Questions and Answers of International Trade

Why does the United States export agricultural products and airplanes?LO.1
What country has the most capital (i.e., factories) as compared with its GDP?LO.1
How does trade affect the earnings of labor and capital?LO.1
Discovering Data In this problem you will learn how to download data for U.S.export and imports for highly disaggregated products. Suppose that you are hired by a company that wants to start
This problem uses the Heckscher–Ohlin model to predict the direction of trade.Consider the production of handmade rugs and assembly line robots in Canada and India.a. Which country would you expect
Leontief’s paradox is an example of testing a trade model using actual data observations. If Leontief had observed that the amount of labor needed per $1 million of U.S. exports was 100
Using the information in the chapter, suppose Home doubles in size, while Foreign remains the same size. Show that an equal proportional increase in capital and labor in Home will change the relative
Suppose when Japan opens to trade, it imports rice, a labor-intensive good.a. According to the Heckscher–Ohlin theorem, is Japan capital-abundant or labor-abundant? Briefly explain.b. What is the
Following are data for soybean yield, production, and trade for 2010–2011:Suppose that the countries listed in the table are engaged in free trade and that soybean production is
According to the standard Heckscher–Ohlin model with two factors (capital and labor) and two goods, the movement of Turkish migrants to Germany would decrease the amount of capital-intensive
Understand how a mobile factor will respond to price changes by moving across sectors. LO.1
Explain why trade will generate both winners and losers in the short run. LO.1
Understand the meaning of gains from trade when there are losers. LO.1
Discuss the reasons why trade is a politically contentious issue. LO.1
Explain the arguments in favor of free trade despite the existence of losers. LO.1
An economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depend on
The marginal product of labor curves corresponding to the production functions in problem 2 are as follows:Workers Employed MPL in Sector 1 MPL in Sector 2 10 1.51 1.59 20 1.14 1.05 30 1.00 .82 40
In Home and Foreign, there are two factors each of production, land, and labor used to produce only one good. The land supply in each country and the technology of production are exactly the same.
Using the numerical example in problem 5, assume now that Foreign limits immigration so that only two workers can move there from Home. Calculate how the movement of these two workers affects the
Studies of the effects of immigration into the United States from Mexico tend to find that the big winners are the immigrants themselves. Explain this result in terms of the example in problem 6. How
Which regions of the world trade the most, and which trade the least?LO.1
How does international trade today differ from trade in the past?LO.1
How does the movement of companies and people around the world compare with the movement of goods and services?LO.1
Discovering Data In this question, you are asked to update the numbers for world trade that are shown in Table 1-1.a. Go to the World Trade Organization’s website at http://www.wto.org, and look
Explain what each of the following terms means, and describe one example from this chapter in which each term is used.a. Bilateral trade balanceb. Trade embargoc. Free trade aread. Import quotae.
Find online press reports dealing with immigration issues in Europe and in the United States. Summarize the issues being discussed in each case.LO.1
Why do countries export and import similar goods?LO.1
How much do consumers benefit from having products available from many countries?LO.1
Do all firms gain from having access to larger markets?LO.1
Discovering Dataa. Of two products, rice and paintings, which do you expect to have a higher index of intra-industry trade?Why?b. Access the U.S. TradeStats Express website at
Explain how increasing returns to scale in production can be a basis for trade.LO.1
Why is trade within a country greater than trade between countries?LO.1
Our derivation of the gravity equation from the monopolistic competition model used the following logic:i. Each country produces many products.ii. Each country demands all of the products that every
What evidence is there that Canada is better off under the free-trade agreement with the United States?LO.1
In the section “Gains and Adjustment Costs for the United States Under NAFTA,”we calculated the lost wages of workers displaced because of NAFTA. Prior experience in the manufacturing sector
Why do governments sometimes apply a tariff on imported goods?LO.1
Why does the World Trade Organization try to reduce the use of tariffs?LO.1
If the quantity of imports is restricted by a quota, how is that different from using a tariff?LO.1
Discovering Data At the opening of this chapter, we referred to the events of May 1995, when the United States considered putting tariffs on imports of luxury cars from Japan. Specifically, on May
Consider a small country applying a tariff t to imports of a good like that represented in Figure 8-5.a. Suppose that the country decides to reduce its tariff to t′. Redraw the graphs for the Home
Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9. How does the size of the terms-of-trade gain compare with the size of the deadweight loss when
Why did President George W. Bush suspend the U.S. tariffs on steel 17 months ahead of schedule?LO.1
No U.S. tire producers joined in the request for the tariff on tires in 2009. Rather, the petition for a tariff on tires imported from China was brought by the United Steelworkers of America, the
Consider a small country applying a tariff t as in Figure 8-5. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota
Consider the following hypothetical information pertaining to a country’s imports, consumption, and production of T-shirts following the removal of the MFA quota:With MFA Without MFA (Free
Suppose that a producer in China is constrained by the MFA to sell a certain number of shirts, regardless of the type of shirt. For a T-shirt selling for $2.00 under free trade, the MFA quota leads
Distinguish between international and domestic economic issues.LO.1
Explain why seven themes recur in international economics and discuss their significance.LO.1
Distinguish between the trade and monetary aspects of international economics.LO.1
The Ricardian model. Production possibilities are determined by the allocation of a single resource, labor, between sectors. This model conveys the essential idea of comparative advantage but does
The specific factors model. This model includes multiple factors of production, but some are specific to the sectors in which they are employed. It also captures the short-run consequences of trade
The Heckscher-Ohlin model. The multiple factors of production in this model can move across sectors. Differences in resources (the availability of those factors at the country level) drive trade
Understand how the components of the standard trade model, production possibilities frontiers, isovalue lines, and indifference curves fit together to illustrate how trade patterns are established by
Recognize how changes in the terms of trade and economic growth affect the welfare of nations engaged in international trade. LO.1
Understand the effects of tariffs and subsidies on trade patterns and the welfare of trading nations and on the distribution of income within countries. LO.1
Relate international borrowing and lending to the standard trade model, where goods are exchanged over time. LO.1
Singapore and Korea are somewhat similar in adopting eco-innovation policies:both are highly innovative economies, with similar patterns of comparative advantage in producing eco-friendly goods and
Suppose Country X subsidizes its exports and Country Y imposes a “countervailing”tariff that offsets the subsidy’s effect, so that in the end, relative prices in Country Y are unchanged. What
Explain the analogy between international borrowing and lending and ordinary international trade. LO.1
Understand how internal economies of scale and product differentiation lead to international trade and intra-industry trade. LO.1
Recognize the new types of welfare gains from intra-industry trade. LO.1
Describe how economic integration can lead to both winners and losers among firms in the same industry. LO.1
Explain why economists believe that “dumping” should not be singled out as an unfair trade practice and why the enforcement of antidumping laws leads to protectionism. LO.1
Explain why firms that engage in the global economy (exporters, outsourcers, multinationals) are substantially larger and perform better than firms that do not interact with foreign markets. LO.1
Understand theories that explain the existence of multinationals and the motivation for foreign direct investment across economies. LO.1
Trade need not be the result of comparative advantage. Instead, it can result from increasing returns or economies of scale, that is, from a tendency of unit costs to be lower with larger output.
