CHAPTER 21 International Trade
Test Yourself
1. (a) In the absence of trade, 1 barrel of wine costs 4 yards of cloth in England.
(b) In the absence of trade, 1 barrel of wine costs 2 yards of cloth in Portugal.
(c)
Figure 1
(d) Portugal has the absolute advantage in the production of both goods, and the comparative advantage in wine. England has the comparative advantage in cloth.
(e) When trade opens, England will specialize in cloth and export it to Portugal, which in turn will specialize in wine and export it to England.
(f) In the international market, the price of a barrel of wine will wind up somewhere between 4 yards and 2 yards of cloth, perhaps 3. Stated another way, the price of 1 yard of cloth will be between 1/2 gallon of wine and 1/4 gallon of wine.
Discussion Questions
2. The argument has to be fallacious, provided that exchange is voluntary (one of the Ideas for Beyond the Final Exam from Chapter 1), since people would not willingly enter a trade that left them worse off. Both parties to a trade benefit, since people give up goods that are worth less to them than the goods they acquire.
4. In the short run, consumers benefit because the price of sugar falls. Domestic sugar producers and their labor force are hurt in the short run, because of increased foreign competition. In the long run, however, workers will find new jobs in sectors of higher productivity. Capital that wears out in the sugar sector will not be replaced, but new capital will be developed in stronger sectors. In time, therefore, the reduction in the sugar quota will help shift the U.S. economy toward sectors that are more efficient and can generate more income.
6. This is a controversial subject. There are, however, rules for fair trade to which most countries have agreed. They prohibit government subsidies of export industries, using non-tariff barriers such as health and environmental regulations for trade protection, discriminating against imports from a country to which most-favored-nation status has been given, dumping (i.e., selling abroad at an artificially low and therefore predatory price), etc. Just because a country has run a trade surplus with the United States does not mean that it has engaged in unfair practices. Unfair trade practices are often claimed but they can be difficult to prove. for example, for price discrimination to be considered “predatory” and therefore unfair, the export market (the United States in this case) must not be contestable.
7. The point of U.S. penalties against a country guilty of unfair trade practices is to force it to abandon those practices. If it does not do so, then the United States has only hurt itself by imposing the penalties. It has less access to the imports of country X, and probably has to pay a higher price for them. Country X is hurt too, by having its access to the U.S. market reduced.
CHAPTER 22 Appendix
Test Yourself
1. (a)
Figure 2
(b) If there is no trade, in the United States the equilibrium price is $5,000 and the equilibrium quantity is 50,000 units. In Japan, the price is $1,000 and the quantity is 50,000.
(c) The new world price will be $3,000 because, at that price, world quantity demanded is 100,000 units (70,000 plus 30,000) and world quantity supplied is also 100,000 units (40,000 plus 60,000). The price of computers has fallen in the United States and risen in Japan. (Note: To arrive at the answer graphically, construct world demand and supply curves. The equilibrium will be found at a world price of $3,000.)
(d) Japan will export 30,000 computers.
(e) In the United States, computer production falls from 50,000 to 40,000, and therefore employment in the computer industry falls. In Japan, computer production rises from 50,000 to 60,000, with a consequent increase in employment. Initially, American consumers and Japanese computer producers (both employers and employees) are helped by free trade, while American computer producers and Japanese consumers are hurt.