Transcript
484Miller•Economics Today, Nineteenth Edition
Chapter 32Comparative Advantage and the Open Economy485
Answers to Questions for Critical Analysis
How African Nations Are Developing Comparative Advantages in Agriculture
(p. 716)
Why do you think that increased specialization in specific agricultural products has accompanied growth in African exports of those products?
Increased specialization in certain agricultural products allows a nation to grow those products in which the nation has comparative advantage. Increased production of those products would therefore lead to growth in the nation’s exports of those products.
Why European Firms View Chinese Tourists’ Parallel Imports as a Threat (p. 719)
Why do you suppose that infant-industry firms that have developed novel products often implore their governments to enact policies aimed at restraining parallel imports?
Infant-industry firms are in need of protection from world competition, especially through copyrights, trademarks, or patents. For this reason, those firms would be more affected by parallel imports than other firms.
Has Greater Financial Uncertainty Become an Argument against Trade? (p. 721)
Why do you think that heightened risk about gains or losses from market transactions is less likely than increased uncertainty to induce people to abandon activities in the affected market?
Risk involves known probabilities that can be factored into decision making. By contrast, uncertainty applies to events for which probabilities cannot be calculated. Hence, heightened risk in market transactions is less likely than increased uncertainty to induce people to abandon market activities.
Ending the U.S. Oil Export Ban (p. 722)
Why was it more efficient to end the quota? (Hint: Why do you think that people usually accept money in exchanges instead of engaging in barter of one good for another every time they trade?)
Before the oil quota was lifted, U.S. firms were permitted to only exchange U.S. oil for another product. This barter system was less efficient than an exchange with money that has been in effect after the quota was lifted.
You Are There
Argentina Specializes in Oil Production to Protect Domestic Jobs (p. 726)
1. Why do you suppose that Argentina’s oil market has been experiencing surpluses as a result of the government’s policy action? (Hint: How does a price control that establishes a price above the market clearing level affect the quantities demanded and supplied?)
Argentina’s government subsidy on oil production is effectively a price control that establishes a price above the market clearing level. As a result of this price control policy, the quantity demanded in its domestic oil market is below its quantity supplied.
2. What entity do you think has been buying surplus oil to maintain the government’s controlled oil price, and who do you suppose ultimately is paying for those oil purchases?
People of Argentina ultimately pay for the surplus oil as a result of the government’s oil price control policy.
Issues and Applications
Drought Induces California Farmers to Double Down on a Comparative Advantage (p. 726–727)
1. Why do you suppose that soil, climate, and water conditions are among the key determinants of a region’s or nation’s comparative advantage in production of agricultural corps? (Hint: Keep in mind that the main determinant of comparative advantage is relative opportunity costs of producing alternative items.)
The soil, climate and water conditions are key features that affect the opportunity costs of producing strawberries relative to the opportunity costs of producing other crops.
2. What other elements besides soil, climate, and water conditions do you suppose influence whether a region or nation develops a comparative advantage in an agricultural product? (Hint: What other factors of production are involved in producing agricultural goods?)
Other than natural conditions, a region or nation’s comparative advantage in an agricultural product can be affected by the relative opportunity costs of its labor and physical capital.
Research Project
1. Find out more about California’s top agricultural export crops in the Web Links in MyEconLab.
2. Learn about the conditions that provide California with its comparative advantage in producing strawberries in the Web Links in MyEconLab.
Answers to Problems
32-1. To answer the questions below, consider the following table for the neighboring nations of Northland and West Coast. The table lists maximum feasible hourly rates of production of pastries if no sandwiches are produced and maximum feasible hourly rates of production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations.
