INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 9
1. Country A’s elasticity of demand for imported manufactures is quite small, because its
own elasticity of supply of manufactures is quite small. How do those circumstances
affect its likely gains from trade creation if it joins a preferential trade agreement?
2. Country B joins a customs union and for trade with other members it eliminates its 50
percent tariff on imported automobiles. Explain how Country B is affected by the
choice of the common external tariff, based on the framework assumed in Figure 9.1.
Do you expect other effects that are not well represented in that framework?
3. Consider the import market for Country C, where import demand is given by the
difference between total demand for the product and its domestic supply:
MD = QD – QS with QD = 140 – P and QS = –100 + 2P
a. If Country C trades with both Countries A and B, but imposes a specific tariff of 20
on imported goods, solve for the equilibrium price and quantity in the import market
if the constant foreign prices exclusive of the tariff are PA = 50 and PB = 40.
b. If Country C forms a PTA with Country A and eliminates this tariff on imports from A
while maintaining it on imports from B, what is the new equilibrium in the import
market? Calculate the gains from trade creation and the losses from trade diversion.
How much better off are consumers in C? By how much do profits in the import-
competing industries fall?
4. Terms of trade effects are often the dominant outcome from customs union formation.
What conditions make it more likely that a country will improve its terms of trade at the
expense of other members? . . . at the expense of non-members?
5. Country C’s demand for imports is MD = 240 – 3P, and it faces supplies from
economies A and B as follows:
MSA = –40 + 2P
MSB = –120 + 3P
a. Assume Country C imposes a tariff of 8 initially on all imports and solve for the
equilibrium price and quantity in this market. Also, calculate the quantity supplied by
both foreign suppliers.
b. Country C is considering forming a customs union with either A or B. One group of
advisers recommends choosing Country A because historically it has traded more
with C. Another group of advisers recommends Country B, because B appears able
to expand output more easily. Determine the consequences of C removing the tariff
on imports from A while maintaining it on B, and calculate the net terms of trade
gain or loss C will experience from its trade with A and B.
c. Remove the tariff on Country B while maintaining it on A, and make the same
calculation of the net terms of trade gain. In which case is there a larger increase in
imports? Which situation appears more favorable for Country C? Which group of
advisers would your analysis support?
6. Trade between Argentine and Brazil rose after the formation of MERCOSUR. How do
economists distinguish whether this extra trade would have occurred anyway in the
absence of MERCOSUR?
7. You are asked to interpret the following estimate of the effect of a PTA on bilateral
trade between countries i and j:
ln Xij = 1.0 ln GDPi + 1.0 ln GDPj –0.7 ln Distanceij + 0.3 PTA
If GDP in both countries doubles over the same time that the PTA is implemented, by
how much do you expect the bilateral trade of its members to rise? [Hint: You can also
think of this relationship as:
Xij = GDPiGDPjDistanceij–0.7e0.3PAT where PTA equals 0 initially and equals 1 in the
new equilibrium where the PTA exists.]
8. If the E.U. adds more members that are distant from the industrial core, what
conditions make it more likely that these members will lag behind the growth of the
existing members? What difference does it make to your answer if labor is quite
mobile within Europe? . . . if capital is quite mobile within Europe?
9. If Canadian tariffs were twice as high as U.S. tariffs on manufactured goods before the
Canada–United States Free Trade Agreement was formed, why did that signal a
possible trade diversion loss for Canada? What was the basis for others to predict an
increase in Canadian productivity? If rising productivity in an industry means fewer
workers are needed to produce the same output, what must economists be assuming
about the workers no longer needed in the industry with rising productivity?
10. The NAFTA agreement was approved over substantial opposition by the Democratic
party in 1993. What were the sources of opposition to that agreement? Would you
expect opposition for the same reasons to an agreement with Korea in 2007?
INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 9: Answers
1. Country A’s elasticity of demand for imported manufactures depends upon its
elasticity of demand for all manufactures and its domestic elasticity of supply of
2. The Figure 9.1 framework demonstrates the potential gain to Country B from the
creation of more trade within the customs union when the price of automobiles
falls in B, and it also shows the loss from diverting trade away from more
3. Analysis of a PTA with constant foreign prices
a) With a specific tariff of 20 on imports from A and B, all imports will come from
b) If C forms a PTA with A, then all imports will now come from A at a price of 50.
4. A country is more likely to improve its terms of trade at the expense of other
members when the agreement results in large reductions in the tariffs that its
exports face, and the elasticity of supply of its export goods is low. The latter
situation arises when production of the export good relies upon industry-specific
5. Analysis of a PTA with variable foreign prices.
a) The initial equilibrium for country C is given by the intersection of its import
demand curve with the sum of the foreign supply curves from A and B.
c) After C forms a PTA with A, the new equilibrium becomes
d) If C forms a PTA with B instead, the corresponding equilibrium is given by
240 – 3P = <minus>160 + 5P – 16
6. Economists attempt to control for other causes of greater trade between Argentina
and Brazil that would have occurred even in the absence of MERCOSUR, such as
greater population, income, and factor endowments, or a reduction in the cost of
7. Because the gravity equation coefficients on GDP are both equal to one, we can
5.4.
8. As the EU adds more members that are geographically distant from the core, a logical
concern has been whether the much lower levels of income per capita in those countries
will be a permanent feature that requires transfer payments from the better off members
9. A country suffers a terms of trade loss when it removes the tariff from a partner’s
exports, an effect you calculated in problems 3 and 5. The loss will be greater
when there is a large difference between the partner and non-partner supply price
in the constant cost situation. In the case of finite supply elasticities, a larger
portion of the tariff is gained by producers in the partner country when their
10. The opposition to NAFTA by organized labor and the Democratic Party was
motivated by the expectation that more competition from Mexican production of
labor-intensive goods would reduce demand for labor in the U.S. and weaken its
bargaining position. The potential effect on U.S. workers would be particularly
