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Microeconomics, 4e (Hubbard/O’Brien) Chapter 9 Comparative Advantage and the Gains from International Trade 9.1 The United States in the International Economy 1) U.S. firms that sell products in foreign markets protested the "Buy American" provision in the 2009 stimulus bill, arguing that if the United States restricted imports from foreign firms, A) foreign countries would likely retaliate by limiting U.S. exports. B) foreign firms would stop selling all products in the United States. C) U.S. firms would never be able to meet the increased demand for U.S.-produced goods. D) eventually the government would demand price cuts from U.S. manufacturers. 2) Workers in industries protected by tariffs and quotas are likely to support these trade restrictions because A) they do not want to offend their employers who want them. B) politicians lobby to convince workers the restrictions will make them better off. C) they believe the restrictions will protect their jobs. D) they don't understand that the restrictions will threaten their jobs. 3) The intention of the "Buy American" provision in the 2009 stimulus bill was to A) increase jobs in the United States. B) prevent foreign firms from dumping product in the United States. C) insure that products used to build roads and bridges meet U.S. quality and safety standards. D) save the government money by restricting the sale of more expensive foreign-made products. 4) In the 1930s, the United States charged an average tariff rate ________. Today, the rate is ________. A) of 100 percent; 20 percent B) above 50 percent; less than 2 percent C) of less than 10 percent; over 40 percent D) of 17 percent; 33 percent 5) A tariff is a tax imposed by a government on A) exports. B) services. C) imports. D) luxury items. Answer: C 6) Goods and services bought domestically but produced in other countries are referred to as A) exports. B) imports. C) transfer payments. D) foreign consumption. 7) Exports are domestically produced goods and services A) sold to other countries. B) sold to the government. C) sold at home. D) which are used to produce other goods and services. 8) When Roxanne, a U.S. citizen, purchases a designer dress from Barneys of New York that was made in Milan, the purchase is A) both a U.S. and an Italian import. B) a U.S. import and an Italian export. C) a U.S. export and an Italian import. D) neither an export nor an import for either country. 9) Which of the following statements about the importance of trade to the U.S. economy is true? A) Since 1950, both exports and imports have steadily decreased as a fraction of U.S. gross domestic product. B) Overall, about 80 percent of U.S. manufacturing jobs depend directly or indirectly on exports. C) The United States is the largest exporter in the world. D) The U.S. economy is highly dependent on international trade for growth in its gross domestic product. 10) In 2010, ________ of Caterpillar's sales were outside the United States. A) only 12 percent B) more than two-thirds C) less than half D) 95 percent 11) Caterpillar's sales were severely affected by the decline in the U.S. housing market that began in 2006. Sales in the United States declined by ________ between 2006 and 2008, and export sales ________ during the same time period. A) more than half; increased by enough to make 2008 a record sales year B) almost 90 percent; remained virtually unchanged C) almost 90 percent; declined by half D) more than half; declined by a similar percentage 12) Which of the following statements is true? A) Japan is more dependent on foreign trade than is the United States. B) Imports and exports account for over one-half of the GDP of Belgium. C) France is the leading exporting country, accounting for 10 percent of total world exports. D) Because the cost of labor used on farms is so high, the United States exports very little of its wheat, rice and corn crops. 13) Twenty-seven countries in Europe have eliminated all tariffs with each other. This group of countries is known as the A) European Union. B) United Federation of Europe. C) Gruppo Euro. D) European Free Trade Association. 14) NAFTA refers to a 1994 agreement that eliminated most tariffs among which countries? A) Canada, the United Kingdom and Mexico B) the United States, the United Kingdom and Mexico C) the United States, Canada and Mexico D) the United States, Mexico and Cuba 15) Today, the United States charged an average tariff rate A) that is more than its average tariff rate in 1930. B) which is greater than any other high-income country. C) of less than 2 percent. D) that exceeds 50 percent. 16) Which of the following statements is true? A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs. B) Each year China exports about 50 percent of its wheat crop and 40 percent of its rice crop. C) Most of the leading exporting countries are large, high-income countries. D) All sectors of the U.S. economy are affected equally by international trade. 