Chapter 5 Mexico The Production Poultry Decreases The Wages

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Solution

1. Both Canada and the United States produce lumber and footballs with constant

opportunity costs. The United States can produce either 10 tons of lumber and no

footballs, or 1,000 footballs and no lumber, or any combination in between. Canada

can produce either 8 tons of lumber and no footballs, or 400 footballs and no lum-

ber, or any combination in between.

a. Draw the U.S. and Canadian production possibility frontiers in two separate dia-

grams, with footballs on the horizontal axis and lumber on the vertical axis.

b. In autarky, if the United States wants to consume 500 footballs, how much lum-

ber can it consume at most? Label this point A in your diagram. Similarly, if

1. a. The two accompanying diagrams illustrate the U.S. and Canadian production pos-

sibility frontiers.

(a) U.S. Production

Possibility Frontier

(b) Canadian Production

Possibility Frontier

Canada PPF

Quantity

of lumber

(tons)

Quantity

of lumber

(tons)

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International Trade 5

CHAPTER

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S-80 CHAPTER 5 INTERNATIONAL TRADE

Solution

d. In the United States, producing 1 additional ton of lumber means forgoing pro-

duction of 100 footballs: the opportunity cost of 1 ton of lumber is 100 footballs.

2. For each of the following trade relationships, explain the likely source of the com-

parative advantage of each of the exporting countries.

2. a. The United States has the comparative advantage in software production because

of a factor endowment: a relatively large supply of human capital. Venezuela has

the comparative advantage in oil production because of a factor endowment: large

oil reserves.

3. The U.S. Census Bureau keeps statistics on U.S. imports and exports on its website.

The following steps will take you to the foreign trade statistics. Use them to answer

the questions below.

(i) Go to the U.S. Census Bureau’s website at www.census.gov

(ii) Under the heading “Topics” select “Business” and then select “International

Trade” under the section “Data by Sector” in the left menu bar

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Solution

(ix) The right side of the table now shows the import and export statistics for the

entire year 2013. For the questions below on U.S. imports, use the column for

“Consumption Imports, Customs Value Basis.”

a. Look up data for U.S. imports of hats and caps: in step (vi), select “(315) Apparel

& Accessories” and in step (vii), select “(315220) Men’s and Boys’ Cut and Sew

Apparel.” From which country do we import the most apparel? Which of the three

3. a. In 2013, the United States imported the most men’s and boy’s apparel from

China: U.S. imports of apparel from China totaled $846 million. (The runner-up

was Vietnam, at $100 million, followed by Bangladesh, at $83 million.) China’s

comparative advantage comes from a difference in factor endowments: China has

4. Since 2000, the value of U.S. imports of men’s and boy’s apparel from China has

more than tripled. What prediction does the Heckscher-Ohlin model make about the

wages received by labor in China?

4. a. The value of U.S. imports of hats and caps from China more than tripled from a

relatively small $249 million in 2000 to $846 million in 2013.

b. As trade increases, the Heckscher–Ohlin model predicts that prices of factors that

are abundantly available in a country will rise. In other words, the model predicts

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S-82 CHAPTER 5 INTERNATIONAL TRADE

Solution

5. Shoes are labor-intensive and satellites are capital-intensive to produce. The

United States has abundant capital. China has abundant labor. According to the

5. The Heckscher–Ohlin model predicts that a country will have a comparative

advantage in the good whose production is intensive in the factor the country has

6. Before the North American Free Trade Agreement (NAFTA) gradually eliminated

import tariffs on goods, the autarky price of tomatoes in Mexico was below the

world price and in the United States was above the world price. Similarly, the autarky

price of poultry in Mexico was above the world price and in the United States was

below the world price. Draw diagrams with domestic supply and demand curves for

each country and each of the two goods. As a result of NAFTA, the United States now

imports tomatoes from Mexico and the United States now exports poultry to Mexico.

How would you expect the following groups to be affected?

a. Mexican and U.S. consumers of tomatoes. Illustrate the effect on consumer sur-

plus in your diagram.

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Solution

6. The four accompanying diagrams illustrate the U.S. and Mexican domestic demand

and supply curves.

(a) U.S. Tomato Imports (b) Mexican Tomato Exports

Domestic

supply

Domestic

supply

Price of

poultry

Price of

poultry

a. As shown in panel (b), consumer surplus decreases in Mexico by the size of area

W as the price rises from PM to PW. As shown in panel (a), consumer surplus

increases in the United States by the size of the area A + B as the price falls from

PUS to PW.

b. As shown in panel (a), production of tomatoes decreases in the United States

from QUS to Q1; producer surplus decreases by area A. As shown in panel (b),

production of tomatoes increases in Mexico from QM to Q2, so producer surplus

increases by areas W + X.

