Transcript
Chapter 37 - International Trade Chapter 37 International Trade QUESTIONS 1. Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner, quantitatively? With what country does the United States have the largest trade deficit? LO1 Answer: Our exports of goods and services are about 13 percent of GDP, which is small relative to the proportion in many other industrialized nations. For example, the percentage is 92 percent in Belgium, 77 percent in the Netherlands, 29 percent in United Kingdom, 32 percent in New Zealand, and 37 percent in Canada. Canada is the United States’ most important trading partner quantitatively. In 2009, about 20 percent of U.S. exported goods were sold to Canadians, who in turn provided 15 percent of the U.S. imports of goods. The United States has a sizable trade deficit with China (largest trade deficit for the United States). In 2009, it was $220 billion. 2. Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive products, unrelated to resource intensity, relate to international trade? LO1, LO2 Answer: Land-intensive commodities include agricultural products such as corn and wheat. Labor-intensive commodities require much skilled labor in production, such as transistor radios and clothing. Capital-intensive products are produced with a large amount of capital equipment and include manufactured items such as aircraft and automobiles. These distinctions are important because if a nation has an abundant supply of particular type of resources, it can produce items that are intensive in these resources with a comparative cost advantage. On the other hand, if it has a relative scarcity of certain resources, such as land, then it will be relatively expensive to produce land-intensive products such as corn and wheat. The difference in relative resource abundance among nations leads to a difference in comparative costs of production, which is the basis for international trade and specialization. Distinctive products, those associated with a particular country (perhaps because of a reputation for quality) can provide an export niche for a country. Even though the country may have no cost advantage in producing the good, the “label” on the good is enough to attract buyers willing to pay more than for potentially comparable substitutes. 3. Explain: “The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China.” Relate your answer to the ideas of Adam Smith and David Ricardo. LO2 Answer: A country is said to have an absolute advantage over other producers of a product if it is the most efficient producer of that product (by which we mean that it can produce more output of that product from any given amount of resource inputs than can any other producer.) A country is said to have a comparative advantage over other producers of a product if it can produce the product at a lower opportunity cost (by which we mean that it must forego less output of alternative products when allocating productive resources to producing the product in question). In the case of toys the United States may have an absolute advantage in producing toys relative to China (can produce toys at a lower cost), but will still import the toys from China because China has a comparative advantage in producing toys (lower opportunity cost). In other words the U.S. can produce toys at a lower cost per unit, but China has to sacrifice less other goods to make the toys. Thus, China should make the toys and the U.S. should import the toys and produce other goods. In 1776, Adam Smith used the concept of absolute advantage to argue for international specialization and trade. His point was that nations would be better off if they each specialized in the production of those products in which they had an absolute advantage and were therefore the most efficient producers. In the early 1800s David Ricardo extended, and modified, Smith’s idea by demonstrating that it is advantageous for a country to specialize and trade even if it is more productive in all economic activities than some trading partner. A nation does not need Smith’s absolute advantage—total superiority in producing some good—to benefit from specialization and trade. It needs only a comparative advantage. In summary, it is the relative cost of producing the good not the absolute cost that drives trade. 4. Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries? How would rising costs (rather than constant costs) impact the extent of specialization and trade between these two countries? LO2 Answer: To answer this question we find the opportunity cost of the two goods. The opportunity cost of good Y (in terms of good X) in Big Country is 3/4 (=60/80) units of Y for each unit of X. That is, Big Country needs to give up 3/4 units of Y to produce 1 more unit of X. Note, this is the slope to Big Country's Production Possibilities Curve with Y on the vertical axis. The opportunity cost of good Y (in terms of good X) in Small Nation is 1 (=60/60) unit of Y for each unit of X. That is, Small Nation needs to give up 1 units of Y to produce 1 more unit of X. Note, this is the slope to Small Nation's Production Possibilities Curve with Y on the vertical axis. Given these opportunity costs Big Country should produce good X (only needs to give up 3/4 units of Y for 1 X) and Small Nation should produce good Y (needs to give up 1 unit of X for 1 unit Y). That is, Big Country has a comparative advantage in producing good X because they have to give up less Y to produce X per unit. The limits of the terms of trade depend on the opportunity costs. For example, Big Country will never pay more than 4/3 a unit of good X for unit of good Y. Big country, can always produce a unit of Y itself by giving up 4/3 a unit of good X. Small Nation will never accept less 1 unit of good X for a unit of good Y because they can always produce a unit of X for good Y. The terms of trade will be between 1 unit of good X for a unit of good Y and 4/3 a unit of X for a unit of good Y. 5. What is an export supply curve? What is an import demand curve? How do such curves relate to the determination of the equilibrium world price of a tradable good? LO3 Answer: The export supply curve for a particular country is the difference between quantity supplied and quantity demanded in the domestic market for a price above the domestic equilibrium price (the price that would occur in the market if trade were not possible. The import demand schedule works in the other direction, it is the difference between quantity supplied and quantity demanded in the domestic market for a price below the domestic equilibrium price (the price that would occur in the market if trade were not possible). Here the negative values (quantity supplied minus quantity demanded) are translated into positive values (absolute value) graphically. The intersection of the world supply and demand schedules determines the equilibrium world price for a tradable good. 6. Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quota for the world economy? LO4 Answer: The reason why a quota is more detrimental to an economy than a tariff that results in the same level of imports (as the quota) is that the government loses revenue. Under the tariff the government collects tax revenue and under a quota this tax revenue is lost. Tariffs and quotas impose costs on domestic consumers but provide gains to domestic producers and, in the case of tariffs, revenue to the Federal government. The consumer costs of trade restrictions are calculated by determining the effect the restrictions have on consumer prices. Protection raises the price of a product in three ways: (1) The price of the imported product goes up; (2) the higher price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods. Study after study finds that the costs to consumers substantially exceed the gains to producers and government. A sizable net cost or efficiency loss to society arises from trade protection. Conclusion: The gains that trade barriers create for protected industries and their workers come at the expense of much greater losses for the entire economy. The result is economic inefficiency, reduced consumption, and lower standards of living. Extending this to the world economy is straightforward. If all domestic economies lose because of trade barriers the world loses (efficiency) as well. 7. Draw a domestic supply and demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b) domestic producers, and (c) foreign exporters? How would the effects of a quota that creates the same amount of imports differ? LO4 Answer: The United States does not have a comparative advantage in this product so the world price Pw is below the U.S. domestic price of Pd. Imports will reduce the domestic price, increasing consumption from nontrade Qc to Qe, and decreasing domestic production from Qc to Qa. See the graph. A tariff of PwPt (a) harms domestic consumers by increasing price from Pw to Pt and decreasing consumption from Qe to Qd; (b) aids domestic producers through the increase in price from Pw to Pt and the expansion of domestic production from Qa to Qb; (c) harms foreign exporters by decreasing exports from QaQe to QbQd. An import quota of QbQd would have the same effects as the tariff, but there would be no tariff revenues to government from these imports; this revenue would effectively go to foreign producers. 