17) In the United States, imports and exports make up more than half of GDP. Answer: FALSE 18) Caterpillar's sales are now greater outside the United States than inside the United States. Answer: TRUE 19) How have U.S. imports and exports, as a fraction of GDP, changed from 1950 to the present? Answer: Since 1950, both exports and imports have been steadily increasing as a fraction of GDP. In 1950, exports and imports were both about 4 percent of GDP. In 2010, exports were about 13 percent of GDP and imports were about 16 percent of GDP. 9.2 Comparative Advantage in International Trade 1) Absolute advantage is A) the ability to produce more of a good or service than competitors when using the same amount of resources. B) the ability to produce higher quality goods compared to one's competitors. C) the ability to produce a good or service at a higher opportunity cost than one's competitors. D) the ability to produce more of a good or service than competitors that have more resources. Answer: A 2) ________ is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. A) Absolute advantage B) Specialization C) Autarky D) Comparative advantage Table 9-1 Bathing Grooming Linda 60 20 Sandy 50 25 Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 9-1 lists the number of dogs Linda and Sandy can each bathe and groom in one week. 3) Refer to Table 9-1. Select the statement that accurately interprets the data in the table. A) Linda has an absolute advantage in dog bathing and Sandy has an absolute advantage in dog grooming. B) Sandy has an absolute advantage in dog bathing and Linda has an absolute advantage in dog grooming. C) Sandy has an absolute advantage in dog bathing and dog grooming. D) Linda has an absolute advantage in dog bathing and dog grooming. 4) Refer to Table 9-1. Select the statement that accurately interprets the data in the table. A) Sandy has a greater opportunity cost than Linda for dog grooming. B) Sandy's opportunity cost for dog grooming is less than Linda's. C) Linda has a greater opportunity cost than Sandy for dog bathing. D) Sandy's opportunity cost for dog grooming and dog bathing are both greater than Linda's. 5) Refer to Table 9-1. Select the statement that accurately interprets the data in the table. A) Sandy has a comparative advantage in dog grooming. B) Linda has a comparative advantage in dog grooming. C) Linda has a comparative advantage in dog grooming and dog bathing. D) Sandy has a comparative advantage in dog bathing. 6) Refer to Table 9-1. Select the statement that accurately interprets the data in the table. A) Linda has a comparative advantage in dog bathing. B) Sandy has an absolute advantage in dog bathing. C) Sandy has a comparative advantage in dog bathing. D) Linda has a comparative advantage in dog grooming and dog bathing. 7) An economic principle that explains why countries produce different goods and services is A) absolute advantage. B) trade as a percentage of GDP. C) comparative advantage. D) NAFTA. 8) Assume that China has a comparative advantage in producing corn and exports corn to Japan. We can conclude that A) China also has an absolute advantage in producing corn relative to Japan. B) China has a lower opportunity cost of producing corn relative to Japan. C) Japan has an absolute disadvantage in producing corn relative to China. D) Labor costs are higher for corn producers in Japan than in China. 9) Whenever a buyer and a seller agree to trade, A) the agreement is made based on absolute advantage. B) they must have identical opportunity costs in producing their respective products. C) one party will always be worse off. D) both must believe they will be made better off. 10) If Japanese workers are more productive than French workers then trade between Japan and France A) can take place only if France has an absolute advantage in producing a good or service Japanese buyers want. B) cannot take place because Japanese goods and services will be less expensive than French goods and services. C) cannot take place until French workers become more productive. D) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want. 11) If the opportunity cost of production for two goods is different between two countries, then A) trade cannot benefit either country. B) only one country can be made better off by trade. C) mutually beneficial trade is possible. D) trade will only benefit both countries if one can lower its opportunity costs. 12) If Canada has a comparative advantage relative to Mexico in the production of timber, then A) the explicit cost of production for timber is lower in Canada than in Mexico. B) the opportunity cost of production for timber is lower in Canada than in Mexico. C) the implicit costs of production for timber are lower in Canada than in Mexico. D) the average cost of production for timber is lower in Canada than in Mexico. 13) If Canada imports fishing poles from Mexico and Mexico imports bacon from Canada, which of the following would explain this pattern of trade? A) Mexico has a lower opportunity cost of producing bacon than Mexico and Mexico has a comparative advantage in producing fishing poles. B) The opportunity cost of producing fishing poles in Canada is higher than the opportunity cost of producing bacon in Mexico. C) Mexico must have an absolute advantage in producing fishing poles and Canada must have an absolute advantage in bacon. D) Mexico has a higher opportunity cost of producing fishing poles than Canada, and Canada has a higher opportunity cost of producing bacon. 14) The ability of a firm or country to produce a good or service at a lower opportunity cost than other producers is called absolute advantage. Answer: FALSE 15) If Estonia has an absolute advantage in the production of two goods compared to Norway, Estonia can not benefit from trade with Norway. Answer: FALSE Table 9-2 Output Per Hour of Work Handbags Jackets Cambodia 15 3 Thailand 24 6 Table 9-2 shows the output per hour of work for handbags and jackets in Cambodia and in Thailand. 16) Refer to Table 9-2. Fill in the following table with the opportunity costs of producing handbags and jackets for Cambodia and Thailand. Handbags Jackets Cambodia Thailand Answer: Handbags Jackets Cambodia 0.20 5 Thailand 0.25 4 17) Refer to Table 9-2. a.Which country has an absolute advantage in the production of handbags and jackets? b. Which country has a comparative advantage in the production of handbags? c. Which country has a comparative advantage in the production of jackets? Answer: a. Thailand has an absolute advantage in the production of both products. b. Cambodia has a comparative advantage in the production of handbags. c. Thailand has a comparative advantage in the production of jackets. 