Book: Chapter 18

Question 1

consumption possibilities curve

Answer 1

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Question 2

import quota

Answer 2

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Question 3

price discrimination

Answer 3

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Question 4

dumping

Answer 4

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Question 5

infant industries

Answer 5

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Question 6

tariff

Answer 6

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Question 7

General Agreement on Tariffs and

Trade (GATT)

Answer 7

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Question 8

learning by doing

Answer 8

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Question 9

terms of trade

Answer 9

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Question 10

outsourcing

Answer 10

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Question 11

voluntary export restraint (VER)

Answer 11

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Question 12

import licenses

Answer 12

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Question 13

predatory pricing

Answer 13

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Question 14

World Trade Organization (WTO)

Answer 14

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Question 15

A country has a comparative advantage if it has a lower

cost of producing a good.

Answer 15

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Question 16

The terms of trade is the rate at which two goods can
be
for one another.

Answer 16

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Question 17

Suppose a country has a comparative advantage in
shirts but not computer chips. Workers in the chip
industry will be
with trade.

Answer 17

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Question 18

Countries will always export the goods in which they
have absolute advantage.
(True/False)

Answer 18

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Question 19

Finding Comparative Advantage. In one minute,
Country B can produce either 1,000 TVs and no
computers or 500 computers and no TVs. Similarly,
in one minute Country C can produce either 2,400
TVs or 600 computers.
a. Compute the opportunity costs of TVs and
computers for each country. Which country has a
comparative advantage in producing TVs? Which
1.6
1.7
country has a comparative advantage in producing
computers?
b. Draw the production possibilities curves for the
two countries.

Answer 19

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Question 20

Benefits from Trade. In Country U, the opportunity
cost of a computer is 10 pairs of shoes. In Country
C, the opportunity cost of a computer is 100 pairs
of shoes.
a. Suppose the two countries split the difference
between the willingness to pay for computers and
the willingness to accept computers. Compute the
terms of trade, that is, the rate at which the two
countries will exchange computers and shoes.
b. Suppose the two countries exchange one computer
for the number of shoes dictated by the terms of
trade you computed in part (a). Compute the net
benefit from trade for each country.

Answer 20

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Question 21

Measuring the Gains from Trade. Consider two
countries, Tableland and Chairland, each capable of producing tables and chairs. Chairland can produce
the following combinations of chairs and tables:
All chairs and no tables: 36 chairs per day
All tables and no chairs: 18 tables per day
Tableland can produce the following combinations of
chairs and tables:
All chairs and no tables: 40 chairs per day
All tables and no chairs: 40 tables per day
In each country, there is a fixed trade-off of tables
for chairs.
a. Draw the two production possibilities curves,
with chairs on the vertical axis and tables on the
horizontal axis.
b. Suppose each country is initially self-sufficient
and divides its resources equally between the two
goods. How much does each country produce
and consume?
c. Which country has a comparative advantage in
producing tables? Which country has a comparative
advantage in producing chairs?
d. If the two countries split the difference between the
buyer’s willingness to pay for chairs and the seller’s
willingness to accept, in terms of chairs per table,
what are the terms of trade?
e. Draw the consumption possibilities curves.
f. Suppose each country specializes in the good
for which it has a comparative advantage, and it
exchanges 14 tables for some quantity of chairs.
Compute the consumption bundles— bundles mean
the consumption of tables and chairs—for each
country.

Answer 21

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Question 22

Who Benefits in the Short Run? Suppose a country
is about to open its markets for trade. In the short run,
would you rather be employed in an industry with a
comparative advantage or a comparative disadvantage?
What about in the long run?

Answer 22

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Question 23

If a country bans the importation of a particular good,
the market equilibrium is shown by the intersection of
the
curve and the
curve.

Answer 23

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Question 24

The equilibrium price under an import quota is
(above/below) the price that occurs with
an import ban and
(above/below) the
price that occurs with free trade.

