QUESTIONS AND PROBLEMS

QUESTIONS

1. What is absolute advantage? What is comparative advantage?
2. Under what conditions does comparative advantage lead to gains from trade?
3. Are differences in geography behind the differences in absolute advantages?
4. Why does the United States not have an absolute advantage in coffee?
5. Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.
6. You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?
7. You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?
8. What is intra-industry trade?  What are the two main sources of economic gains from intra-industry trade?
9. Why might intra-industry trade seem surprising from the point of view of comparative advantage?
10. What are main reasons for protecting “infant industries”? Why is it difficult to stop protecting them?
11. What is dumping? Why does prohibiting it often work better in theory than in practice?
12. What is the “race to the bottom” scenario?
13. What is the national interest argument for protectionism with regard to certain products?
14. How would direct subsidies to key industries be preferable to tariffs or quotas?
15. How can governments identify good candidates for infant industry protection? Can you suggest some key characteristics of good candidates? Why are industries like computers not good candidates for infant industry protection?
16. How do you think Americans would feel if other countries began to urge the United States to increase environmental standards?
17. Is it legitimate to impose higher safety standards on imported goods that exist in the foreign country where the goods were produced?
18. Why might the unsafe consumer products argument be a more effective strategy (from the perspective of the importing country) than using tariffs or quotas to restrict imports?
19. What is the general trend of trade barriers over recent decades: higher, lower, or about the same?
20. If opening up to free trade would benefit a nation, then why do nations not just eliminate their trade barriers, and not bother with international trade negotiations?
21. Why do you think that the GATT rounds and, more recently, WTO negotiations have become longer and more difficult to resolve?
22. Who gains and who loses from trade?
23. What are some ways that governments can help people who lose from trade?
24. You have just been put in charge of trade policy for Malawi. Coffee is a recent crop that is growing well and the Malawian export market is developing. As such, Malawi coffee is an infant industry. Malawi coffee producers come to you and ask for tariff protection from cheap Tanzanian coffee. What sorts of policies will you enact? Explain.
25. Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of $10 per phone and South Korea can produce 50 million mobile phones at $5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?
26. Are the gains from international trade more likely to be relatively more important to large or small countries?
27. Why might a low-income country put up barriers to trade, such as tariffs on imports?
28. Who does protectionism protect? From what does it protect them?
29. Name and define three policy tools for enacting protectionism.
30. How does protectionism affect the price of the protected good in the domestic market?
31. Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference, then, between the two types of trade barriers? Hint: It is not something you can see from the graph.
32. From the Work It Out “Effects of Trade Barriers,” you can see that a tariff raises the price of imports. What is interesting is that the price rises by less than the amount of the tariff. Who pays the rest of the tariff amount? Can you show this graphically?
33. Does international trade, taken as a whole, increase the total number of jobs, decrease the total number of jobs, or leave the total number of jobs about the same?
34. Is international trade likely to have roughly the same effect on the number of jobs in each individual industry?
35. How is international trade, taken as a whole, likely to affect the average level of wages?  Is international trade likely to have about the same effect on everyone’s wages?
36. If trade barriers hurt the average worker in an economy (due to lower wages), why does government create trade barriers?
37. In principle, the benefits of international trade to a country exceed the costs, no matter whether the country is importing or exporting. In practice, it is not always possible to compensate the losers in a country, for example, workers who lose their jobs due to foreign imports. In your opinion, does that mean that trade should be inhibited to prevent the losses?
38. Trade has income distribution effects. For example, suppose that because of a government-negotiated reduction in trade barriers, trade between Germany and the Czech Republic increases. Germany sells house paint to the Czech Republic. The Czech Republic sells alarm clocks to Germany. Would you expect this pattern of trade to increase or decrease jobs and wages in the paint industry in Germany? The alarm clock industry in Germany? The paint industry in Czech Republic? The alarm clock industry in Czech Republic? What has to happen for there to be no increase in total unemployment in both countries?
39. France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.
    a. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.
    b. Identify which country has the comparative advantage.
    c. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?
40. In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

a. Who has the absolute advantage in the production of rubber or radios? How can you tell?
b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?
c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?
d. In this example, does each country have an absolute advantage and a comparative advantage in the same good?
e. In what product should Japan specialize? In what product should Malaysia specialize?

41.  Review the numbers for Canada and Venezuela from [link] which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.
b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber.
c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

42. The country of Pepperland exports steel to the Land of Submarines. Information for the quantity demanded (Qd) and quantity supplied (Qs) in each country, in a world without trade, are given in Table 13.20 and Table 13.21.

1. What would be the equilibrium price and quantity in each country in a world without trade? How can you tell?
2. What would be the equilibrium price and quantity in each country if trade is allowed to occur? How can you tell?
3. Sketch two supply and demand diagrams, one for each country, in the situation before trade.
4. On those diagrams, show the equilibrium price and the levels of exports and imports in the world after trade.
5. If the Land of Submarines imposes an anti-dumping import quota of 30, explain in general terms whether it will benefit or injure consumers and producers in each country.
6. Does your general answer change if the Land of Submarines imposes an import quota of 70?

43. Economists sometimes say that protectionism is the “second-best” choice for dealing with any particular problem. What they mean is that there is often a policy choice that is more direct or effective for dealing with the problem—a choice that would still allow the benefits of trade to occur. Explain why protectionism is a “second-best” choice for:

a. helping workers as a group
b. helping industries stay strong
c. protecting the environment
d. advancing national defense