9.3 How Countries Gain from International Trade 1) A situation in which a country does not trade with other countries is called A) autarky. B) self-actualization. C) autonomy. D) independence. 2) The ratio at which a country can trade its exports for imports from other countries is called A) a trade barrier. B) the terms of trade. C) autarky. D) a free trade agreement. 3) Countries that engage in trade will tend to specialize in the production of goods and services in which they have ________ and will ________ these goods and services. A) a comparative advantage; import B) an absolute advantage; export C) a comparative advantage; export D) an absolute advantage; import 4) Examples of ________ show how trade between two countries can make each better off. A) absolute advantage B) comparative advantage C) autarky D) trade barriers 5) The first example used to explain comparative advantage used two countries (England and Portugal) and two goods (wine and cloth) to show that A) each country would be better off from trade if it had an absolute advantage in producing one of the goods. B) each country would have a comparative advantage in the production of the good for which it had an absolute advantage. C) mutually beneficial trade was possible between two countries even if one had an absolute advantage in the production of both goods. D) mutually beneficial trade was possible between two countries even if one had a comparative advantage in the production of both goods. 6) In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. One reasons for this is A) comparative advantage works better in theory than in practice. B) some countries have more resources than other countries. C) tastes for many traded goods are similar in many countries because of globalization. D) production of most goods involves increasing opportunity costs. 7) Tastes for products such as beer differ. As a result A) we see countries specializing completely in the production of beer. B) consumers of beer have difficulty deciding what type of imported beer to buy. C) the quality of imported beer is less than it could be. D) different countries may each have a comparative advantage in producing different types of beer. 8) A consequence of increasing marginal costs of producing digital music players in Japan is A) Japan will not export digital music players. B) Japan will stop short of complete specialization in the production of digital music players. C) Japan will import digital music players from countries that don't experience increasing marginal costs. D) Japan will likely impose trade restrictions on imported digital music players. 9) Which of the following statements is true? A) All individuals in both countries are made better off as a result of international trade. B) Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall. C) Although some individuals are made better off as a result of international trade, both countries may be made worse off overall. D) Each country as a whole is made better off as a result of international trade, but individuals within each country may be made worse off. 10) A Federal Reserve publication proclaimed that "Trade is a win-win situation for all countries that participate." This statement is A) false since it ignores the workers who lose their jobs as result of international trade. B) false since not all countries participate in international trade. C) true because it refers to countries; individuals may be losers as a result of international trade. D) true because all consumers and workers benefit from international trade. 11) Which of the following is not a source of comparative advantage? A) relative abundance of labor and capital B) technology C) climate and natural resources D) a strong foreign currency exchange rate 12) Japan has developed a comparative advantage in designing and producing automobiles. The source of its comparative advantage in these products is A) abundant supplies of natural resources. B) a favorable climate. C) a strong central government. D) technology. 13) China has developed a comparative advantage in the production of clothing. The source of this comparative advantage is A) a large supply of natural resources. B) a large supply of unskilled workers and relatively little capital. C) investment in capital used to produce clothing. D) superior process technology. 14) ________ refers to reductions in a firm's costs that result from an increase in the size of an industry. A) Internal economies B) External economies C) Autarkial dominance D) Streamlining 15) Once a country has lost its comparative advantage in producing a good, its income will be ________ and its economy will be ________ if it switches from producing the good to importing it. A) higher; less efficient B) higher; more efficient C) lower; less efficient D) lower; more efficient 16) Wall Street, in the borough of Manhattan in New York City, is the heart of the U.S. financial system, where banks, brokerage houses, other financial firms, and the New York Stock Exchange are all located. What is the reason for New York City's comparative advantage in the financial market? A) the development of superior information technology B) an abundant supply of skilled labor C) New York City has one of the largest sea ports in the world. D) external economies 17) The United States is a leading exporter of wheat. What explains the comparative advantage of the United States in wheat production? A) positive externalities B) investment by multinational firms such as Archer-Daniels-Midland and the Tyson Foods Inc. C) climate and soil conditions in the United States which are well-suited for wheat production D) a large supply of unskilled labor 18) In the 1970s and 1980s, the United States lost its comparative advantage in consumer electronics goods to Japan. What factor was most responsible for the development of Japan's comparative advantage in consumer electronics goods? A) Japanese firms benefited from external economies. B) Japan has abundant supplies of labor. C) Japanese firms excelled in process technology. D) Japan has abundant supplies of natural resources needed to produce electronics goods. 