Product Northland West Coast
Pastries (per hour) 50,000 100,000
Sandwiches (per hour) 25,000 200,000
a. What is the opportunity cost of producing pastries in Northland? Of producing sandwiches in Northland?
b. What is the opportunity cost of producing pastries in West Coast? Of producing sandwiches in West Coast?
a. The opportunity cost of pastries in Northland is 0.5 sandwich per pastry. The opportunity cost of sandwiches in Northland is 2 pastries per sandwich.
b. The opportunity cost of pastries in West Coast is 2 sandwiches per pastry. The opportunity cost of sandwiches in West Coast is 0.5 pastries per sandwich.
32-2. Based on your answers to Problem 32-1, which nation has a comparative advantage in producing pastries? Which nation has a comparative advantage in producing sandwiches?
Northland has a comparative advantage in pastry production, and West Coast has a comparative advantage in producing sandwiches.
32-3. Suppose that the two nations in Problems 32-1 and 32-2 choose to specialize in producing the goods for which they have a comparative advantage. They agree to trade at a rate of exchange of 1 pastry for 1 sandwich. At this rate of exchange, what are the maximum possible numbers of pastries and sandwiches that they could agree to trade?
If Northland specializes in producing pastries, the maximum number of pastries it can produce and trade to West Coast is 50,000 pastries. Hence, the maximum number of units of each good that the two countries can trade at a rate of exchange of 1 pastry for 1 sandwich is 50,000.
32-4. Residents of the nation of Border Kingdom can forgo production of digital televisions and utilize all available resources to produce 300 bottles of high-quality wine per hour. Alternatively, they can forgo producing wine and instead produce 60 digital TVs per hour. In the neighboring country of Coastal Realm, residents can forgo production of digital TVs and use all resources to produce 150 bottles of high-quality wine per hour, or they can forgo wine production and produce 50 digital TVs per hour. In both nations, the opportunity costs of producing the two goods are constant.
a. What is the opportunity cost of producing digital TVs in Border Kingdom? Of producing bottles of wine in Border Kingdom?
b. What is the opportunity cost of producing digital TVs in Coastal Realm? Of producing bottles of wine in Coastal Realm?
a. The opportunity cost of digital TVs in Border Kingdom is 5 bottles of wine per digital TV. The opportunity cost of a bottle of wine in Border Kingdom is 0.20 digital TV per bottle of wine.
b. The opportunity cost of digital TVs in Coastal Realm is 3 bottles of wine per digital TV. The opportunity cost of a bottle of wine in Coastal Realm is 0.33 digital TVs per bottle of wine.
32-5. Based on your answers to Problem 32-4, which nation has a comparative advantage in producing digital TVs? Which nation has a comparative advantage in producing bottles of wine?
Coastal Realm has a comparative advantage in producing digital TVs, and Border Kingdom has a comparative advantage in wine production.
32-6. Suppose that the two nations in Problem 32-4 decide to specialize in producing the good for which they have a comparative advantage and to engage in trade. Would residents of both nations find a rate of exchange of 4 bottles of wine for 1 digital TV potentially agreeable? Why or why not?
To answer Problems 32-7 and 32-8, refer to the following table, which shows possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East Isle, in which opportunity costs of producing both products are constant.
South Shore East Isle
Modems Flash Drives Modems Flash Drives
75 0 100 0
60 30 80 10
45 60 60 20
30 90 40 30
15 120 20 40
0 150 0 50
Residents of Border Kingdom will be willing to trade bottles of wine for digital TVs produced in Coastal Realm as long as the rate of exchange is less than its own opportunity cost of producing digital TVs, which is 5 bottles of wine per digital TV. Thus, Border Kingdom residents will accept a rate of exchange of 4 bottles of wine for a digital TV. Residents of Coastal Realm will be willing to trade digital TVs for bottles of wine produced in Border Kingdom as long as the rate of exchange is less than its own opportunity cost of producing wine, which is 0.33 digital TVs per bottle of wine. Thus, Border Kingdom residents will accept a rate of exchange of 0.25 digital TV for 1 bottle of wine. Thus, both countries will accept a rate of exchange of 4 bottles of wine for 1 digital TV.
