Questions and Answers of International Trade

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
In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is instead a fall in that relative price.a. Starting at the no-trade
If instead of the situation given in the Work It Out problem, the price of manufacturing were to fall by 20%, would landowners or capital owners be better off? Explain. How would the decrease in the
In the specific-factors model, assume that the price of agricultural goods decreases while the price of manufactured goods is unchanged (ΔPA/PA < 0 and ΔPM/PM = 0).Arrange the following terms in
Does immigration lower wages?LO.1
Which industries expand because of immigration?LO.1
Who gains when foreign companies move in?LO.1
Discovering Data Under Headlines: Brussels Resumes Policy Push to Share Out Refugees Across EU, there is a map showing persons seeking asylum in the European Union as of May 2015. In this question,
In the short-run specific-factors model, examine the impact on a small country following a natural disaster that decreases its population. Assume that land is specific to agriculture, and capital is
How would your answer to Problem 2 change if instead we use the long-run model, with shoes and computers produced using labor and capital?LO.1
According to part A of Table 5-1, what education level loses most (i.e., has the greatest decrease in wage) from immigration to the United States? Does this result depend on keeping the rental on
Continuing from Problem 7, we now use the factor price insensitivity result to compare factor prices across countries in the Heckscher–Ohlin model.a. Illustrate the international trade equilibrium
Recall the formula from the application “The Effect of FDI on Rentals and Wages in Singapore.” Give an intuitive explanation for this formula for the rental rate. Hint:Describe one side of the
Figure 5-14 is a supply and demand diagram for the world labor market. Starting at points A and A*, consider a situation in which some Foreign workers migrate to Home but not enough to reach the
A housekeeper from the Philippines is contemplating immigrating to Singapore in search of higher wages. Suppose the housekeeper earns approximately $3,000 annually and expects to find a job in
Why do some firms shift parts of their production to other countries?LO.1
Who can gain when firms shift their production abroad?LO.1
Do countries gain overall when their firms offshore to other countries?LO.1
Discovering Data What type of occupation would you like to pursue after graduation? To see what is available, go to the Bureau of Labor Statistics website at:http://www.bls.gov/ooh/.a. Find four
Consider an offshoring model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production
Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:Components: Total costs of production = PC · QC = 200 Earnings of high-skilled
Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:Components: Total costs of production = PC · QC = 200 Earnings of high-skilled
Read the following excerpt, and using what you have learned in this chapter, discuss how offshoring creates opportunities for the countries involved.Sudhakar Shenoy, chief executive of Information
The quote from the 2004 Economic Report of the President at the beginning of the chapter generated a lot of controversy that year. The chairman of the Council of Economic Advisers, N. Gregory Mankiw,
Why might it be relatively easier for a developing country like India to export service activities through offshoring than to participate in the global economy by producing manufacturing
It is widely noted that even though China is the favored destination for manufacturing offshoring, it is far behind India in the business of offshored services.What differences between these two
Chinese hourly manufacturing wages have increased by 12% per year on average since 2001, which is much higher than wage growth in developed or other developing countries. How will this wage growth in
Can governments use trade policy to give home firms a strategic advantage in their markets?LO.1
Why would foreign firms dump their products by exporting them at a price below their costs?LO.1
Is there an argument for using infant industry protection, and has it worked in practice?LO.1
Discovering Data Figures A, B, and C (see the next page) are taken from Chad Bown: “The Pattern of Antidumping and Other Types of Contingent Protection”(World Bank, PREM Notes No. 144, October
Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the price PC) and under monopoly (with the price P M). In this problem, we compare the welfare of Home consumers in
Rank the following in descending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.a. Tariff t in a small country with perfect competitionb.
Refer to the prices of Japanese auto imports under the VER (Figure 9-5) and answer the following:a. What component of the price of imported automobiles from Japan rose the most over the period 1980
Suppose that the demand curve for a good is represented by the straight line P = 20 – 2Q Fill in the missing information in the following chart:Quantity Price Total Revenue Marginal Revenue 0 NA 12
Suppose the Home firm is considering whether to enter the Foreign market. Assume that the Home firm has the following costs and demand:Fixed costs = $100 Marginal costs = $15 per unit Local price =
Why is it necessary to use a market failure to justify the use of infant industry protection?LO.1
What is a positive externality? Explain the argument of knowledge spillovers as a potential reason for infant industry protection.LO.1

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