Economies of scale internal to firms lead to a breakdown of perfect competition;models of imperfect competition must be used instead to analyze the consequences of increasing returns at the level of
In monopolistic competition, an industry contains a number of firms producing differentiated products. These firms act as individual monopolists, but additional firms enter a profitable industry
International trade allows for the creation of an integrated market that is larger than any one country’s market. As a result, it is possible to simultaneously offer consumers a greater variety of
When firms differ in terms of their performance, economic integration generates winners and losers. The more productive (lower-cost) firms thrive and expand, while the less productive (higher-cost)
In the presence of trade costs, markets are no longer perfectly integrated through trade. Firms can set different prices across markets. These prices reflect trade costs as well as the level of
Dumping occurs when a firm sets a lower price (net of trade costs) on exports than it charges domestically. A consequence of trade costs is that firms will feel competition more intensely on export
Some multinationals replicate their production processes in foreign facilities located near large customer bases. This is categorized as horizontal foreign direct investment(FDI). An alternative is
Some multinationals break up their production chain and perform some parts of that chain in their foreign facilities. This is categorized as vertical foreign direct investment (FDI). One alternative
Multinational firms and firms that outsource parts of production to foreign countries take advantage of cost differences across production locations. This is similar to models of comparative
In perfect competition, firms set price equal to marginal cost. Why can’t firms do this when there are internal economies of scale? LO.1
Suppose the two countries we considered in the numerical example on pages 208–212 were to integrate their automobile market with a third country and a fourth country, which have an annual market
Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are $7.5 billion and that variable costs are equal to $20,000 per finished
Go back to the model with firm performance differences in a single integrated market (pp. 206–208). Now assume a new technology becomes available. Any firm can adopt the new technology, but its use
If there are internal economies of scale, why would it ever make sense for a firm to produce the same good in more than one production facility? LO.1
Consider the example of industries in problem 9. What would those choices imply for the extent of intra-firm trade across industries? That is, in what industries would a greater proportion of trade
What are reasons for countries to trade?LO.1
Will the country that is best at producing a good always export it?LO.1
How can countries compete with low-wage exporters, like China?LO.1
Discovering Data In this problem you will use the World Development Indicators (WDI) database from the World Bank to compute the comparative advantage of two countries in the major sectors of gross
Suppose that each worker in Home can produce two cars or three TVs. Assume that Home has four workers.a. Graph the production possibilities frontier for Home.b. What is the no-trade relative price of
Suppose that each worker in Foreign can produce three cars or two TVs. Assume that Foreign also has four workers.a. Graph the production possibilities frontier for Foreign.b. What is the no-trade
Suppose that in the absence of trade, Home consumes two cars and nine TVs, while Foreign consumes nine cars and two TVs. Add the indifference curve for each country to the figures in Problems 3 and
Label the production possibilities frontier(PPF), indifference curve (U1), and the no-trade equilibrium consumption and production for each country.LO.1
Now suppose the world relative price of cars is PC/PTV = 1.a. In what good will each country specialize? Briefly explain why.b. Graph the new world price line for each country in the figures in
Assume that Home and Foreign produce two goods, TVs and cars, and use the information below to answer the following questions:In the No-Trade Equilibrium Home Foreign WageTV = 12 WageC = ? Wage*TV =
Which good will each country export? Briefly explain why.d. In the trade equilibrium, what is the real wage in Home in terms of cars and in terms of TVs? How do these values compare with the real
Why do some low-wage countries, such as China, pose a threat to manufacturers in industrial countries, such as the United States, whereas other low-wage countries, such as Haiti, do not?Answer
(This is a harder question.) Suppose that Home is much larger than Foreign. For example, suppose we double the number of workers in Home from 25 to 50. Then,suppose that Home is willing to export up
Do you personally gain from inexpensive imported goods?LO.1
Besides you, who gains and who loses from trade?LO.1
What government policies can help firms and workers that lose from trade?LO.1
Discovering Data In this chapter, we learned that workers displaced by import competition are eligible for compensation through the Trade Adjustment Assistance program. Firms are also eligible for
Why is the specific-factors model referred to as a short-run model?LO.1
Figure 3-7 presents wages in the manufacturing and services sectors for the period 1974 to 2014. Is the difference in wages across sectors consistent with either the Ricardian model studied in

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