600 Miller Economics Today, Nineteenth Edition
Chapter 32 Comparative Advantage and the Open Economy
Power Moves across Borders in South America
Most South American nations produce about half of their electricity by burning natural gas to generate
electric power. Natural gas is easier to find, extract, and put to use in Brazil than in neighboring Argentina
and Uruguay. Consequently, the lower opportunity cost of producing electricity in Brazil explains why
both Argentina and Uruguay have been importing electricity from Brazil since 2004.
The Problem with Agricultural Subsidies
A major problem for negotiations by members of the World Trade Organization to expand free trade has
been the issue of agricultural subsidies. U.S. government agricultural subsidies to cotton farmers have
allowed them to sell cotton at lower prices than they would have otherwise accepted and which turned out
Democrats, Republicans, and Free Trade Policy
Democrats and Republicans have been divided in recent years on the issue of free trade. Republicans
generally view free trade as promoting economic growth. Republicans largely hold the economics
economies and results in more output being produced at a lower cost. The result is increased standards of
living in both the U.S. and global economies. The bottom line from the Republican point of view is that
consumers as a group are better off.
Lecture Extender Examples 601
All of the debates about improving our export sector to increase jobs and U.S. competitiveness ignore the
benefits of imports. David Wessel of The Wall Street Journal illustrated this point with an example of
baby clothes. Currently, a typical family spends about $500 a year on baby clothes. The total expenditures
are more than $2 billion a year. For years, there was a quota on imports of baby clothes. In 1998, the
Japan Loses Its Electronics Advantage to the United States
From the 1950s to the late 1990s, companies based in Japan, such as Sony, Panasonic, and Pioneer, made
Japan an exporter of electronic devices such as televisions, stereo equipment, and radios. Since the 1990s,
however, U.S. electronics companies such as Apple Computer, Microsoft, and Eastman Kodak have been
able to elbow out Japanese firms. These and other U.S. firms have greater skill in writing software for
digital chips used in the latest electronic products, including downloadable music players, video game
consoles, hand-held devices such as smartphones, and digital cameras. In addition, U.S. electronics
manufacturers have found more cost-
popular devices. U.S. producers are now exporting many of these devices to Japan. Thus, the United
States has developed a comparative advantage over Japan in producing a number of electronic products.
An Infant Industry Blossoms Due to Protection from Foreign Imports:
The Case of Marijuana
Marijuana was made illegal in the United States in the 1930s, but just as with many other outlawed drugs,
a market for it remained. Until about 25 years ago, virtually all marijuana consumed in the United States
was imported. Today, earnings from burgeoning and increasingly high-
with President Richard Nixon in the 1970s, the federal government has ended up protecting the domestic
602 Miller Economics Today, Nineteenth Edition
U.S. Exports Pay for More Oil Imports
The increase in oil prices in the 2000s, contributed to an increase in U.S. spending on imports. It also
raised the earnings of residents of oil-exporting nations, including the 11 countries that make up OPEC.
Residents of OPEC nations responded by buying more goods and services from other nations, including the
United States. Imports by OPEC countries, which included electronic devices, aircraft, and automobiles,
increased from the United States during this period. These increases in U.S. exports to the OPEC nations
helped pay for higher spending on oil imported from those countries.
Did the Smoot-Hawley Tariff Worsen the Great Depression?
By 1930, the unemployment rate had almost doubled in a year as the economy entered the Great Depression.
Congress and President Hoover wanted to do something that would help stimulate U.S. production and
reduce unemployment. The result was the Smoot-Hawley Tariff, which set tariff schedules for more than
20,000 products, raising duties on imports by an average of 52 percent. This attempt to improve the
domestic economy at the expense of foreign economies backfired. Each trading partner of the United
States in turn imposed its own high tariffs, including the United Kingdom, the Netherlands, France, and
Switzerland. The result was a massive reduction in international trade by an incredible 64 percent in three
years. Some believe that the Great Depression was partially caused by such tariffs.