8. “The potentially valid arguments for tariff protection—military self-sufficiency, infant industry protection, and diversification for stability—are also the most easily abused.” Why are these arguments susceptible to abuse? LO4 Answer: Each of these valid arguments is often misapplied. Dumping cases by foreign firms in the United States are difficult to prove and rare. Often domestic producers will claim their foreign competitors are dumping when the lower prices simply reflect a comparative advantage in foreign production. If this is true the use of antidumping duties reduces the benefits of trade. The protection of new “infant” domestic industries to allow them to develop efficient production techniques is questionable in an advanced economy such as the United States. There is a tendency for trade barriers to remain in place even after the industry becomes established. The argument relating to military self-sufficiency is questionable when applied to sectors other than those directly related to defense. Almost all industries can claim to play a role in a wartime economy. As a rule, direct government subsidies are a more equitable means of protecting military security than trade protection, since taxpayers as a whole, rather than just consumers of protected industries will shoulder the burden. Direct subsidies also make the costs of these programs obvious rather than hiding them in the form of higher import prices. 9. Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies reduce unemployment in one U.S. industry but increase it in another U.S. industry? LO4 Answer: Artificial trade barriers may protect U.S. jobs that need to compete with the foreign sector. This would tend to move the U.S. economy towards full-employment. However, it is likely that foreign countries would impose, or implement, non-tariff barriers on U.S. goods. This response would reduce U.S. exports and cost U.S. jobs in the exporting sector of the economy. This would tend to move the U.S. economy away from full-employment. In effect, the artificial trade barriers will likely reduce unemployment in one industry (import sector) and increase unemployment in another industry (export sector). 10. In 2007, manufacturing workers in the United States earned average compensation of $30.56 per hour. That same year, manufacturing workers in Mexico earned average compensation of $3.91 per hour. How can U.S. manufacturers possibly compete? Why isn’t all manufacturing done in Mexico and other low-wage countries? LO4 Answer: The U.S. can compete if the workers are more productive. That is, if the productivity level for U.S. workers is higher. If this is the case, then some manufacturing will take place in the U.S. (with productivity adjusted wages equalized). The other reason that all manufacturing doesn’t take place in the low wage countries may be due to trade barriers. 11. How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what way do foreign firms that “dump” their products onto the U.S. market in effect provide bargains to American consumers? How might the import competition lead to quality improvements and cost reductions by American firms? LO4 Answer: If a country imposes import tariffs other countries may follow with their own import tariffs. These foreign import tariffs will reduce the exports of the nation that originally imposed the import tariffs. If foreign firms dump their products on the U.S. market they are in effect selling them for below cost. This provides the consumers in the U.S. with a bargain because they can purchase the goods at a below-cost price. The fact that foreign firms will be losing 'money' by dumping makes it difficult to sustain this practice for long periods of time. If domestic firms need to compete with imports this may lead to quality improvements in domestic goods to differentiate themselves from the imports and may result in cost reductions in the U.S. as firms try to compete on the cost side of the ledger (allows the firm to lower price). 12. Identify and state the significance of each of the following trade-related entities: (a) the WTO; (b) the EU; (c) the Euro Zone; and (d) NAFTA. LO5 Answer: (a) The WTO oversees trade agreements reached by member nations and arbitrates trade disputes among them. (b) The EU is a trading bloc of 25 European countries who have agreed to abolish tariffs and import quotas on most products and have liberalized the movement of labor and capital within the EU. (c) The euro is the common currency that is used by 12 of the original 15 EU countries (known as the Euro Zone). (d) NAFTA is a trade bloc made up of the United Sates, Canada, and Mexico whose purpose is to reduce tariffs and other trade barriers among the three countries. 13. What form does trade adjustment assistance take in the United States? How does such assistance promote political support for free trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other changes in the economy, say, changes in patterns of government spending? LO6 Answer: The Trade Adjustment Assistance Act of 2002 introduced some new novel elements to help those hurt by shifts in international trade patterns. Such as: cash assistance for up to 78 weeks; relocation allowances; refundable tax credits for health insurance; training programs or remedial education; and for those workers over the age of 50 “wage insurance” which replaces a fraction of the worker’s wages. These programs create political support for free-trade agreements. The answers to the last part of this question depend on the individual. 