Chapter 20 – International Trade
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Chapter 20 International Trade
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 13 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
3. Explain: “The United States can make certain toys with greater productive efficiency than can
China. Yet we import those toys from China.” Relate your answer to the ideas of Adam Smith
and David Ricardo. LO2
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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
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 Y (in terms of good X) in Big Country is 3/4 (=60/80) units
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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 supply 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.
7. Draw a domestic supply and demand diagram for a product in which the United States does not
have a comparative advantage. What impact do foreign imports have on domestic price and
quantity? On your diagram show a protective tariff that eliminates approximately one-half of the
assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b)
domestic producers, and (c) foreign exporters? How would the effects of a quota that creates the
same amount of imports differ? LO4
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Answer:
8. “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
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9. 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.
10. In 2007, manufacturing workers in the United States earned average compensation of $30.56
per hour. That same year, manufacturing workers in Mexico earned average compensation of
$3.91 per hour. How can U.S. manufacturers possibly compete? Why isn’t all manufacturing
done in Mexico and other low-wage countries? LO4
Answer: The U.S. can compete if the workers are more productive. That is, if the
productivity level for U.S. workers is higher. If this is the case, then some manufacturing
11. 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
Answer: If a country imposes import tariffs other countries may follow with their own
import tariffs. These foreign import tariffs will reduce the exports of the nation that
originally imposed the import tariffs.
12. 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. LO5
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Answer: (a) The WTO oversees trade agreements reached by member nations and
arbitrates trade disputes among them. (b) The EU is a trading bloc of 25 European
13. 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
Answer: The Trade Adjustment Assistance Act of 2002 introduced some new novel
elements to help those hurt by shifts in international trade patterns. Such as: cash
14. 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
Answer: The off-shoring of white collar service jobs refers to jobs relating to data entry,
15. LAST WORD What was the central point that Bastiat was trying to make in his imaginary
petition of the candlemakers?
Answer: Bastiat’s objective was to discredit the arguments in favor of protectionism by
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PROBLEMS
1. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as
follows in the nations of Canswicki and Tunata:
Canswicki: 1 can baby formula ≡ 2 cans tuna fish
Tunata: 1 can baby formula ≡ 4 cans tuna fish
In what product should each nation specialize? Which of the following terms of trade would be
acceptable to both nations: (a) 1 can baby formula ≡ 2 1/2 cans tuna fish; (b) 1 can baby formula
≡ 1 can tuna fish; (c) 1 can baby formula ≡ 5 cans tuna fish? LO2
Feedback: Consider the following example. Assume that the comparative-cost ratios of
two products—baby formula and tuna fish—are as follows in the nations of Canswicki
and Tunata:
In what product should each nation specialize?
The opportunity cost of producing 1 can of baby formula in Canswicki is 2 cans of tuna
fish.
Which of the following terms of trade would be acceptable to both nations:
(a) 1 can baby formula ≡ 2 1/2 cans tuna fish?
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These terms of trade are acceptable. The best Canswicki can do without trade is produce
(b) 1 can baby formula ≡ 1 can tuna fish?
These terms of trade would not be acceptable. Canswicki would not be willing to trade 1
(c) 1 can baby formula ≡ 5 cans tuna fish?
These terms of trade would not be acceptable. Tunata would not be willing to trade (give
2. The accompanying hypothetical production possibilities tables are for New Zealand and Spain.
Each country can produce apples and plums. Plot the production possibilities data for each of the
two countries separately. Referring to your graphs, answer the following: LO2
a. What is each country’s cost ratio of producing plums and apples?
b. Which nation should specialize in which product?
c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2
apples. (Plot these lines on your graph.)
d. Suppose the optimum product mixes before specialization and trade were alternative B in New
Zealand and alternative S in Spain. What would be the gains from specialization and trade?
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Feedback: Consider the following example. The accompanying hypothetical production
possibilities tables are for New Zealand and Spain. Each country can produce apples and
plums. Plot the production possibilities data for each of the two countries separately.
Referring to your graphs, answer the following:
a. What is each country’s cost ratio of producing plums and apples?
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The opportunity cost of producing 1 apple in New Zealand is 0.25 plums. That is, for
b. Which nation should specialize in which product?
The opportunity cost of producing apples in New Zealand is lower than Spain’s
c. Show the trading possibilities lines for each nation if the actual terms of trade are 1
plum for 2 apples. (Plot these lines on your graph.)
The graphs below show the each country’s production possibilities schedules with and
without trade. Apples are on the vertical axis and plums are on the horizontal axis.
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d. Suppose the optimum product mixes before specialization and trade were alternative B
in New Zealand and alternative S in Spain. What would be the gains from specialization
and trade?
The first step is to determine total production before any trade takes place.
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3. The following hypothetical production possibilities tables are for China and the United States.
Assume that before specialization and trade the optimal product mix for China is alternative B
and for the United States is alternative U. LO2
a. Are comparative-cost conditions such that the two areas should specialize? If so, what product
should each produce?
b. What is the total gain in apparel and chemical output that would result from such
specialization?
c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of
apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of
chemicals. What are the gains from specialization and trade for each nation?
possibilities tables are for China and the United States. Assume that before specialization
and trade the optimal product mix for China is alternative B and for the United States is
alternative U.
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a. Are comparative-cost conditions such that the two areas should specialize? If so, what
product should each produce?
b. What is the total gain in apparel and chemical output that would result from such
specialization?
The first step is to determine total production before any trade takes place.
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c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1
unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6
units of chemicals. What are the gains from specialization and trade for each nation?
To determine the limits of the terms of trade we look at opportunity cost. The opportunity
Now assuming the actual terms are 1000 units of apparel for 1.5 tons of chemicals and
that the ACTUAL amount traded (exchange) is 4000 units of apparel for 6 tons of
chemicals we can find the new consumption levels for each country.
4. Refer to Figure 3.6, page 57. Assume that the graph depicts the U.S. domestic market for corn.
How many bushels of corn, if any, will the United States export or import at a world price of $1,
$2, $3, $4, and $5? Use this information to construct the U.S. export supply curve and import
demand curve for corn. Suppose that the only other corn-producing nation is France, where the
domestic price is $4. Which country will export corn; which county will import it? LO3
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Feedback: Consider the following example. Refer to Figure 3.6, page 55. Assume that
the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any,
will the United States export or import at a world price of $1, $2, $3, $4, and $5? Use this
information to construct the U.S. export supply curve and import demand curve for corn.
Suppose that the only other corn-producing nation is France, where the domestic price is
$4. Which country will export corn; which county will import it?
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