Answer 24

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Question 25

From the perspective of the government, a

(tariff/quota) is better.

Answer 25

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Question 26

Threatening to impose a tariff on a country’s exports
if it doesn’t open up its markets to trade is an example of a
policy.

Answer 26

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Question 27

Incentives for Smuggling. If a country bans imports,
smugglers may try to penetrate its markets. Suppose
Chipland bans shirt imports, causing some importers
to bribe customs officials who “look the other way”
as smugglers bring shirts into the country. Your job
is to combat shirt smuggling. Use the information
in Figure 18.3 on page 369 to answer the following
questions:
a. Suppose importers can sell their shirts on the world
market at a price of $12 per shirt. How much is an
importer willing to pay to get customs officials to
look the other way?
b. What sort of change in trade policy would make
your job easier?

Answer 27

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Question 28

Tariffs on Computer Chips. Suppose a country
imposed tariffs on computer chips to protect its chip-
making industries. What other types of firms in that
economy might object to this policy?

Answer 28

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Question 29

Tariffs and the Poor. Historically, apparel and
textiles were subject to high tariffs. Explain why this
might hurt low-income consumers more than high-
income consumers. (Related to Application 1 on
page 372.)

Answer 29

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Question 30

Auctioning Import Licenses. In the text we explained
that tariffs can be set to have the same effects as import
quotas. However, if the government gives import licenses
to producers, it will not collect any revenues. Suppose the
government auctions the import licenses to the highest
bidders. How will the revenue from the auction compare
to the revenue raised by tariffs?

Answer 30

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Question 31

The
industry argument is often given to
provide a rationale for tariffs for new firms.

Answer 31

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Question 32

Knowledge gained during production is known as

by doing.

Answer 32

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Question 33

If only one firm can exist in a market, a government
may try to subsidize the firm so that the country can
share in the
profits.

Answer 33

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Question 34

In the 1950s and 1960s, countries in
used tariffs and other policies to nurture domestic
industries.

Answer 34

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Question 35

Learning by Doing? An industry has been operating
for 10 years under protection. The government wants
to remove the trade protection, but the industry
claims that it needs the protection because of learn-
ing by doing. Evaluate its claim. Can you think of a
circumstance where it could be true?

Answer 35

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Question 36

Two Countries Fighting over Airplane Production.
Suppose there are monopoly profits in the production
of airplanes, but two countries are each determined to capture the industry. When one country subsidizes its
domestic firm, the other country matches the tactic.
As a result, both firms stay in business. Who gains
and who loses? Consider the effects on the firms,
consumers, and taxpayers.

Answer 36

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Question 37

Why the Pace of Imports May Matter. If it rains
very hard during a major storm, the drains in the
streets may not be able to handle all the water and
flooding will temporarily occur. Use this analogy to
explain why the pace of imports into a community
may be important in the short run for economic
adjustment. (Related to Application 2 on page 374 ).

Answer 37

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Question 38

Protection for Candle Makers. In a famous tale, the
French economist Frédéric Bastiat (1801–1850) wrote
a fake petition for relief from trade for the candle
makers. They were complaining that the sun was
hurting their business. What lesson do you draw from
this tale?

Answer 38

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Question 39

The latest trade round is called the

round.

Answer 39

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Question 40

The
was formed in 1995 to oversee
GATT.

Answer 40

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Question 41

NAFTA is a free-trade agreement between the United
States, Mexico, and
.

Answer 41

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Question 42

The average tariff rate in the United States is roughly

percent.

Answer 42

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Question 43

A Major Change in U.S. Trade Policy? In
Chapter 7 of the 2006 Economic Report of the President
( www.gpoaccess.gov/eop/download.html ), the
authors of the report discuss the important changes
that occurred in 1934 under the Reciprocal Trade
Agreements Act. They contend that it began to move
the United States to a policy of more open trade after
the Smoot−Hawley tariffs. Identify the key changes
enacted in 1934.