32-7. Consider the above table and answer the questions that follow.
a. What is the opportunity cost of producing modems in South Shore? Of producing flash memory drives in South Shore?
b. What is the opportunity cost of producing modems in East Isle? Of producing flash memory drives in East Isle?
c. Which nation has a comparative advantage in producing modems? Which nation has a comparative advantage in producing flash memory drives?
a. The opportunity cost of modems in South Shore is 2 flash drives per modem. The opportunity cost of flash drives in South Shore is 0.5 modem per flash drive.
b. The opportunity cost of modems in East Isle is 0.5 flash drive per modem. The opportunity cost of flash drives in East Isle is 2 modems per flash drive.
c. Residents of South Shore have a comparative advantage in producing flash drives, and residents of East Isle have a comparative advantage in producing modems.
32-8. Refer to your answers to Problem 32-7 when answering the following questions.
a. Which one of the following rates of exchange of modems for flash memory drives will be acceptable to both nations: (i) 3 modems for 1 flash drive; (ii) 1 modem for 1 flash drive; or (iii) 1 flash drive for 2.5 modems? Explain.
b. Suppose that each nation decides to use all available resources to produce only the good for which it has a comparative advantage and to engage in trade at the single feasible rate of exchange you identified in part (a). Prior to specialization and trade, residents of South Shore chose to produce and consume 30 modems per hour and 90 flash drives per hour, and residents of East Isle chose to produce and consume 40 modems per hour and 30 flash drives per hour. Now, residents of South Shore agree to export to East Isle the same quantity of South Shore’s specialty good that East Isle residents were consuming prior to engaging in international trade. How many units of East Isle’s specialty good does South Shore import from East Isle?
c. What is South Shore’s hourly consumption of modems and flash drives after the nation specializes and trades with East Isle? What is East Isle’s hourly consumption of modems and flash drives after the nation specializes and trades with South Shore?
d. What consumption gains from trade are experienced by South Shore and East Isle?
a. A rate of exchange of 3 modems for 1 flash drive is higher than South Shore’s opportunity cost of producing modems, so its residents will not accept this rate of exchange. A rate of exchange of 2.5 modems for 1 flash drive is higher than East Isle’s opportunity cost of producing flash drives, so its residents will not accept this rate of exchange. The rate of exchange of 1 modem for 1 flash drive is lower than the opportunity cost of producing flash drives in East Isle, and the rate of exchange of 1 flash drive for 1 modem is lower than the opportunity cost of producing modems in South Shore. Thus, residents of both nations will find this rate of exchange acceptable.
b. South Shore’s specialty good for export is flash drives. Residents of East Isle previously were producing and consuming 30 flash drives per hour domestically. Now, if residents of South Shore export this quantity of flash drives at an exchange rate of 1 flash drive for 1 modem, residents of South Shore import 30 modems from East Isle.
c. Residents of South Shore specialize in producing flash drives and hence produce 150 flash drives per hour. They exports 30 of these to East Isle in trade for 30 modems. Thus, South Shore residents consume 120 flash drives and 30 modems. Residents of East Isle specialize in producing modems and hence produce 100 modems. They export 30 modems to South Shore in exchange for 30 flash drives. Consequently, they consume 70 modems and 30 flash drives.
d. For residents of South Shore, the gain from trade is 30 flash drives per hour, and for residents of East Isle, the gain from trade is 30 modems per hour.
32-9. Critics of the North American Free Trade Agreement (NAFTA) suggest that much of the increase in exports from Mexico to the United States now involves goods that Mexico otherwise would have exported to other nations. Mexican firms choose to export the goods to the United States, the critics argue, solely because the items receive preferential treatment under NAFTA tariff rules. What term describes what these critics are claiming is occurring with regard to U.S.-Mexican trade as a result of NAFTA? Explain your reasoning.