14. What is offshoring of white-collar service jobs and how does that practice relate to international trade? Why has offshoring increased over the past few decades? Give an example (other than that in the textbook) of how offshoring can eliminate some American jobs while creating other American jobs. LO6 Answer: The off-shoring of white collar service jobs refers to jobs relating to data entry, book composition, and software coding. This reflects a growing specialization and international trade in services. These types of jobs are moving to countries with an educated labor force such as India. 15. LAST WORD What was the central point that Bastiat was trying to make in his imaginary petition of the candlemakers? Answer: Bastiat’s objective was to discredit the arguments in favor of protectionism by carrying the arguments to logical but absurd conclusions. Bastiat was demonstrating that there are numerous forces that create competitive challenges for firms and industries, but that doesn’t necessarily justify the imposition of protectionist measures. PROBLEMS 1. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula ? 2 cans tuna fish Tunata: 1 can baby formula ? 4 cans tuna fish In what product should each nation specialize? Which of the following terms of trade would be acceptable to both nations: (a) 1 can baby formula ? 2 1/2 cans tuna fish; (b) 1 can baby formula ? 1 can tuna fish; (c) 1 can baby formula ? 5 cans tuna fish? LO2 Answer: Canswicki should produce baby food, and Tunata should produce tuna; (a) acceptable; (b) not acceptable; (c) not acceptable. Feedback: Consider the following example. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula ? 2 cans tuna fish Tunata: 1 can baby formula ? 4 cans tuna fish In what product should each nation specialize? The opportunity cost of producing 1 can of baby formula in Canswicki is 2 cans of tuna fish. The opportunity cost of producing 1 can of baby formula in Tunata is 4 cans of tuna fish. Since the opportunity cost of producing baby formula is lower in Canswicki, this implies Canswicki should produce baby formula. This also implies that Tunata should specialize in producing Tuna. We can also look at the opportunity cost of producing cans of tuna fish (in terms of foregone cans of baby formula). The opportunity cost of producing 1 can of tuna fish in Canswicki is 1/2 a can of baby formula. The opportunity cost of producing 1 can of tuna fish in Tunata is 1/4 a can of baby formula. Since the opportunity cost of producing tuna fish is lower in Tunata, this implies Tunata should produce tuna fish. This also implies that Canswicki should specialize in producing baby formula. Which of the following terms of trade would be acceptable to both nations: (a) 1 can baby formula ? 2 1/2 cans tuna fish? These terms of trade are acceptable. The best Canswicki can do without trade is produce 2 cans of tuna fish for each can of baby formula. If they trade 1 can of baby formula for 2.5 cans of tuna fish they will be better off. Tunata will also trade because they only need to give up 2.5 cans of tuna fish for each can of baby formula. If Tunata produced baby formula themselves they would need to give up 4 cans of tuna fish for each can of baby formula. (b) 1 can baby formula ? 1 can tuna fish? These terms of trade would not be acceptable. Canswicki would not be willing to trade 1 can of baby formula for 1 can of tuna fish. They can do better themselves by producing 2 cans of tuna fish for each can of baby formula. (c) 1 can baby formula ? 5 cans tuna fish? These terms of trade would not be acceptable. Tunata would not be willing to trade (give up) 5 cans of tuna fish for 1 can of baby formula. They could do better themselves by producing a can of baby food and giving up 4 cans of tuna fish. 2. The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following: LO2 a. What is each country’s cost ratio of producing plums and apples? b. Which nation should specialize in which product? c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.) d. