Solutions for Chapter 17, International Trade
Concept Problems
1. Trade between two countries leads each to specialize in the good in which it has a
comparative advantage. Taken together, the two countries can produce a greater quantity
of each good and then, through trade, each may end up consuming an amount of both goods
that is beyond its production possibilities curve.
2. The reasons a country might impose restrictions on international trade include the infant
industry argument, strategic trade policy, the national security argument, the job
protection argument, the cheap foreign labor argument, the retaliation against dumping
argument, and the environmental standards argument.
3. A tariff is a tax on imported goods and services, but the quantity is otherwise not
restricted. A quota differs in that it is a direct restriction on the total quantity of a good or
service that may be imported.
4. The argument in the text suggests that it is the result in large part of an atmosphere of
innovation. Another factor might be that U.S. firms are relatively less efficient in high-
volume, standardized production.
5. The lawyer, who is clearly allowing resources to be used according to their comparative
advantage. (The only exception here would occur if the secretary were making more than
50 percent of the lawyer’s salary. In that case, the lawyer may want to look for a faster
typist.)
6. The beneficiaries of a tariff on shoes are the owners of capital, labor, and natural
resources employed in the U.S. shoe-manufacturing industry. The losers include foreign
producers and people who buy shoes.
7. A protected industry, by definition, is producing a greater level of output than is
warranted by supply and demand. Resources used in the production of protected goods,
therefore, are not used in the production of other goods and services that have higher
value. The economy is forced to operate at a point on the production possibilities curve that
is not the highest valued combination.
8. People in Kansas buy most of their tomatoes from other states because those other states
have a comparative advantage in tomato growing. Kansas is even better suited to growing
crops such as corn, which increases its cost of producing tomatoes.
9. Two-way trade in the same goods may arise from variations in transportation costs and
seasonal influences. Two-way trade in similar goods is often the result of imperfect
competition and product differentiation.
10. Domestic copper producers, and suppliers of metals that compete with copper, would
be helped. Copper consumers would be hurt.
,11. If taken literally, it represents a plan to eliminate comparative advantage. That would
destroy the fundamental motivation for trade and thus eliminate the gains all nations
obtain from trade.
12. Differences in wage rates generally reflect differences in worker productivity. The
higher wages paid in the United States compared to the Philippines do not necessarily
mean that labor costs are higher in the United States
Numerical Problems
1.
a.
The opportunity cost of producing a unit of wheat per period in Argentina is 0.35 units of
mutton per period. The opportunity cost of producing a unit of mutton per period is 2.86
units of wheat per period.
b. The opportunity cost of producing a unit of wheat per period in New Zealand is 2.50
units of mutton per period. The opportunity cost of producing a unit of mutton per period
in New Zealand is 0.40 units of wheat per period.
c. Argentina has a comparative advantage in the production of wheat since for Argentina
the opportunity cost of producing wheat is lower, and New Zealand has a comparative
advantage in the production of mutton since for New Zealand the opportunity cost of
producing mutton is lower.
d. Wheat production in Argentina would rise.
e. Mutton production in Argentina would fall.
f. Wheat production in New Zealand would fall. Mutton production would rise.
g. Following the new world trading line whose slope equals -1 for Argentina up and to the
left from Point B, we can find points that lie up and to the right from Point A, the original
point of consumption in Argentina. So, Argentina ends up with more of both goods.
,Similarly, we can follow the world trade line for New Zealand down into the right from
Point D and find points that lie above and to the right of Point C, the original point of
consumption in New Zealand. So, New Zealand also ends up consuming more of both goods.
2.
Here is one possible solution, with Argentina shipping 75 units of wheat to New Zealand in
exchange for 75 units of mutton. Argentina moves to point S, and New Zealand moves to
point T. Any trade involving more than 60 and less than 100 units of the two goods will
leave both countries with more of both goods.
3.
a. The market is likely to be characterized by two-way trade because of product
differentiation in the market for radios.
b. Marginal cost for producing radios in Country A will rise by $5 per radio per period. The
price of radios in Country A will rise, but by less than $5 in the short run. Because of
, product differentiation, Country A can be expected to continue to produce and export
radios.
c.
The $5 tax causes the marginal cost curve to shift up from MC1 to MC2 and the profit-
maximizing number of radios to fall from q1 to q2. The tax also causes the ATC to increase
from ATC1 to ATC2, which means that some firms would be incurring economic losses as
shown. The price rises in Country A to P2, which is less than a $5 price increase in the short
run.
d.
In the long run, as some firms close, the demand curve faced by the typical remaining firm
will shift to the right from D1 to D2. There will be a corresponding shift in marginal revenue
from MR1 to MR2. Price will increase further from P2 to $30, that is, by the full amount of
the tax. Note that output would increase from q2 to q3. In the new long-run equilibrium,
firms will again be earning zero economic profit.
