Questions and Problems

Check Your Understanding

1. Question

   What is the difference between absolute and comparative advantage? Why would Michelle Wie, who is better than you at both golf and laundry, still hire you to do her wash?

   Prob 16 1. What is the difference between absolute and comparative advantage? Why would Michelle Wie, who is better than you at both golf and laundry, still hire you to do her wash?

2. Question

   If the United States has a comparative advantage in the production of strawberries compared to Iceland, how might trade affect the prices of strawberries in the two countries?

   Prob 16 2. If the United States has a comparative advantage in the production of strawberries compared to Iceland, how might trade affect the prices of strawberries in the two countries?

3. Question

   Who are the beneficiaries from a large U.S. tariff on French and German wines? Who are the losers?

   Prob 16 3. Who are the beneficiaries from a large U.S. tariff on French and German wines? Who are the losers?

4. Question

   Why does a quota generate a larger loss to the importing country than a tariff that restricts imports to the same quantity?

   Prob 16 4. Why does a quota generate a larger loss to the importing country than a tariff that restricts imports to the same quantity?

5. Question

   What is the difference between an infant industry and a key industry? Why do producers in both industries desire protection against foreign imports?

   Prob 16 5. What is the difference between an infant industry and a key industry? Why do producers in both industries desire protection against foreign imports?

6. Question

   How could free trade between the United States and China potentially lead to more jobs in the United States?

   Prob 16 6. How could free trade between the United States and China potentially lead to more jobs in the United States?

Apply the Concepts

7. Question

   South Korean film production companies have been protected for half a century by policies enacted to protect an infant industry. But beginning in July 2006, the days that local films must be shown by any movie house was reduced to 73 from 146. South Korean film celebrities and the industry fought the changes even though local films commanded half the box office. Why would a country enact special protection for the local film industry? Who would be the major competitor threatening the South Korean film industry? If films made by the local industry must be shown at least 146 days a year, does the local industry have much incentive to develop good films and be competitive with the rest of the world?

   Prob 16 7. South Korean film production companies have been protected for half a century by policies enacted to protect an infant industry. But beginning in July 2006, the days that local films must be shown by any movie house was reduced to 73 from 146. South Korean film celebrities and the industry fought the changes even though local films commanded half the box office. Why would a country enact special protection for the local film industry? Who would be the major competitor threatening the South Korean film industry? If films made by the local industry must be shown at least 146 days a year, does the local industry have much incentive to develop good films and be competitive with the rest of the world?

8. Question

   Expanding trade in general benefits both countries, or they would not willingly engage in trade. But we also know that consumers and society often gain while particular industries or workers lose. Because society and consumers gain, why don’t the many gainers compensate the few losers for their loss?

   Prob 16 8. Expanding trade in general benefits both countries, or they would not willingly engage in trade. But we also know that consumers and society often gain while particular industries or workers lose. Because society and consumers gain, why don’t the many gainers compensate the few losers for their loss?

9. Question

   Some activist groups are calling for “fair trade laws” by which other countries would be required to meet or approach our environmental standards and provide wage and working conditions approaching those of developed nations in order to be able to trade with us. Is this just another form of rent seeking by industries and unions for protection from overseas competition?

   Prob 16 9. Some activist groups are calling for “fair trade laws” by which other countries would be required to meet or approach our environmental standards and provide wage and working conditions approaching those of developed nations in order to be able to trade with us. Is this just another form of rent seeking by industries and unions for protection from overseas competition?

10. Question

    Why is there free trade between states in the United States but not necessarily between countries?

    Prob 16 10. Why is there free trade between states in the United States but not necessarily between countries?

11. Question

    Remittances from developed countries amount to over $325 billion each year. These funds are sent to their home countries by migrants in developed nations. Is this similar to the gains from trade discussed in this chapter, or are these workers just taking jobs that workers in developed countries would be paid more to do in the absence of the migrants?

    Prob 16 11. Remittances from developed countries amount to over $325 billion each year. These funds are sent to their home countries by migrants in developed nations. Is this similar to the gains from trade discussed in this chapter, or are these workers just taking jobs that workers in developed countries would be paid more to do in the absence of the migrants?

12. Question

    Suppose Brazil developed a secret process that effectively quadrupled its output of coffee from its coffee plantations. This secret process enabled it to significantly undercut the prices of U.S. domestic producers. Would domestic producers receive a sympathetic ear to calls for protection from Brazil’s lower cost coffee? How is this case different from that of protection against cheap foreign labor?