19) One reason a country does not specialize completely in production is that not all goods and services are traded internationally. Answer: TRUE 20) One of the main sources of comparative advantage is internal economies. Answer: FALSE 21) What is autarky? Answer: Autarky is a situation in which a country does not trade with other countries. 22) The simple trade model demonstrates that countries can expand consumption by specializing in the production of goods and services in which they have a comparative advantage. In reality we do not see complete specialization in production. State three reasons why this is case. Answer: Three reasons outlined in the text are: 1. Not all goods and services are traded internationally. 2. As more exported goods are produced, the opportunity cost of producing additional units eventually increases. 3. Since most products are differentiated some buyers prefer to purchase domestically produced products while others will prefer to buy similar products produced abroad. The automobile industry is a good example of this. 23) Suppose in Finland a worker can produce either 32 cell phones or 4 kayaks while in Canada a worker can produce either 40 cell phones or 10 kayaks. a. Which country has an absolute advantage in cell phone production? In kayak production? b. What is the opportunity cost of 1 cell phone in Finland? In Canada? c. What is the opportunity cost of 1 kayak in Finland? In Canada? d. Which country has a comparative advantage in cell phone production? In kayak production? e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labor force to cell phone production and 60 percent to kayak production. What is the output of cell phones and kayaks for each country and what is the total output of cell phones and kayaks between the two countries? f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cell phones and kayaks in the two countries? g. Provide a numerical example to show how Finland and Canada can both gain from trade. Assume that the terms of trade are established at 6 cell phones for 1 kayak. Answer: a. Canada has an absolute advantage in the production of both goods. b. In Finland, the opportunity cost of 1 cell phone = 1/8 kayak. In Canada, the opportunity cost of 1 cell phone = 1/4 kayak. c. In Finland, the opportunity cost of 1 kayak = 8 cell phones. In Canada, the opportunity cost of 1 kayak = 4 cell phones. d. Finland has a comparative advantage in cell phone production and Canada in kayak production. e. Cell Phones Kayaks Finland 400 × 32 = 12,800 600 × 4 = 2,400 Canada 400 × 40 = 16,000 600 × 10 = 6,000 Total 28,800 8,400 f. If each country specializes, output is: Cell Phones Kayaks Finland 1,000 × 32 = 32,000 Canada 1,000 × 10 = 10,000 Total 32,000 10,000 g. Finland Output 32,000 cell phones Exports 18,000 cell phones Consumes 14,000 cell phones Imports 3,000 kayaks Canada Output 10,000 kayaks Exports 3,000 kayaks Consumes 7,000 kayaks Imports 18,000 cell phones 24) What are the four main sources of comparative advantage? Briefly explain each source and provide examples. Answer: The 4 main sources cited are: 1. climate and natural resources 2. relatively abundant supplies of labor and capital 3. technology 4. external economies. Some examples of natural resource rich countries include Saudi Arabia (rich in oil), Malaysia (rich in palm oil), Indonesia (rich in tropical hardwoods), and Kenya with its exotic wildlife (for tourism). Advantageous climate is also a source of comparative advantage. For example, the South of France and certain parts of Italy have a particular blend of climatic conditions and land that is well suited to the cultivation of truffles. Countries like the United States have many highly skilled workers and a huge stock of capital equipment compared to, say, China and India which have more low-skilled workers and relatively little machinery. As a result, the United States has a comparative advantage in the production of goods that require skilled workers or sophisticated machinery (software, biotechnology) while China and India have a comparative advantage in the production of goods that require low-skilled workers and small amounts of simple machinery (carpets, clothing items). The text discusses the distinction between product technologies and process technologies and how they lead to specialization in different kinds of products. For example, the United States is undoubtedly the world leader in research and development leading to a comparative advantage in technology-intensive products and services. Examples include the development of new products in the field of medicine, telecommunications and bioengineering. Countries that are strong in process technologies are likely to concentrate on improving the process used to make existing products. External economies occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation network, firms located in that network gain advantages over firms located outside the network. 9.4 Government Policies That Restrict International Trade 1) Trade between countries that is without restrictions is called A) unobstructed commerce. B) unabated trade. C) free trade. D) unencumbered trade. Figure 9-1 Figure 9-1 shows the U.S. demand and supply for leather footwear. 2) Refer to Figure 9-1. Under autarky, the consumer surplus is ________ and the producer surplus is ________. A) $195; $105 B) $300; $285 C) $260; $40 D) $555; $105 3) Refer to Figure 9-1. Under autarky, the deadweight loss is A) $0. B) $15. C) $30. D) $40. 