170 ❖ Chapter 9/Application: International Trade
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Since wool suits are cheaper in neighboring countries, Autarka would import suits if it were to
allow free trade.
2. Figure 1 shows the supply and demand for wool suits in Autarka. With no trade, the price of
suits is 3 ounces of gold, consumer surplus is area A, producer surplus is area B + C, and
surplus, and reduce the gain in total surplus.
Figure 1
3. Lobbyists for the textile industry might make five arguments in favor of a ban on the import
of wool suits: (1) imports of wool suits destroy domestic jobs; (2) the wool–suit industry is
vital for national security; (3) the wool-suit industry is just starting up and needs protection
from foreign competition until it gets stronger; (4) other countries are unfairly subsidizing
their wool-suit industries; and (5) the ban on the importation of wool suits can be used as a
bargaining chip in international negotiations.
In defending free trade in wool suits, you could argue that: (1) free trade creates jobs in
some industries even as it destroys jobs in the wool-suit industry and allows Autarka to enjoy
a higher standard of living; (2) the role of wool suits for the military may be exaggerated; (3)
government protection is not needed for an industry to grow on its own; (4) it would be good
for the citizens of Autarka to be able to buy wool suits at a subsidized price; and (5) threats
against free trade may backfire, leading to lower levels of trade and lower economic welfare
for everyone.
Chapter 9/Application: International Trade ❖ 171
Questions for Review
1. If the domestic price that prevails without international trade is above the world price, the
2. A country will export a good for which its domestic price is lower than the prevailing world
advantage in producing a good, it will become an importer when trade is allowed.
3. Figure 2 illustrates supply and demand for an importing country. Before trade is allowed,
surplus is an increase of area D.
Figure 2
4. A tariff is a tax on goods produced abroad and sold domestically. If a country is an importer
5. The arguments given to support trade restrictions are: (1) trade destroys jobs; (2) industries
threatened with competition may be vital for national security; (3) new industries need trade
easily identify new industries that are worth protecting; (4) if countries subsidize their
exports, doing so simply benefits consumers in importing countries; and (5) bargaining over
trade.
172 ❖ Chapter 9/Application: International Trade
6. A unilateral approach to achieving free trade occurs when a country removes trade
recent years. Examples of the multilateral approach include NAFTA in 1993 and the GATT
negotiations since World War II.
Quick Check Multiple Choice
1. a
2. c
3. a
4. b
5. c
6. d
Problems and Applications
1. a. Figure 4 illustrates the Canadian market for wine, where the world price of wine is
P
1.
Figure 4
world price of wine to
P
2. The table shows the new areas of consumer, producer, and
total surplus, as well as the changes in these surplus measures. Consumers lose,
producers win, and Canada as a whole is worse off.
2. The impact of a tariff on imported autos is shown in Figure 6. Without the tariff, the price of
an auto is
P
W, the quantity produced in the United States is
Q
1S, and the quantity purchased
in the United States is
Q
1D. The United States imports
Q
1D –
Q
1S autos. The imposition of the
P
1
P
2
CHANGE
Consumer Surplus
A + B + D + E
A + D
–B – E
Producer Surplus
C
B + C
+B
Total Surplus
A + B + C + D + E
A + B + C + D
–E
Chapter 9/Application: International Trade ❖ 173
producers to
Q
2S and a decline in the quantity demanded to
Q
2D. This reduces the number of
government, and D + F is deadweight loss.
Figure 6
Before Tariff
After Tariff
CHANGE
Consumer Surplus
A + B + C + D + E + F
A + B
–C – D – E – F
Producer Surplus
G
C + G
+C
Government Revenue
0
E
+E
Total Surplus
A + B + C + D + E + F + G
A + B + C + E + G
–D – F
174 ❖ Chapter 9/Application: International Trade
3. a. For a country that imports clothing, the effects of a decline in the world price are shown
in Figure 7. The initial price is
P
w1 and the initial level of imports is
Q
d1
– Q
s1
.
The new
world price is
P
w2 and the new level of imports is
Q
d2
– Q
s2. The table below shows the
changes in consumer surplus, producer surplus, and total surplus. Domestic consumers
are made better off, while domestic producers are made worse off. Total surplus rises by
areas D + E + F.
Figure 7 Figure 8
P
w2
CHANGE
Consumer Surplus
A+B+C+D+E+F
C+D+E+F
Producer Surplus
G
–
C
Total Surplus
A+B+C+D+E+F+G
D+E+F
in Figure 8. The initial price is
P
w1 and the initial level of exports is
Q
s1
– Q
d1
.
The new
s2
d2. The table below shows the
changes in consumer surplus, producer surplus, and total surplus. Domestic consumers
area D.
P
w1
P
w2
CHANGE
Consumer Surplus
A
A + B + C
B + C
Producer Surplus
B + C + D + E + F + G + H
E + F + G + H
–
B
–
C
–
D
Total Surplus
A + B + C + D + E + F + G
+ H
A + B + C + E + F + G + H
–
D
exporting countries are harmed.
4. a. While there are many possible answers, one correct answer is: the jobs argument and
the unfair-competition argument. There are many workers employed in the timber
cheaper.
Chapter 9/Application: International Trade ❖ 175
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b. While there are many possible answers, one correct answer is: the national-security
argument and the infant-industry argument. The economic rationale for the national-
security argument is that if the product is necessary for national security, we should not
rely on imports for the production of the good. The economic rationale against the
national-security argument is that the proponents of trade restrictions may exaggerate
government to foresee which industries will be profitable and worth protecting.
5. a. Figure 9 shows the market for T-shirts in Textilia. The domestic price is $20 Once trade is
allowed, the price drops to $16 and three million T-shirts are imported.
Figure 9
$14 million.
Producer surplus declines by area A. Thus, producer surplus falls by $8 million.