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade? Answer: (a) New Zealand: cost of producing 1 apple is 0.25 plums; cost of producing 1 plum is 4 apples; Spain: cost of producing 1 apple is 1 plum; cost of producing 1 plum is 1 apple. (b) New Zealand should produce apples and Spain should produce plums. (c) See graphs: (d) Total Gain Apples = 20 (= 60 - 40); Total Gain Plums = 10 (= 60 -50) Feedback: Consider the following example. The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following: a. What is each country’s cost ratio of producing plums and apples? The opportunity cost of producing 1 apple in New Zealand is 0.25 plums. That is, for each apple produced in New Zealand the country must give up 0.25 plums. The opportunity cost of producing 1 apple in Spain is 1 plum. That is, for each apple produced in Spain the country must give up 1 plum. We can also look at the opportunity cost of producing plums. The opportunity cost of producing 1 plum in New Zealand is 4 Apples. That is, for each plum produced in New Zealand the country must give up 4 Apples. The opportunity cost of producing 1 plum in Spain is 1 apple. That is, for each plum produced in Spain the country must give up 1 Apple. b. Which nation should specialize in which product? The opportunity cost of producing apples in New Zealand is lower than Spain's opportunity cost of producing apples. Therefore, New Zealand should produce apples and Spain should produce plums. c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.) The graphs below show the each country's production possibilities schedules with and without trade. Apples are on the vertical axis and plums are on the horizontal axis. New Zealand has a vertical intercept of 60 apples (produce only apples) and a horizontal intercept of 15 plums (produce only plums). The slope of production possibilities schedule equals -4 (negative 4). This slope is the opportunity cost of producing plums. That is, for each plum produced by New Zealand they must give up 4 apples. However, after trade, New Zealand's horizontal intercept will be 30 apples. Since the terms of trade are 1 plum for 2 apples, New Zealand could specialize in apple production and trade 2 apples for each plum (produce 60 apples and receive 30 plums). The slope of the after-trade production possibilities schedule is -2 (negative 2). New Zealand must now only give up 2 apples for each additional plum consumed (trade 2 apples for additional plum). The same logic applies to Spain. Before trade the vertical intercept is 60 apples and the horizontal intercept 60 plums. The slope of the production possibilities schedule is -1, which is the opportunity cost of 1 more plum in terms of apples. After trade Spain's vertical intercept is now 120 apples and the horizontal intercept remains at 60 plums. Spain will produce only plums and can trade now 1 plum for 2 apples (terms of trade). If they trade all 60 plums for apples they will receive 120 apples. The new slope of the production possibilities schedule is -2, which is the opportunity cost of consuming (not trading) 1 more plum. (NOTE: The intercepts above reflect possibilities not actual equilibrium consumption bundles. For example, if Spain produced only plums and traded these for apples, they should be able to consume 120 apples (vertical intercept after trade). The problem is that New Zealand is only producing 60 apples (the most it possibly can). This is not a flaw in the logic of the problem because we are only considering the construction of the production possibilities schedules. The next step would be to allow terms of trade to adjust in response to shortages and surpluses of goods based on country preferences. We do not do this step here.) d. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade? The first step is to determine total production before any trade takes place. New Zealand's optimal product mix before trade is alternative B (given above): Apples = 20 Plums = 10 Spain's optimal product mix before trade is alternative S (given above): Apples = 20 Plums = 40 Combined, the optimal mix before trade is: Before Trade Total Apples = 40 (20 New Zealand plus 20 Spain) Before Trade Total Plums = 50 (10 New Zealand plus 40 Spain) The next step is to determine total production after specialization. Recall New Zealand will specialize in apple production (produce only apples) and Spain will specialize in plum production (produce only plums). After Trade Total Apples = 60 (New Zealand alternative D) After Trade Total Plums = 60 (Spain alternative R) The final step is to determine the total gain for each good, which is the difference between total production before trade and total production after trade. Total Gain Apples = 20 (= 60 - 40) Total Gain Plums = 10 (= 60 -50) 3. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. LO2 a. Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce? b. What is the total gain in apparel and chemical output that would result from such specialization? c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation? Answer: (a) Yes; China should produce apparel and the United States should produce chemicals. (b) Total Gain apparel = 6000; Total Gain chemicals = 2. (c) Limits of the terms of trade = 1000 units of apparel for 1 ton of chemicals and 1000 units of apparel for 2 tons of chemicals; gain of 2000 units of apparel and 2 tons of chemicals. Feedback: Consider the following example. The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U. a. Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce? Yes, the two areas should specialize. The opportunity cost of producing 1000 units of apparel is 1 ton of chemicals in China. The opportunity cost of producing 1000 units of apparel is 2 tons of chemicals. Thus, the opportunity cost for apparel is lower in China. This implies China should produce apparel and the United States should produce Chemicals. b. What is the total gain in apparel and chemical output that would result from such specialization? The first step is to determine total production before any trade takes place. China's optimal product mix before trade is alternative B (given above): Apparel = 24,000 Chemicals = 6 The United States' optimal product mix before trade is alternative U (given above): Apparel = 4,000 Chemicals = 12 Combined, the optimal mix before trade is: Before Trade Total Apparel = 28,000 (24,000 China plus 4,000 US) Before Trade Total Chemicals = 18 (6 China plus 12 US) The next step is to determine total production after specialization. Recall China will specialize in apparel production (produce only apparel) and the United States will specialize in Chemical production (produce only chemicals). After Trade Total Apparel = 30,000 (China alternative A) After Trade Total Chemicals = 20 (US alternative W) The final step is to determine the total gain for each good, which is the difference between total production before trade and total production after trade. Total Gain Apparel = 2000 (=30,000-28,000) Total Gain Chemicals = 2 (=20-18) c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation? To determine the limits of the terms of trade we look at opportunity cost. The opportunity cost of producing 1000 units of apparel is 1 ton of chemicals in China. The opportunity cost of producing 1000 units of apparel is 2 tons of chemicals. The most China will trade (give up) is 1000 units of apparel for 1 ton of chemicals. If the US required more China could do better producing the chemicals themselves. The most the US is willing to trade (give up) is 2 tons of chemical for 1000 units of apparel. If China required more the US could do better producing the apparel This implies the range, or limits, of the terms of trade. 1000 units of apparel for 1 ton of chemicals 1000 units of apparel for 2 tons of chemicals Now assuming the actual terms are 1000 units of apparel for 1.5 tons of chemicals and that the ACTUAL amount traded (exchange) is 4000 units of apparel for 6 tons of chemicals we can find the new consumption levels for each country. The US produces all 20 tons chemicals. They trade 6 tons of chemical for 4000 units of apparel. So, after trade the US consumes 14 tons of chemical and 4000 units of apparel. China produces all 30,000 units of apparel. They trade 4000 units of apparel for 6 tons of chemicals. So, after trade China consumes 6 tons of chemical and 26,000 units of apparel. The gain to China comes in apparel. Before trade they consumed 24,000 units of apparel and after trade they consume 26,000. This is a gain of 2000 units of apparel. The gain to the US comes in chemicals. Before trade they consumed 12 tons of chemicals and after trade they consume 14 tons of chemicals. This is a gain of 2 tons of chemicals. 4. Refer to Figure 3.6, page 57. Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price of $1, $2, $3, $4, and $5? Use this information to construct the U.S. export supply curve and import demand curve for corn. Suppose that the only other corn-producing nation is France, where the domestic price is $4. Which country will export corn; which county will import it? LO3 Answer: At a price of $1: -15,000; Price $2: -7,000; Price $3: 0; Price $4: 6,000; Price $5: 10,000. At a price of $4 the U.S. will export corn and France will import corn. Feedback: Consider the following example. Refer to Figure 3.6, page 55. Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price of $1, $2, $3, $4, and $5? Use this information to construct the U.S. export supply curve and import demand curve for corn. Suppose that the only other corn-producing nation is France, where the domestic price is $4. Which country will export corn; which county will import it? To calculate the amount of imports or exports subtract quantity supplied from the quantity demanded at each price: Price $1: quantity supplied - quantity demanded = 1,000 - 16,000 = -15,000 (on the import supply schedule below this value will be positive) Price $2: 4,000 - 11,000 = -7,000 Price $3: 7,000 - 7,000 = 0 Price $4: 10,000 - 4,000 =6,000 Price $5: 12,000 - 2,000 = 10,000 At a price of $4 the U.S. will export corn and France will import corn. 37-16 © 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