4.
Concept Problems
1. Trade between two countries leads each to specialize in the good in which it has a
comparative advantage. Taken together, the two countries can produce a greater quantity
of each good and then, through trade, each may end up consuming an amount of both goods
that is beyond its production possibilities curve.
2. The reasons a country might impose restrictions on international trade include the infant
industry argument, strategic trade policy, the national security argument, the job
protection argument, the cheap foreign labor argument, the retaliation against dumping
argument, and the environmental standards argument.
3. A tariff is a tax on imported goods and services, but the quantity is otherwise not
restricted. A quota differs in that it is a direct restriction on the total quantity of a good or
service that may be imported.
4. The argument in the text suggests that it is the result in large part of an atmosphere of
innovation. Another factor might be that U.S. firms are relatively less efficient in high-
volume, standardized production.
5. The lawyer, who is clearly allowing resources to be used according to their comparative
advantage. (The only exception here would occur if the secretary were making more than
50 percent of the lawyer’s salary. In that case, the lawyer may want to look for a faster
typist.)
6. The beneficiaries of a tariff on shoes are the owners of capital, labor, and natural
resources employed in the U.S. shoe-manufacturing industry. The losers include foreign
producers and people who buy shoes.
7. A protected industry, by definition, is producing a greater level of output than is
warranted by supply and demand. Resources used in the production of protected goods,
therefore, are not used in the production of other goods and services that have higher
value. The economy is forced to operate at a point on the production possibilities curve that
is not the highest valued combination.
8. People in Kansas buy most of their tomatoes from other states because those other states
have a comparative advantage in tomato growing. Kansas is even better suited to growing
crops such as corn, which increases its cost of producing tomatoes.
9. Two-way trade in the same goods may arise from variations in transportation costs and
seasonal influences. Two-way trade in similar goods is often the result of imperfect
competition and product differentiation.
10. Domestic copper producers, and suppliers of metals that compete with copper, would
be helped. Copper consumers would be hurt.
,11. If taken literally, it represents a plan to eliminate comparative advantage. That would
destroy the fundamental motivation for trade and thus eliminate the gains all nations
obtain from trade.
12. Differences in wage rates generally reflect differences in worker productivity. The
higher wages paid in the United States compared to the Philippines do not necessarily
mean that labor costs are higher in the United States
Numerical Problems
1.
a.
The opportunity cost of producing a unit of wheat per period in Argentina is 0.35 units of
mutton per period. The opportunity cost of producing a unit of mutton per period is 2.86
units of wheat per period.
b. The opportunity cost of producing a unit of wheat per period in New Zealand is 2.50
units of mutton per period. The opportunity cost of producing a unit of mutton per period
in New Zealand is 0.40 units of wheat per period.
c. Argentina has a comparative advantage in the production of wheat since for Argentina
the opportunity cost of producing wheat is lower, and New Zealand has a comparative
advantage in the production of mutton since for New Zealand the opportunity cost of
producing mutton is lower.
d. Wheat production in Argentina would rise.
e. Mutton production in Argentina would fall.
f. Wheat production in New Zealand would fall. Mutton production would rise.
g. Following the new world trading line whose slope equals -1 for Argentina up and to the
left from Point B, we can find points that lie up and to the right from Point A, the original
point of consumption in Argentina. So, Argentina ends up with more of both goods.
,Similarly, we can follow the world trade line for New Zealand down into the right from
Point D and find points that lie above and to the right of Point C, the original point of
consumption in New Zealand. So, New Zealand also ends up consuming more of both goods.
2.
Here is one possible solution, with Argentina shipping 75 units of wheat to New Zealand in
exchange for 75 units of mutton. Argentina moves to point S, and New Zealand moves to
point T. Any trade involving more than 60 and less than 100 units of the two goods will
leave both countries with more of both goods.
3.
a. The market is likely to be characterized by two-way trade because of product
differentiation in the market for radios.
b. Marginal cost for producing radios in Country A will rise by $5 per radio per period. The
price of radios in Country A will rise, but by less than $5 in the short run. Because of
, product differentiation, Country A can be expected to continue to produce and export
radios.
c.
The $5 tax causes the marginal cost curve to shift up from MC1 to MC2 and the profit-
maximizing number of radios to fall from q1 to q2. The tax also causes the ATC to increase
from ATC1 to ATC2, which means that some firms would be incurring economic losses as
shown. The price rises in Country A to P2, which is less than a $5 price increase in the short
run.
d.
In the long run, as some firms close, the demand curve faced by the typical remaining firm
will shift to the right from D1 to D2. There will be a corresponding shift in marginal revenue
from MR1 to MR2. Price will increase further from P2 to $30, that is, by the full amount of
the tax. Note that output would increase from q2 to q3. In the new long-run equilibrium,
firms will again be earning zero economic profit.
4.
