Problems

1.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?
    Saudi Arabia United States
    Quantity of oil (millions of barrels) Quantity of cars (millions) Quantity of oil (millions of barrels) Quantity of cars (millions)
        0 4     0 10.0
    200 3 100   7.5
    400 2 200   5.0
    600 1 300   2.5
    800 0 400      0
  • 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 and 2.5 million cars. Without trade, can Saudi Arabia produce more oil and more cars? Without trade, can the United States produce more oil and more cars?

2.The production possibilities for the United States and Saudi Arabia are given in Problem 1. Suppose now that each country specializes in the good in which it has the comparative advantage, and the two countries trade.

  • a. What is the total quantity of oil produced? What is the total quantity of cars produced?
  • b. Is it possible for Saudi Arabia to consume 400 million barrels of oil and 5 million cars and for the United States to consume 400 million barrels of oil and 5 million cars?
  • c. Suppose that, in fact, Saudi Arabia consumes 300 million barrels of oil and 4 million cars and the United States consumes 500 million barrels of oil and 6 million cars. How many barrels of oil does the United States import? How many cars does the United States export? Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world-market?

3.Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no CDs, or 400 CDs and no lumber, or any combination in between.

  • a. Draw the U.S. and Canadian production possibility curves in two separate diagrams, with CDs on the horizontal axis and lumber on the vertical axis.
  • b. In autarky, if the United States wants to consume 500 CDs, how much lumber can it consume at most? Label this point A in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many CDs can it consume in autarky? Label this point C in your diagram.
  • c. Which country has the absolute advantage in lumber production?
  • d. Which country has the comparative advantage in lumber production?
    Suppose each country specializes in the good in which it has the comparative advantage, and there is trade.
  • e. How many CDs does the United States produce? How much lumber does Canada produce?
  • f. Is it possible for the United States to consume 500 CDs and 7 tons of lumber? Label this point B in your diagram. Is it possible for Canada at the same time to consume 500 CDs and 1 ton of lumber? Label this point D in your diagram.

4.For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries.

  • a. The United States exports software to Venezuela, and Venezuela exports oil to the United States.
  • b. The United States exports airplanes to China, and China exports clothing to the United States.
  • c. The United States exports wheat to Colombia, and Colombia exports coffee to the United States.

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 Heckscher–Ohlin model, which good will China export? Which good will the United States export? In the United States, what will happen to the price of labor (the wage) and to the price of capital?

6.Before the North American Free Trade Agreement (NAFTA) gradually eliminated import tariffs on goods traded by the United States, Mexico, and Canada, 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 surplus in your diagram.
  • b. Mexican and U.S. producers of tomatoes. Illustrate the effect on producer surplus in your diagram.
  • c. Mexican and U.S. tomato workers.
  • d. Mexican and U.S. consumers of poultry. Illustrate the effect on consumer surplus in your diagram.
  • e. Mexican and U.S. producers of poultry. Illustrate the effect on producer surplus in your diagram.
  • f. Mexican and U.S. poultry workers.

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 commercial jet airplane is $100 million.

Price of jet (millions) Quantity of jets demanded Quantity of jets supplied
$120 100 1,000
 110 150   900
 100 200   800
 90 250   700
 80 300   600
 70 350   500
 60 400   400
 50 450   300
 40 500   200
  • a. In autarky, how many commercial jet airplanes does the United States produce, and at what price are they bought and sold?
  • b. With trade, what will the price for commercial jet airplanes be? Will the United States import or export airplanes? How many?

8.The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.

Price of orange Quantity of oranges demanded (thousands) Quantity of oranges supplied (thousands)
$1.00  2 11
 0.90  4 10
 0.80  6  9
 0.70  8  8
 0.60 10  7
 0.50 12  6
 0.40 14  5
 0.30 16  4
 0.20 18  3
  • a. Draw the U.S. domestic supply curve and domestic demand curve.
  • b. With free trade, how many oranges will the United States import or export?
    Suppose that the U.S. government imposes a tariff on oranges of $0.20 per orange.
  • c. How many oranges will the United States import or export after introduction of the tariff?
  • d. In your diagram, shade the gain or loss to the economy as a whole from the introduction of this tariff.

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.
  • b. What will the domestic price of oranges be after introduction of the quota?
  • c. What is the value of the quota rents that foreign exporters of oranges receive?

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

The world price of beef is PW. The United States currently imposes an import tariff on beef, so the price of beef is PT. Congress decides to eliminate the tariff. In terms of the areas marked in the diagram, answer the following questions.

  • a. What is the gain/loss in consumer surplus?
  • b. What is the gain/loss in producer surplus?
  • c. What is the gain/loss to the government?
  • d. What is the gain/loss to the economy as a whole?

11.As the United States has opened up to trade, it has lost many of its low-skill manufacturing jobs, but it has gained jobs in high-skill industries, such as the software industry. Explain whether the United States as a whole has been made better off by trade.

12.If a country agrees to reduce trade barriers (tariffs or quotas), is doing so a concession to other countries? Do you think that this terminology is appropriate?

13.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 productive than foreign workers. So import-competing industries need to be protected.” Is this a valid argument? Explain your answer.

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