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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

Arguments that protection saves jobs, allows us to compete with cheap foreign labor, makes the economy diversified and stable, and is needed to penalize lax environmental standards are flawed.
The arguments that protection is necessary for national security, for infant industries, and to prevent dumping are weak.
Trade restrictions raise the domestic price of imported goods, lower the quantity imported, decrease consumer surplus, increase producer surplus, and create a deadweight loss.
Countries restrict international trade by imposing tariffs, import quotas, other import barriers, and export subsidies.
Identify the gains from international trade and its winners and losers.9.2
9.1 Explain how markets work with international trade.
Compared to a no-trade situation, in a market with exports, consumer surplus is smaller, producer surplus is larger, and total surplus is larger with free international trade.
Compared to a no-trade situation, in a market with imports, consumer surplus is larger, producer surplus is smaller, and total surplus is larger with free international trade.
When the world price of a good is higher than the price that balances domestic demand and supply, a country gains by increasing production and exporting the good.
Comparative advantage drives international trade.When the world price of a good is lower than the price that balances domestic demand and supply, a country gains by decreasing production and
Watch Solutions Video: The Case Against Protection Chapter Summary Key Points
Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz
Indian steel producers are using the dumping argument:Protection is needed because foreign producers are selling steel in India at prices below the cost of production. What’s wrong with this
3. The argument is that the import quota protects the jobs of U.S. workers. The argument is flawed because the United States does not have a comparative advantage in producing sugar and so an import
2. The U.S. argument is that European producers dump steel on the U.S. market. With an import quota, U.S. steel producers will face less competition and U.S. jobs will be saved. Workers in the steel
1. The main arguments are that Japanese rice is a better quality rice and that the quota limits competition faced by Japanese farmers. The arguments are not correct. If Japanese consumers do not like
What is the argument that Indian steel producers are using to support an increase in the tariff on steel imports? What is wrong with their argument?Solutions to Practice Problems
India looks at raising duty on steel imports to 20%India’s steel imports are 58 percent higher than a year ago and the country’s steel producers have complained that cheap imports have driven
3. The United States maintains an import quota on sugar.What is the argument for this import quota? Is this argument flawed? If so, explain why.Source: The Financial Times, September 10, 2015 In the
2. The United States has, from time to time, limited imports of steel from Europe. What argument has the United States used to justify this quota? Who wins from this restriction? Who loses?
1. Japan sets an import quota on rice. California rice growers would like to export more rice to Japan. What are Japan’s arguments for restricting imports of Californian rice? Are these arguments
Explain and evaluate arguments used to justify restricting international trade.9.4
But as a worker, your self-interest might be hurt by freer access to U.S. markets for foreign producers.So as you decide how to vote, you must figure out what trade policy serves your self-interest
As a voter, you have a big stake in the politics of free trade versus protection. As a buyer, your self-interest is hurt by tariffs and quotas on imported goods. Each time you buy a $20 sweater, you
Even if you were to become a college professor, you would benefit from international trade in education services when your school admits foreign students.
People who work in the aircraft industry, for example, benefit from the huge global market for large passenger jets. Airlines from Canada to China are buying Boeing 737 and 787 aircraft as fast as
As a producer (or as a potential producer if you don’t yet have a job), you benefit from huge global markets for U.S. products.Your job prospects would be much dimmer if the firm for which you work
Look closely at the labels on the goods that you buy. Where was your computer made? Where were your shirt and your shoes made? Where are the fruits and vegetables that you buy, especially in winter,
As a consumer, you benefit from the availability of a wide range of low-cost, high-quality goods and services that are produced in other countries.
Because the gain from a tariff is large, producers have a strong incentive to incur the expense of lobbying for a tariff and against free trade. On the other hand, because each consumer’s loss is
The winners from free trade are the millions of consumers of low-cost imports, but the benefit per individual consumer is small. The losers from free trade are the producers of import-competing
Political support for international trade restrictions in the United States and most other developed countries arises from rent seeking. Rent seeking is lobbying and other political activity that
Why, despite all the arguments against protection, is international trade restricted? One reason that applies to developing nations is that the tariff is a convenient source of government revenue,
Why Is International Trade Restricted?
So the four common arguments that we’ve just considered do not provide overwhelming support for protection. They all have flaws and leave the case for free international trade a strong one.