Answer 43

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Question 44

Expansion in the European Union. When the
EU originated, member countries generally had
similar standards of living. However, with the most
recent expansion of the EU, countries that were less
developed joined the developed countries. What
implications might the entry of the new countries
have for wage inequality within the more established
European countries?

Answer 44

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Question 45

Trade in Intellectual Property. Trade in
international property (for example, patents,
licenses, royalty agreements) has been particularly
controversial. Go to the intellectual property section
of the WTO’s Web site ( http://www.wto.org/ english/
tratop_e/trips_e/trips_e.htm ) and explore some of its case studies. Do developing countries, as well as
developed countries, have an interest in protecting
intellectual property?

Answer 45

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Question 46

Pricing below production cost or selling at prices in
foreign markets less than those in domestic markets is
known as
.

Answer 46

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Question 47

Under global trade rules, the United States was
allowed to ban Mexican tuna because Mexico
used fishing nets that killed dolphins.
(True/False)

Answer 47

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Question 48

Suppose the United States has a comparative advantage
in goods that use skilled labor. If we trade with a
country that has a comparative advantage in goods
using unskilled labor, the wage differences between
skilled and unskilled labor in the United States will
.

Answer 48

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Question 49

Under a scheme of
pricing, a firm cuts
its price to drive out rivals and then raises its price
later.

Answer 49

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Question 50

Trade in Genetically Modified Crops. Suppose
the residents of a country become fearful of using
genetically modified crops in their food supply.
Consider the following two possible scenarios:
a. Aware of consumer sentiment, the largest
supermarket chains in the country vow they will
not purchase food products that use genetically
modified crops.
b. The government, aware of voter sentiment during
an election year, bans the import of the food prod-
ucts that use genetically modified crops.
In both cases, no genetically modified crops enter
the country. Does either of these cases run afoul of
WTO policies?

Answer 50

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Question 51

Blinder versus Bhagwati on Outsourcing of
Services. In an essay in the journal Foreign Affairs ,
Princeton economist Alan Blinder warned that
the United States potentially faces great dangers
from outsourcing of services. Columbia economist
Jagdish Bhagwati was highly skeptical of this
argument. Read both articles and come to your own
assessment. The Blinder article, “Offshoring: The
Next Industrial Revolution,” Foreign Affairs , March/
April 2006, is available at http://www.foreignaffairs.
com/articles/61514/alan-s-blinder/offshoring-the-
next-industrial- revolution (Accessed October 29,
2012) . The Bhagwati article, “Don’t Cry for Free
Trade,” New York: Council of Foreign Relations,
October 15, 2007, is available at http://www.cfr.
org/trade/dont-cry-free-trade/p14526 (Accessed
October 29, 2012) .

Answer 51

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Question 52

A Dumping Calculation. To produce 100 units of
a good, a firm needs $40,000 in labor, $60,000 in
material and capital cost, and requires a 10 percent
profit rate. What would be the hypothetical price
calculated for this firm? Suppose the profit rate was
20 percent—how would the price change? (Related to
Application 3 on page 376 .)

Answer 52

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Question 53

To Whom Should China Be Compared? Under
U.S. dumping rules, China is classified as a non-
market economy so other market economies are
used to calculate prices for dumping. Until recently,
China was compared to India, but now it is compared
to Thailand. Using Thailand rather than India as a
comparison country was one of the key reasons that
5.9
China was found to be dumping solar panels. Why
does the choice of country matter?

Answer 53

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Question 54

What Do the Poor and the Rich Buy? In
Application 4, we highlighted research showing that
the nondurable goods the poor buy have gone up in
price less than those purchased by the rich and that
the poor buy a higher percentage of newer goods
than the rich. Can you give some examples of these
price differences from your experience at normal
and upscale supermarkets? Visit a couple of same-
industry stores such as Walmart and Whole Foods to
collect data if necessary. (Related to Application 4 on
page 379.)

Answer 54

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