    Prob 16 12. Suppose Brazil developed a secret process that effectively quadrupled its output of coffee from its coffee plantations. This secret process enabled it to significantly undercut the prices of U.S. domestic producers. Would domestic producers receive a sympathetic ear to calls for protection from Brazil’s lower cost coffee? How is this case different from that of protection against cheap foreign labor?

In the News

13. Question

    Economist Steven Landsburg (New York Times, January 16, 2008, p. A23) made the point that “bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted.” He also argued, “Surely we have fellow citizens who are hurt by those [trade] agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?” The United States has programs to educate and retrain workers displaced by free trade agreements. Do we even owe them that? Why?

    Prob 16 13. Economist Steven Landsburg (New York Times, January 16, 2008, p. A23) made the point that “bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted.” He also argued, “Surely we have fellow citizens who are hurt by those [trade] agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?” The United States has programs to educate and retrain workers displaced by free trade agreements. Do we even owe them that? Why?

14. Question

    The Economist (November 21, 2009) suggested that in a highly globalized world where production is easily moved to other countries, there is an inherent tension between our desire to reduce carbon emissions to stem global climate change and our commitment to free trade. Do you agree? Why or why not?

    Prob 16 14. The Economist (November 21, 2009) suggested that in a highly globalized world where production is easily moved to other countries, there is an inherent tension between our desire to reduce carbon emissions to stem global climate change and our commitment to free trade. Do you agree? Why or why not?

Solving Problems

15. The figure below shows the production possibilities frontiers (PPFs) for Italy and India for their domestic production of olives and tea. Without trade, assume that each is consuming olives and tea at point a.
    

    1. Question

       If Italy and India were to consider specialization and trade, what commodity would each specialize in? What is India’s opportunity cost for tea and olives? What is Italy’s opportunity cost for tea and olives?

       Prob 16 15a. If Italy and India were to consider specialization and trade, what commodity would each specialize in? What is India’s opportunity cost for tea and olives? What is Italy’s opportunity cost for tea and olives?

    2. Question

       Assume that the two countries agree to specialize entirely in one product (the one for which each country has a comparative advantage), and agree to split the total output between them. Complete the table below. Are both countries better off after trade?

       
       
       
       

       Prob 16 15b. Assume that the two countries agree to specialize entirely in one product (the one for which each country has a comparative advantage), and agree to split the total output between them. Complete the table below. Are both countries better off after trade?
16. The following figure shows the annual domestic demand and supply for 10 GB compact flash cards for digital cameras.
    

    1. Question

       Assume that the worldwide price of these 10 GB cards is $10. What percent of United States sales would be imported?

       Prob 16 16a. Assume that the worldwide price of these 10 GB cards is $10. What percent of United States sales would be imported?

    2. Question

       Assume the U.S. government puts a $5 tariffper card on imports. How many 10 GB flash cards would be imported into the United States?

       Prob 16 16b. Assume the U.S. government puts a $5 tariffper card on imports. How many 10 GB flash cards would be imported into the United States?

    3. Question

       Given the tariff in question (b), how much revenue would the government collect from this tariff?

       Prob 16 16c. Given the tariff in question (b), how much revenue would the government collect from this tariff?

    4. Question

       Given the tariff in question (b), how much more sales revenue would domestic companies enjoy as a result of the tariff?

       Prob 16 16d. Given the tariff in question (b), how much more sales revenue would domestic companies enjoy as a result of the tariff?

17. Question

    According to By the Numbers, approximately when was the last time the United States had a trade surplus? As a percentage of GDP, what was the highest trade surplus the United States has achieved? What was the highest trade deficit the United States has achieved?

    Prob 16 17. According to By the Numbers, approximately when was the last time the United States had a trade surplus? As a percentage of GDP, what was the highest trade surplus the United States has achieved? What was the highest trade deficit the United States has achieved?

18. Question

    According to By the Numbers, most of the developed countries (Canada, Australia, the United States, Switzerland, and Hong Kong) have relatively low tariff barriers while much of the developing world still has high tariffs on imports. What reasons might account for why these countries continue to have high tariffs?

    Prob 16 18. According to By the Numbers, most of the developed countries (Canada, Australia, the United States, Switzerland, and Hong Kong) have relatively low tariff barriers while much of the developing world still has high tariffs on imports. What reasons might account for why these countries continue to have high tariffs?