This argument for trade restrictions is not entirely convincing. A poor country is less able than a rich one to devote resources to achieving high environmental standards. If free trade helps a poor
A new argument for protection is that many poorer countries, such as Mexico, do not have the same environmental standards that we have, and because they are willing to pollute and we are not, we
Most economies—the rich advanced economies of the United States, Japan, and Europe and the developing economies of China and Brazil—have diversified production and do not have this type of
A diversified investment portfolio is less risky than one that has “all of its eggs in one basket.” The same is true for an economy’s production. A diversified economy fluctuates less than an
Although high-wage U.S. workers are more productive, on the average, than lower-wage Mexican workers, there are differences across industries. U.S. labor is relatively more productive in some
Labor costs depend on the wage rate and the quantity a worker produces.For example, if a U.S. auto worker earns $30 an hour and produces 15 units of output an hour, the average labor cost of a unit
With the removal of protective tariffs in U.S. trade with Mexico, some people said that jobs would be sucked into Mexico and that the United States would not be able to compete with its southern
Second, imports create jobs. They create jobs for retailers that sell imported goods and for firms that service those goods. They also create jobs by creating incomes in the rest of the world, some
U.S. workers now have better-paying jobs than as shoe makers or textile workers because other export industries have expanded and created more jobs than have been destroyed.
First, free trade does cost some jobs, but it also creates other jobs. It brings about a global rationalization of labor and allocates labor resources to their highest-valued activities. Because of
Few shoe factories remain in the United States and manufacturing jobs have been lost …
When Americans buy imported goods such as shoes from Brazil, U.S.workers who produce shoes lose their jobs. With no earnings and poor prospects, these workers become a drain on welfare and spend
Four Newer Arguments for Protection Four newer and commonly made arguments for restricting international trade are that protection Saves jobs Allows us to compete with cheap foreign labor Brings
The three arguments for protection that we’ve just examined have an element of credibility. The counterarguments are in general stronger, so these arguments do not make the case for protection.
Third, if a good or service were a truly global natural monopoly, the best way to deal with it would be by regulation—just as in the case of domestic monopolies. Such regulation would require
Even if all the domestic firms were driven out of business in some industry, it would always be possible to find several and usually many alternative foreign sources of supply and to buy at prices
But there are powerful reasons to resist the dumping argument for protection. First, it is virtually impossible to detect dumping because it is hard to determine a firm’s costs. As a result, the
NAFTA, and CAFTA and is regarded as a justification for temporary tariffs. Consequently, anti-dumping tariffs have become important in today’s world.
Whatever its source, dumping is illegal under the rules of the WTO,
Subsidies are very common in almost all countries. The United States and the European Union subsidize the production of many agricultural products and dump their surpluses on the world market. This
Subsidy A subsidy is a payment by the government to a producer. A firm that receives a subsidy is able to sell profitably for a price below cost.
When the domestic firms have gone, the foreign firm takes advantage of its monopoly position and charges a higher price for its product. The higher price will attract new competitors, which makes it
Predatory Pricing A firm that engages in predatory pricing sets its price below cost in the hope that it can drive its competitors out of the market.If a firm in one country tries to drive out
Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production. You might be wondering why a firm would ever want to sell any of its output at a price below the
Historical evidence is against the protection of infant industries.Countries in East Asia that have not given such protection have performed well. Countries that have protected infant industries, as
The Infant-Industry Argument The infant-industry argument is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The argument
First, it is an argument for international isolation, for in a time of war, there is no industry that does not contribute to national defense. Second, if the case is made for boosting the output of a
The national security argument is that a country must protect industries that produce defense equipment and armaments and those on which the defense industries rely for their raw materials and other
9.4 The Case Against Protection For as long as nations and international trade have existed, people have debated whether free international trade or protection from foreign competition is better for
Click here to open your MyEconLab Study Plan and work these interactive problems online.Key Terms Quiz Watch Solutions Video: International Trade Restrictions Watch Concept Video: The Case Against
Removing trade barriers on milk and beef will raise the price at which U.S. farmers can sell each item and exports will increase.U.S. farmers will gain and U.S. consumers will lose. Removing U.S.
3. With an import quota, the price of tomatoes in the United States would rise and the quantity bought would decrease. Consumer surplus would decrease. Growers would receive a higher price, produce a
2. The quantity of U.S. exports to Mexico has increased and the U.S. government’s tariff revenue from trade with Mexico has fallen.
1. The price that U.S. consumers pay for goods imported from Mexico has fallen and the quantity of U.S. imports from Mexico has increased. The winners are U.S.consumers of goods imported from Mexico
U.S. exports and imports and who in the United States will gain and lose from the TPP.Solutions to Practice Problems
Explain how the changes described in the news clip will change
3. Suppose that this year, tomato growers in Florida lobby the U.S. government to impose an import quota on Mexican tomatoes. Explain who, in the United States, would gain and who would lose from
2. Explain how the quantity of U.S. exports to Mexico and the U.S. government’s tariff revenue from trade with Mexico have changed.
