Discussion: Becoming a Net-Importer (LO 17.3)
Have students view this brief clip of Don Boudreaux discussing the bene,ts
of free trade.
1. What parties will gain if a country opens up to free trade?
2. What parties could be harmed if a country opens up to free trade?
3. Why do so many people both defend and critique free trade?
Class Discussion: Tari/s (LO 17.4)
Show students the ,gures from this World Trade Organization paper by
Richard Baldwin.
1. What is the impact of tari!s on price and quantity sold in general?
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Chapter 17 – International Trade
2. What factors contributed to the drop in the average tari! rate over
time?
Class Discussion: Tari/s (LO 17.4)
Have students read this brief article from USA Today regarding the imposition
of tari!s by the European Union on solar panels from China.
1. Why do countries impose tari!s?
2. What are the problems associated with the use of tari!s?
3. Do you think that tari!s are justi,ed?
Clicker Questions
There are three main purposes to clicker questions. First, they are a great
way to do a quick and instant “on demand” test of student understanding of
the material. You can cover material, and instantly get feedback on student
comprehension. You can see whether you need to explain certain topics
again, or move on to the next subject. Second, they are a great method to
break up the class and take a moment away from lecture. It gets the
students actively involved. Finally, certain clicker questions can be framed in
a “discussion” manner, in which you can invite students to talk about the
possible right answer with their peers. You can instruct students to convince
their classmate of a right or wrong answer.
1. The United States has a lot of skilled labor and land. What goods might it
have a comparative advantage in producing? [LO 17.1]
A. Clothing
Feedback: We export a lot of commodities (corn, rice) to other countries.
Land is used here, but not skilled labor.
2. Assume a country starts to import a good in which the rest of the world
has a comparative advantage. After trade, the country’s consumer surplus
_________ and the price they pay for the good _______ compared to autarky.
[LO 17.2, 17.3]
A. increases, increases
Feedback: The country will now pay the world price (which is lower than
the domestic price). The country will produce some of the good, and import
the rest. More consumption at the lower price increases consumer surplus.
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Chapter 17 – International Trade
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Chapter 17 – International Trade
3. What is the main reason a country would impose a tari! on imports? [LO
17.4]
A. To generate tax revenues
Feedback: Tax revenues are certainly generated, but it probably not the
main reason why a tari! is implemented.
4. According to economic theory, what is one result of trade liberalization?
[LO 17.6]
A. Lower global demand for goods
5. Regarding trade, why might a developing country resist international
pressure to eliminate child labor and to adopt environmental standards? [LO
17.7]
A. These policies will cause higher demand for goods that the country can’t
produce
Feedback: Politically, these things are toxic. But economically, cheap labor
and no environmental standards can result in the ability to make goods at
low cost compared to the rest of the world.
Solutions to End-of-Chapter Questions and Problems
Review Questions
1. Why might a country that is more productive in producing wheat than its
trading partners end up importing wheat? [LO 17.1]
Answer: A country trading on world markets will export goods for which it
has a comparative advantage and import goods for which it does not have
a comparative advantage. Comparative advantage is based on
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Chapter 17 – International Trade
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Chapter 17 – International Trade
2. Imagine two nations with similar landmasses and levels of wealth that do
not specialize in the same industries. What characteristics might drive
di!erences in their comparative advantages? [LO 17.1]
Answer: The two countries may di!er in their relative access to labor or
capital. If one of the countries has access to abundant labor, that country
3. Producing socks is labor-intensive, while producing satellites is capital-
intensive. If India has abundant labor and the United States has abundant
capital, which good will the U.S. export? Is trade bene,cial to textile laborers
in the United States? [LO 17.2]
Answer: If India has abundant labor, and the U.S. has abundant capital,
the U.S. will export satellites. If the U.S. is importing socks (textiles), it
4. Suppose Egypt wants to open its trade borders to the world market for
natural gas. What will determine whether Egypt becomes a net-exporter or
net-importer of natural gas? If Egypt becomes a net-exporter, will domestic
supply be equal to, less than, or greater than domestic demand? [LO 17.2]
Answer: Whether Egypt becomes a net exporter or net importer will
depend on whether the domestic price of natural gas in Egypt is greater
5. If Argentina becomes a net-exporter of beef after trade barriers are
removed, how does total welfare in Argentina change compared with
autarky? Are Argentine cattle ranchers better or worse o!? What about
Argentine consumers? [LO 17.3]
Answer: If Argentina becomes a net exporter of beef after trade barriers
are removed, total welfare in Argentina increases compared with autarky.
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Chapter 17 – International Trade
6. Suppose a country opens its trade borders and becomes a net-exporter of
beef. Is it better for domestic consumers of beef if the country is a large
player on the world market or a small player? [LO 17.3]
Answer: If a country becomes an exporter of beef, this is because the
world price of beef is higher than the domestic price, which is bad for
domestic consumers. If the exporting country is a small player on the
7. Suppose the United States wants to open its trade borders to the world
market for co!ee. What will determine whether the world price for co!ee is
a!ected? [LO 17.4]
Answer: For the United States to be a price taker in the global market for
some good, the quantity it produces and consumes must be very small
8. Suppose that Japan is a net exporter of automobiles. If a large country like
the United States moves from autarky to free trade in automobiles, how will
the price of automobiles sold in Japan change? How will the amount of
automobiles exported change? [LO 17.4]
Answer: Because the United States both produces and consumes a lot of
cars, when it enters the world market, it will likely inKuence the world
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Chapter 17 – International Trade
9. Suppose Mexico wants to protect its domestic auto-mobile industry from
U.S. and Japanese competition. How will a tari! on imported cars help it to
accomplish this task? How does the tari! a!ect domestic producer and
consumer surplus? [LO 17.5]
Answer: A tari! is a tax on imports. By taxing imports, the price of
automobiles rises from the world price to the world price plus the tari!.
10. Refer back to Figure 17-9. Explain why area D is a dead-weight loss.
What about area F? [LO 17.5]
Answer: At the world price, domestic consumers demanded 30 million
tons of steel. After the tari! raises the price of steel, domestic consumers
demand only 25 million tons. Area F represents the loss of surplus on the
11. Imagine Mexico is considering using an import quota rather than a
tari! to protect its domestic automobile industry. How does the outcome
di!er from that of a tari!? [LO 17.6]
Answer: A quota is a cap on the quantity of imports rather than a tax on
imports. Both policies will reduce the number of imports and raise the
12. Explain how lifting an import quota on other countries will a!ect an
exporting country that had been exempted from the quota restriction.
[LO 17.6]
Answer: Lifting an import quota will lower the price back to the world
price. If a country that was exempted from the import quota has a higher
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Chapter 17 – International Trade
13. Labor is relatively abundant in Mexico compared with arable land.
Explain who wins and who loses in Mexico as a result of the North American
Free Trade Agreement (NAFTA), which liberalized trade between the United
States, Canada, and Mexico. [LO 17.7]
Answer: Liberalizing trade bene,ts owners of domestically abundant
factors of production, in this case laborers in Mexico, because increased
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Chapter 17 – International Trade
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