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Solution

7. The accompanying table indicates the U.S. domestic demand schedule and domestic

supply schedule for commercial jet airplanes. Suppose that the world price of a com-

mercial jet airplane is $100 million.

7. a. In autarky, the equilibrium price will be $60 million, and 400 airplanes will be

bought and sold at that price.

b. When there is trade, the price rises to the world price of $100 million. At that

price, the domestic quantity supplied is 800, and the domestic quantity demanded

is 200. So 600 airplanes are exported.

8. The accompanying table shows the U.S. domestic demand schedule and domestic sup-

ply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.

Price of jet Quantity of jets Quantity of jets

(millions) demanded supplied

$120 100 1,000

110 150 900

100 200 800

Quantity of Quantity of

oranges oranges

Price of demanded supplied

orange (thousands) (thousands)

$1.00 2 11

0.90 4 10

0.80 6 9

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Solution

Suppose that the U.S. government imposes a tariff on oranges of $0.20 per orange.

8. a. The U.S. domestic supply and demand curves are illustrated in the accompanying

diagram.

$0.70

0.50

Price of

orange

Domestic

supply

b. With free trade, the price will be the world price, $0.30, the domestic quantity

demanded will be 16,000 oranges, and the domestic quantity supplied will be

4,000 oranges. So the United States will import 12,000 oranges.

9. The U.S. domestic demand schedule and domestic supply schedule for oranges was

given in Problem 8. Suppose that the world price of oranges is $0.30. The United

States introduces an import quota of 3,000 oranges and assigns the quota rents to

foreign orange exporters.

a. Draw the domestic demand and supply curves.

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Solution

9. a. The domestic demand and domestic supply curves are shown in the accompanying

diagram.

$0.60

0.30

Price of

orange

Domestic

supply

Domestic

demand

10. The accompanying diagram illustrates the U.S. domestic demand curve and domestic

supply curve for beef.

Domestic

supply

Price of

beef

ACBD

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Solution

10. a. As the price falls from PT to PW, consumer surplus increases by areas A + B + C + D.

11. As the United States has opened up to trade, it has lost many of its low-skill manufac-

turing jobs, but it has gained jobs in high-skill industries, such as the software indus-

try. Explain whether the United States as a whole has been made better off by trade.

11. As the United States has opened up to trade, it has specialized in producing goods

that use high-skill labor (such as software design) in which it has a comparative

advantage, and it has allowed other countries to specialize in producing low-skill

12. The United States is highly protective of its agricultural industry, imposing import

tariffs, and sometimes quotas, on imports of agricultural goods. This chapter pre-

12. The three arguments for trade protection are the national security, job creation, and

infant industry arguments. Agriculture is not an infant industry, so this argument

does not apply. Some argument can be made that agricultural products are neces-

13. In World Trade Organization (WTO) negotiations, if a country agrees to reduce trade

barriers (tariffs or quotas), it usually refers to this as a concession to other countries.

Do you think that this terminology is appropriate?

13. The word concession implies that when a country lowers its trade barriers, it is giving

up something to other countries. As discussed in this chapter, free trade is beneficial

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Solution

14. Producers in import-competing industries often make the following argument:

“Other countries have an advantage in production of certain goods purely because

workers abroad are paid lower wages. In fact, American workers are much more pro-

ductive than foreign workers. So import-competing industries need to be protected.”

Is this a valid argument? Explain your answer.

14. Even if American workers were better at producing everything than are foreign work–

ers (that is, even if America has the absolute advantage in everything), this does not

15. Assume Saudi Arabia and the United States face the production possibilities for oil

and cars shown in the accompanying table.

a. What is the opportunity cost of producing a car in Saudi Arabia? In the United

States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia?

In the United States?

b. Which country has the comparative advantage in producing oil? In producing

cars?

c. Suppose that in autarky, Saudi Arabia produces 200 million barrels of oil and

3 million cars; similarly, that the United States produces 300 million barrels of oil

Saudi Arabia United States

Quantity of oil Quantity of oil

(millions of Quantity of (millions of Quantity of

barrels) cars (millions) barrels) cars (millions)

0 4 0 10.0

200 3 100 7.5

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CHAPTER 5 INTERNATIONAL TRADE S-89

Solution

15. a. In Saudi Arabia, 1 million cars can be produced by giving up production of 200

b. Since the opportunity cost of producing oil is lower in Saudi Arabia, it has the

comparative advantage in oil production. And since the opportunity cost of pro-

ducing cars is lower in the United States, it has the comparative advantage in car

production.

c. In autarky, Saudi Arabia cannot produce both more oil and more cars. If Saudi

Arabia produces 200 million barrels of oil and 3 million cars, it is on its produc-

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