1. Explain how the price that U.S. consumers pay for goods imported from Mexico and the quantity of U.S. imports from Mexico have changed. Who, in the United States, are the winners and losers from
9.3 Explain the effects of international trade barriers.
Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA.U.S. tariffs on imports
T5\6.RP[[[[An export subsidy is a payment by the government to the producer to cover part of the cost of production that is exported. The U.S. and European Union governments subsidize farm products.
A voluntary export restraint is like a quota allocated to a foreign exporter of the good. A voluntary export restraint decreases imports just like an import quota does, but the foreign exporter gets
Thousands of detailed health, safety, and other regulations restrict international trade. For example, U.S. food imports are examined by the Food and Drug Administration to determine whether the food
You can now see the one difference between an import quota and a tariff.A tariff brings in revenue for the government while an import quota brings a profit for the importer. All the other effects are
The third part of the loss of consumer surplus is a transfer to no one: it is a deadweight loss. Consumers buy a smaller quantity at a higher price. The two gray areas labeled D represent this loss
Watch The Winners and Losers from an Import Quota The decrease in consumer surplus divides into three parts. First, some of the consumer surplus is transferred to producers. The blue area B
Figure 9.8 The Winners and Losers from an Import Quota The world price of a T-shirt is $5. With free trade, 1 the United States imports 40 million T-shirts. 2 Consumer surplus, 3 producer surplus,
9.8(b) with Figure 9.8(a) , you can see how an import quota of 10 million T-shirts changes the surpluses. Producer surplus—the blue area—increases by the area labeled B. The increase in producer
U.S. consumers lose more than U.S. producers and importers gain.Figure 9.8 compares the gains from trade under free trade with those under a quota. Figure 9.8(a) shows the consumer surplus and
An import quota creates winners and losers that are similar to those of a tariff but with an interesting difference. When the government imposes an import quota, U.S. producers of the good gain.U.S.
Watch The Effects of an Import Quota Figure 9.7(a) shows the situation with free international trade. Figure 9.7(b) shows what happens with a quota that limits imports to 10 million T-shirts a year.
The effects of an import quota are similar to those of a tariff. The price rises, the quantity bought decreases, and the quantity produced in the United States increases. Figure 9.7 illustrates the
Quotas enable the government to satisfy the self-interest of people who earn their incomes in import-competing industries. You will see that like a tariff, a quota on imports decreases the gains from
An import quota is a quantitative restriction on the import of a good that limits the maximum quantity of a good that may be imported in a given period. The United States imposes import quotas on
Let’s now look at the second tool for restricting trade: quotas.Watch Concept Video: Import Quotas Import Quotas
The decrease in consumer surplus divides into three parts. First, some of the consumer surplus is transferred to producers. The blue area B represents this loss of consumer surplus (and gain of
Figure 9.6 The Winners and Losers from a Tariff The world price of a T-shirt is $5. With free trade, 1 the United States imports 40 million T-shirts. 2 Consumer surplus, 3 producer surplus, and 4 the
surplus and producer surplus with free international trade in T-shirts. The dark green area is the increase in total surplus that comes from free international trade. By comparing Figure 9.6(b) with
U.S. Consumers of the Good Lose Because the price of a T-shirt in the United States rises, the quantity of T-shirts demanded decreases. The combination of a higher price and smaller quantity bought
A tariff on an imported good creates winners and losers. When the U.S.government imposes a tariff on an imported good, U.S. producers of the good gain.U.S. consumers of the good lose.U.S. consumers
in Imports T-shirt imports decrease by 30 million from 40 million to 10 million a year. Both the decrease in purchases and the increase in domestic production contribute to this decrease in
Decrease in Purchases The higher price of a T-shirt brings a decrease in the quantity demanded, which Figure 9.5(b) shows as a movement along the demand curve from 60 million T-shirts at $5 a T-shirt
Rise in Price of a T-Shirt To buy a T-shirt, Americans must pay the world price plus the tariff, so the price of a T-shirt rises by $2 to $7. Figure 9.5(b) shows the new domestic price line, which
Figure 9.5(a) is the same as Figure 9.1(b) and shows the situation with free international trade. The United States produces 20 million T-shirts and imports 40 million T-shirts a year at the world

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