4) Refer to Figure 9-1. Suppose the government allows imports of leather footwear into the United States. What happens to the market price and what is the quantity of imports? A) The price equals $24 and imports equal 20 units. B) The price falls to $24 and imports equal 5 units. C) The price falls to $18 and imports equal 15 units. D) The price equals $18 and imports equals 10 units. 5) Refer to Figure 9-1. Suppose the government allows imports of leather footwear into the United States. The market price falls to $18. What are the values of consumer surplus and domestic producer surplus? A) Consumer surplus = $270; producer surplus = $40. B) Consumer surplus = $320; producer surplus = $40. C) Consumer surplus = $320; producer surplus = $360.. D) Consumer surplus = $305; producer surplus = $320. 6) Which of the following is not an example of a trade restriction? A) tariffs B) quotas and voluntary export restraints C) legislation requiring that cars sold in a country have a 50 percent domestic content D) consumer preferences for goods produced domestically 7) Under autarky, consumer surplus is represented by the area A) above the supply curve and below the equilibrium price. B) above the supply curve and below the demand curve. C) below the demand curve and above the equilibrium price. D) above the demand curve and below the supply curve. 8) A tariff is A) a limit placed on the quantity of goods that can be imported into a country. B) a tax imposed by a government on goods imported into a country. C) a subsidy granted to importers of a vital input. D) a health and safety restriction imposed on an imported product. 9) A numerical limit imposed by a government on the quantity of a good that can be imported into the country is called a A) tariff. B) quota. C) quantity floor. D) barricade. 10) Which of the following is the best example of a tariff? A) a subsidy from the U.S. government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers B) a limit on the quantity of residential air conditioners that can be imported from a foreign country C) a $150 fee imposed on all imported residential air conditioners D) a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment 11) A tariff A) makes domestic consumers worse off. B) makes both domestic producers and consumers worse off. C) makes everyone better off. D) makes domestic producers worse off. Figure 9-2 Suppose the U.S. government imposes a $0.40 per pound tariff on rice imports. Figure 9-2 shows the impact of this tariff. 12) Refer to Figure 9-2. The tariff revenue collected by the government equals the area A) D + E + F. B) E. C) B + D + E + F. D) C + D + E + F. 13) Refer to Figure 9-2. Without the tariff in place, the United States consumes A) 9 million pounds of rice. B) 15 million pounds of rice. C) 31 million pounds of rice. D) 42 million pounds of rice. 14) Refer to Figure 9-2. Without the tariff in place, the United States produces A) 9 million pounds of rice. B) 15 million pounds of rice. C) 31 million pounds of rice. D) 42 million pounds of rice. 15) Refer to Figure 9-2. With the tariff in place, the United States A) imports 16 million pounds of rice. B) imports 9 million pounds of rice. C) imports 15 million pounds of rice. D) exports 31 million pounds of rice. 16) Refer to Figure 9-2. As a result of the tariff, domestic producers increase their quantity supplied by A) 31 million pounds of rice. B) 22 million pounds of rice. C) 15 million pounds or rice. D) 6 million pounds of rice. 17) Refer to Figure 9-2. The increase in domestic producer surplus as a result of the tariff is equal to the area A) C. B) C + G. C) A + C + G. D) C + D + G + H + I. 18) Refer to Figure 9-2. The tariff causes domestic consumption of rice A) to fall by 27 million pounds. B) to fall by 11 million pounds. C) to rise by 6 million pounds. D) to rise by 16 million pounds. 19) Refer to Figure 9-2. The loss in domestic consumer surplus as a result of the tariff is equal to the area A) B + D + E + F. B) D + E + F. C) C + D + E + F. D) B. 20) Refer to Figure 9-2. If the tariff was replaced by a quota which limited rice imports to 16 million pounds, the amount of revenue received by rice importers would equal A) $6.4 million. B) $9.6 million. C) $16 million. D) $19.8 million. 21) An agreement negotiated by two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is called A) a non-tariff trade barrier. B) an export quota. C) an import quota. D) a voluntary export restraint. 22) The main purpose of most tariffs and quotas is to A) raise revenue for the government. B) reduce the prices consumers pay for goods and services. C) reduce the foreign competition that domestic firms face. D) improve the quality of goods and services imported into the country. 23) Which of the following is the best example of a quota? A) a limit imposed on the number of sport utility vehicles that the United States can import from Japan B) a subsidy granted by the U.S. government to domestic garment manufacturers so they can compete more effectively with foreign garment manufacturers C) a tax placed on all sport utility vehicles sold in the domestic market D) a $5,000 per-car fee imposed on all sport utility vehicles imported into the United States 24) In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to voluntary export restraints. With voluntary export restraints, foreign producers A) agree to meet specific quality standards required by the importing country. B) limit their exports to a country. C) pay a tax on all products they export. D) must agree to import an equal quantity of products that they export. Answer: B Figure 9-3 Since 1953 the United States has imposed a quota to limit the imports of peanuts. Figure 9-3 illustrates the impact of the quota. 