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.