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Chapter 22/International Trade and Comparative Advantage
CHAPTER 22
INTERNATIONAL TRADE AND COMPARATIVE
ADVANTAGE
TEST YOURSELF
1. The following table describes the number of yards of cloth and barrels of wine that can
be produced with a week’s worth of labor in England and Portugal. Assume that no
other inputs are needed.
In England In Portugal
Cloth 8 yards 12 yards
Wine 2 barrels 6 barrels
a. If there is no trade, what is the price of wine in terms of cloth in England?
b. If there is no trade, what is the price of wine in terms of cloth in Portugal?
c. Suppose each country has 1 million weeks of labor available per year. Draw the
production possibilities frontier for each country.
d. Which country has an absolute advantage in the production of which good(s)? Which
country has a comparative advantage in the production of which good(s)?
e. If the countries start trading with each other, which country will specialize and
export which good?
f. What can be said about the price at which trade will take place?
(a) In the absence of trade, 1 barrel of wine costs 4 yards of cloth in England.
(c)
FIGURE 1
Chapter 22/International Trade and Comparative Advantage
(e) When trade opens, England will specialize in cloth and export it to Portugal, which in
2. Suppose that the United States and Mexico are the only two countries in the world and
that labor is the only productive input. In the United States, a worker can produce 12
bushels of wheat or 2 barrels of oil in a day. In Mexico, a worker can produce 2 bushels
of wheat or 4 barrels of oil per day.
a. What will be the price ratio between the two commodities (that is, the price of oil in
terms of wheat) in each country if there is no trade?
b. If free trade is allowed and there are no transportation costs, which commodity
would the United States import? What about Mexico?
c. In what range would the price ratio have to fall under free trade? Why?
d. Picking one possible post-trade price ratio, show clearly how it is possible for both
countries to benefit from free trade.
(a) In the absence of trade, in the United States 1 barrel of oil will cost 6 bushels of
wheat, while in Mexico 1 barrel of oil will cost one half bushel of wheat. Stated
DISCUSSION QUESTIONS
1. You have a dozen shirts and your roommate has six pairs of shoes worth roughly the
same amount of money. You decide to swap six shirts for three pairs of shoes. In
financial terms, neither of you gains anything. Explain why you are nevertheless both
likely to be better off.
You are better off by swapping shirts for shoes, since you need to wear both, not just
2. In the eighteenth century, some writers argued that one person in a trade could be
made better off only by gaining at the expense of the other. Explain the fallacy in this
argument.
The argument has to be fallacious, provided that exchange is voluntary (one of the Ideas
3. Country A has a cold climate with a short growing season, but a highly skilled labor
force (think of Finland). What sorts of products do you think it is likely to produce?
What are the characteristics of the countries with which you would expect it to trade?
Country A is likely to produce and export manufactured goods that embody high
4. After the removal of a quota on sugar, many U.S. sugar farms go bankrupt. Discuss the
pros and cons of removing the quota in the short and long runs.
In the short run, consumers benefit because the price of sugar falls. Domestic sugar
producers and their labor force are hurt in the short run, because of increased foreign
5. Country A has a mercantilist government that believes it is always best to export more
than it imports. As a consequence, it exports more to Country B every year than it
imports from Country B. After 100 years of this arrangement, both countries are
destroyed in an earthquake. What were the advantages or disadvantages of the surplus
to Country A? To Country B?
The advantage lies with Country B, which for 100 years had access to more goods than it
6. Under current trade law, the president of the United States must report periodically to
Congress on countries engaging in unfair trade practices that inhibit U.S. exports. How
would you define an “unfair” trade practice? Suppose Country X exports much more to
the United States than it imports, year after year. Does that constitute evidence that
Country X’s trade practices are unfair? What would constitute such evidence?
This is a controversial subject. There are, however, rules for fair trade to which most
countries have agreed. They prohibit government subsidies of export industries, using
non-tariff barriers such as health and environmental regulations for trade protection,
Chapter 22/International Trade and Comparative Advantage
7. Suppose the United States finds Country X guilty of unfair trade practices and
penalizes it with import quotas. So U.S. imports from Country X fall. Suppose, further,
that Country X does not alter its trade practices in any way. Is the United States better
or worse off? What about Country X?
The point of U.S. penalties against a country guilty of unfair trade practices is to force it
to abandon those practices. If it does not do so, then the United States has only hurt itself
APPENDIX
TEST YOURSELF
1. The following table presents the demand and supply curves for laptop computers in
Japan and the United States.
Price per
Computer
Quantity
Demanded
in United
States
Quantity
Supplied
in
United
States
Quantity
Demanded
in Japan
Quantity
Supplied
in Japan
$ 200 90 30 50 50
400 80 35 40 55
600 70 40 30 60
800 60 45 20 65
1,000 50 50 10 70
1,200 40 55 0 75
NOTE: Quantity is in thousands.
a. Draw the demand and supply curves for the United States on one diagram and those
for Japan on another one.
b. If the United States and Japan do not trade, what are the equilibrium price and
quantity in the laptop market in the United States? In Japan?
c. Now suppose trade is opened up between the two countries. What will be the
equilibrium price in the world market for laptops? What has happened to the price
of laptops in the United States? In Japan?
d. Which country will export laptops? How many?
Chapter 22/International Trade and Comparative Advantage
e. When trade opens, what happens to the quantity of laptop computers produced, and
therefore employment, in the computer industry in the United States? In Japan?
Who benefits and who loses initially from free trade?
(a)
FIGURE 2