25) Refer to Figure 9-3. Without the quota, the domestic price of peanuts equals the world price which is $2.00 per pound. What is the quantity of peanuts supplied by domestic producers in the absence of a quota? A) 10 million pounds B) 28 million pounds C) 30 million pounds D) 40 million pounds 26) Refer to Figure 9-3. If there was no quota, how many pounds of peanuts would domestic consumers purchase and what quantity would be imported? A) 28 million pounds of which 18 million pounds would be imported B) 40 million pounds of which 12 million pounds would be imported C) 40 million pounds of which 30 million pounds would be imported D) 40 million pounds all of which would be imported 27) Refer to Figure 9-3. What is the area of domestic producer surplus without a quota? A) C B) C + B C) A + B + C D) A + B + C + D 28) Refer to Figure 9-3. With a quota in place, what is the quantity consumed in the domestic market and what portion of this is supplied by domestic producers? A) Domestic consumption equals 28 million pounds of which 18 million pounds are produced by domestic producers. B) Domestic consumption equals 40 million pounds of which 22 million pounds are produced by domestic producers. C) Domestic consumption equals 34 million pounds of which 16 million pounds are produced by domestic producers. D) Domestic consumption equals 34 million pounds of which 18 million pounds are produced by domestic producers. 29) Refer to Figure 9-3. What is the area of consumer surplus after the imposition of the quota? A) A + G + H B) G + H + E + I+ J + M C) G + H D) A 30) Refer to Figure 9-3. What is the area of domestic producer surplus after the imposition of a quota? A) B B) B + C C) B + E + I + J + M D) E + I + J + M 31) Refer to Figure 9-3. What is the area that represents revenue to foreign producers who are granted permission to sell in the U.S. market when there is a quota? A) I + J B) E + I + J + M C) I + J + K+ L D) G + H + I + J 32) Refer to Figure 9-3. What is the area that represents the deadweight loss as a result of the quota? A) G + H B) G + H + I + J C) E + I + J + M D) E + M 33) Under trade agreements signed with other countries, the United States is allowed to impose tariffs on imports if foreign firms are selling products in the United States at below their production cost. This is exactly what occurred when the United States raised the tariff on wire hangers imported from China. This tariff A) increased wages in the Chinese wire hanger industry and increased imports of Chinese wire hangers to the United States. B) decreased imports of chinese wire hangers to the United States and increased exports of U.S. wire hangers to China. C) saved some jobs in the U.S. wire hanger industry, but increased costs and possibly cost jobs in the U.S. dry cleaning industry. D) increased costs in the Chinese wire hanger industry and decreased costs in the U.S. wire hanger industry. 34) A tariff is a numerical limit on the quantity of a good that can be imported. Answer: FALSE 35) The U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. Answer: TRUE 36) Distinguish between a voluntary export restraint and a quota. Answer: A voluntary export restraint is an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. A quota is a numerical limit imposed by the government on the quantity of a good that can be imported into a country. Figure 9-4 Suppose the U.S. government imposes a $0.50 per pound tariff on sugar imports. Figure 9-4 shows the demand and supply curves for sugar and the impact of this tariff. 37) Use Figure 9-4 to answer questions a-i. a. Following the imposition of the tariff, what is the price that domestic consumers must now pay and what is the quantity purchased? b. Calculate the value of consumer surplus with the tariff in place. c. What is the quantity supplied by domestic sugar producers with the tariff in place? d. Calculate the value of producer surplus received by U.S. sugar producers with the tariff in place. e. What is the quantity of sugar imported with the tariff in place? f. What is the amount of tariff revenue collected by the government? g. The tariff has reduced consumer surplus. Calculate the loss in consumer surplus due to the tariff. h. What portion of the consumer surplus loss is redistributed to domestic producers? To the government? i. Calculate the deadweight loss due to the tariff. Answer: a. Price = $2.00 per pound; Quantity purchased = 15 million pounds b. Consumer surplus = 1/2 × 15 million × $3 = $22.5 million c. Quantity supplied by domestic producers = 10 million pounds d. Producer surplus to rice growers = 1/2 × 10 million × $1.25 = $6.25 million e. Quantity imported = 5 million pounds f. Tariff revenue collected by the government = $0.50 × 5 million = $2.5 million g. Loss in consumer surplus due to the tariff = 15 million × $0.50 + 1/2 × 5 million × $0.50 = $8.75 million h. Amount redistributed to domestic producers = 7 million × $0.50 + 1/2 × 3 million × $0.50 = $4.25 million Amount redistributed to the government = 5 million × $0.50 = $2.5 million i. Deadweight loss due to the tariff = 1/2 × 3 million × $0.50 + 1/2 × 5 million × $0.50 = $2 million Figure 9-5 Bragabong currently both produces and imports almonds. The government of Bragabong decides to restrict international trade in almonds by imposing a quota that allows imports of only 10 million kilos each year. Figure 9-5 shows the estimated demand and supply curves for almonds in Bragabong and the results of imposing the quota. 38) Use Figure 9-5 to answer questions a-j . a. If there is no quota what is the domestic price of almonds and what is the quantity of almonds demanded by consumers? b. If there is no quota how many kilos of almonds would domestic producers supply and what quantity would be imported? c. If there is no quota what is the dollar value of consumer surplus? d. If there is no quota what is the dollar value of producer surplus received by producers in Bragabong? e. If there is no quota what is the revenue received by foreign producers who supply almonds to Bragabong? f. With a quota in place what is the price that consumers of Bragabong must now pay and what is the quantity demanded? g. With a quota in place what is the dollar value of consumer surplus? Are consumers better off? h. With a quota in place what is the dollar value of producer surplus received by producers in Bragabong? Are domestic producers better off? i. Calculate the revenue to foreign producers who are granted permission to sell in Bragabong after the imposition of the quota. j. Calculate the deadweight loss as a result of the quota. Answer: a. Price without a quota = $3 per kilo; quantity demanded = 36 million kilos b. Quantity supplied by domestic producers when there is no quota = 14 million kilos; quantity imported = 22 million kilos c. Consumer surplus without a quota = 1/2 × $6 × 36 million = $108 million d. Domestic producer surplus without a quota = 1/2 × 14 million × $2.40 = $16.8 million e. Revenue received by foreign producers when there is no quota =22 million × $3 = $66 million f. Price with a quota = $4.00 per kilo; quantity demanded = 30 million kilos g. Consumer surplus with a quota = 1/2 × $5 × 30 million = $75 million. No, consumers are worse off. h. Domestic producer surplus with a quota = 1/2 × $3.40 × 20 million = $34 million. Yes, domestic producers are better off. i. With a quota revenue to foreign producers = $4 × 10 million = $40 million j. Deadweight loss = 1/2 × $1 × 6 million + 1/2 × $1 × 6 million = $6 million 9.5 The Arguments over Trade Policies and Globalization 1) Disagreements about whether the U.S. government should regulate international trade A) began during the Great Depression. B) began after World War I when government officials no longer believed in isolationism. C) date back to the beginning of the country. D) did not occur until the end of the Mexican War in 1848. 2) ________ raised average tariff rates by over 50 percent in the United States in 1930. A) The GATT B) The WTO C) NAFTA D) The Smoot-Hawley Tariff 3) In 1930, the U.S. government attempted to help domestic firms that were harmed by the Great Depression by A) establishing the General Agreement on Tariffs and Trade (GATT). B) passing the Smoot-Hawley Tariff. C) establishing the World Trade Organization (WTO). D) passing the North American Free Trade Agreement (NAFTA). 4) In 1995 ________, which was established in 1948, was replaced by ________. A) the GATT; the WTO B) the WTO; NAFTA C) the Smoot-Hawley Tariff; the GATT D) NAFTA; the Smoot-Hawley Tariff 5) The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In recent years opposition to globalization has led to violent protests at meetings of the WTO. One reason for these anti-globalization protests is A) foreign trade and investment are examples of zero-sum games. B) protesters believe that globalization will result in a return to communism in developing countries. C) protesters believe that free trade destroys the distinctive cultures of many countries. D) protesters object to the loss of intellectual property (such as software programs and movies) that results from foreign trade and investment. 6) Many people assume that if child workers in developing countries weren't working in factories, they would be in school. In fact, children in developing countries A) split their time evenly between work and school. B) usually have few good alternatives to work. C) are only allowed to work if they have attended school up to age 15. D) who work are relatively rare, as most do attend school full time. 7) Protectionism A) is the use of cheap labor to protect firms from paying high wages. B) is the use of trade barriers to protect domestic firms from foreign competition. C) refers to reductions in tariffs and other barriers that protect consumers from paying high prices. D) refers to the use of copyright and trademark laws to protect inventors and artists from losing the rights to their creative efforts. 8) Free trade ________ living standards by ________ economic efficiency. A) raises; increasing B) lowers; decreasing C) raises; equalizing D) lowers; eliminating 9) Many economists criticize protectionism because it causes losses to consumers and eliminates jobs in domestic industries that use protected products. Why, then, do some people support protectionism? A) The criticisms of economists are based on theory. In fact, protectionism increases consumer and producer surplus as well as employment. B) Supporters of protectionism in high-income countries believe that wages will fall as a result of competition with firms from developing countries. C) Supporters of protectionism believe free trade will cause their countries to lose their comparative advantage. D) Supporters of protectionism believe that free trade will lead to inflation. 10) Which of the following statements is used to justify protectionism? A) Free trade leads to higher prices for imported goods. B) Free trade increases employment by protecting domestic firms. C) A country should not rely on other countries for goods that are critical to its national defense. D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection. 11) Which of the following describes the infant industry argument for protectionism? A) An industry must be protected in its early stages of development so that firms can compete with government-subsidized foreign competition. B) Some strategic industries must be protected to ensure adequate supplies of resources needed for national defense in emergencies. C) Domestic producers in high-wage countries must be protected from foreign producers in low-wage countries to produce a level playing field. D) Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets. 12) The process of countries becoming more open to foreign trade and investment is known as A) autarky. B) foreign exchange. C) globalization. D) protectionism. 13) Economists believe the most persuasive argument for protectionism is to protect infant industries. But the argument has a drawback. What is this drawback? A) Governments always make the level of protection for infant industries too high. B) Governments are usually too impatient and do not allow protection to remain in place long enough to allow industries to be competitive in international markets. C) Governments usually use tariffs, rather than quotas, to protect infant industries in order to collect tariff revenue. (Quotas do not result in government revenue). D) Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never "growing up." 14) Suppose that American firms claim that protectionism in Canada is on the rise as the Canadian government attempts to protect its infant industries. This protectionism will cause the greatest harm to A) Canadian manufacturers. B) the Canadian government. C) manufacturers who export to Canada. D) Canadian consumers. 15) Suppose that American firms claim that protectionism in Canada is on the rise as the Canadian government attempts to protect its infant industries with a "Buy Canadian" provision. This policy, similar to the original "Buy American" provision in the 2009 U.S. stimulus bill, is likely to cause A) exporting countries to retaliate by placing trade barriers on Canadian imports. B) Canadian manufacturers to become more efficient. C) Canadian companies to pay lower prices for protected products. D) most countries to reduce their own trade barriers to be able to better compete with Canadian imports at home. 16) The selling of a product for a price below its cost of production is called A) fair competition. B) dumping. C) unfair competition. D) operating at a loss. 17) Imposing tariffs in cases of dumping A) is allowed under the WTO agreement. B) is not allowed under the WTO agreement. C) is not addressed by the WTO agreement. D) has never occurred, even though it is allowed under the WTO agreement. 18) Measuring the impact of a quota or tariff on the U.S. economy is an example of ________. Stating that a quota or tariff should be eliminated is an example of ________. A) statistical analysis; economic analysis B) positive analysis; normative analysis C) econometric analysis; protectionism D) trade analysis; an opinion 19) One reason for the success that firms have in getting the government to erect barriers to foreign competition is that jobs lost to foreign competition are easy to identify but jobs created by foreign trade are often hard to identify. Which of the following is a second reason? A) The costs that tariffs and quotas impose on consumers are large in total but relatively small per person. B) People who benefit from foreign trade tend not to vote in elections; people who are harmed by foreign trade are much more likely to vote. C) Firms that benefit from trade barriers have more money to lobby government officials to support the barriers than do firms that are harmed by trade barriers. D) The benefits from free trade are less than the costs. 20) The "Buy American" provision in the 2009 stimulus package would require that stimulus money be spent only on U.S.-made goods. In the market for steel, the "Buy American" provision would ________ the price of steel in the United States and ________ the quantity of steel demanded in the United States. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 21) In the U.S. steel market, a "Buy American" provision in the 2009 stimulus package would A) convert some consumer surplus to deadweight loss. B) transfer some deadweight loss to producer surplus. C) transfer some producer surplus to consumer surplus. D) reduce the producer surplus received by foreign manufacturers. 22) Selling a product at a price below its cost is known as dumping. Answer: TRUE 23) Protectionism refers to the use of trade barriers to shield domestic firms from foreign competition. Answer: TRUE 24) a. What is the World Trade Organization? b. When was it established? c. How many countries are members of the World Trade Organization? Answer: a. The World Trade Organization (WTO) is an international organization based in Geneva, Switzerland, that oversees international trade agreements. b. The WTO replaced the GATT in January, 1995. c. Currently, more than 150 countries are members of the WTO. 25) Dalton, Georgia, a town with a population less than 35,000, has developed into a leading producer of carpets, despite its small size. Some government officials argue that the success achieved by firms in Dalton in developing a comparative advantage in carpet making because of external economies can be used to justify trade barriers as a means to protect an "infant industry." After an infant industry gains experience it can compete in international markets and the trade barriers can be removed. What objections do economists make to this argument in favor of trade barriers? Answer: Many economists believe that this is the most persuasive argument for protection but experience teaches us that tariffs and quotas can stifle the incentive firms have to become more efficient producers, which is the reason for imposing trade restrictions in the first place. Few firms volunteer to have trade restrictions removed once they have been established. 26) Anti-globalization and protectionism are both arguments against free trade. How do these two arguments differ? Answer: The anti-globalization argument against trade is relatively new. This argument includes the notion that free trade destroys the culture of many countries and that factories locating to low-income countries do not meet environmental or safety regulations that are imposed in high-income countries. The protectionism argument has been around for centuries. Protectionism is usually justified on the basis of one of the following four arguments: saving jobs, protecting high wages, protecting infant industries, and protecting national security.