The critics are suggesting that Mexican exporters are shifting exports that would have gone to other nations to the United States, a nation within NAFTA, which would constitute trade diversion.
32-10. Some critics of the North American Free Trade Agreement (NAFTA) suggest that firms outside NAFTA nations sometimes shift unassembled inputs to Mexico, assemble the inputs into final goods there, and then export the final product to the United States in order to take advantage of Mexican trade preferences. What term describes what these critics are claiming is occurring with regard to U.S.-Mexican trade as a result of NAFTA? Explain your reasoning.
The critics are suggesting that some non-NAFTA exporters are shifting production to Mexico solely to benefit from NAFTA trade preferences granted to Mexican imports into the United States, which would constitute trade deflection.
32-11. How could multilateral trade agreements established for all nations through the World Trade Organization help to prevent both trade diversion and trade deflection that can occur under regional trade agreements, thereby promoting more overall international trade?
Diversion and deflection occur when nations within or outside a particular regional trade bloc try to benefit from preferences that only exist within the bloc. As long as the WTO agreements involve all nations equally, no diversion or deflection could occur.
32-12. Consider the data in Table 32-1. Would U.S. residents gain from trade of U.S. tablets for Indian apps if the rate of exchange of tablet devices for digital apps happened to be 3 tablets per app?
The opportunity cost of apps in the United States is 225 tablets / 90 apps, or 2.5 tablets per app. Without trade, therefore, U.S. residents already can obtain an app by giving up home production and consumption of 2.5 tablets. Hence, U.S. residents will not gain from trade at a rate of exchange of 3 tablets per app, because then they would have to give up more tablets to obtain apps.
32-13. Take a look at the data in Table 32-1. Would Indian residents gain from trade of Indian apps for U.S. tablets if the rate of exchange of tablet devices for digital apps happened to be 0.75 tablets per app?
The opportunity cost of tablets in India is 50 tablets / 100 apps, or 0.5 tablet per app. Without trade, therefore, Indian residents can obtain only 0.5 tablet for each app they produce. At a rate of exchange of 0.75 tablet per app, however, Indian residents can obtain an additional 0.25 tablet for each app that they export to the United States. Hence, Indian residents would gain from trade.
32-14. Take a look at Figure 32-3. What is the effect on foreign textile importers’ total revenues of the imposition of the quota that generates a movement from point E1 to point E2?
Prior to imposition of the quota, at point E1, the total revenues of foreign textile importers were $1.00 per yard of textiles times 900 million yards, or $900 million. After imposition of the quota, at point E2, total revenues are $1.50 per yard times 800 million yards, or $1,200 million. Hence, imposition of the quota has caused total revenues of foreign textile importers to increase by
$400 million.
32-15. Consider Figure 32-3. What is the effect on U.S. textile consumers’ total expenditures of the imposition of the quota that generates a movement from point E1 to point E2?
Prior to imposition of the quota, at point E1, the total expenditures of U.S. textile consumers were $1.00 per yard of textiles times 900 million yards, or $900 million. After imposition of the quota, at point E2, total expenditures are $1.50 per yard times 800 million yards, or $1,200 million. Hence, imposition of the quota has caused total expenditures of U.S. textile consumers to increase by $300 million.
32-16. Take a look at panel (a) of Figure 32-4. On a per-unit basis, how much of the $50-per-unit tariff on imported tablet devices is paid by U.S. consumers? On a per-unit basis, how much of the $50-per-unit tariff is paid by Chinese tablet-producing firms?
The market equilibrium price of imported tablets rises from $200 per tablet to $225 per tablet, so the price paid by U.S. consumers increases by $25 per unit. Consequently, U.S. consumers pay $25 of the $50-per-unit tariff is paid on each tablet that they purchase. Chinese tablet-producing firms pay the remaining $25 of the tariff on each unit that they sell in the United States.
32-17. Based on your answer to Problem 32-16, what are the total tariff revenues of the U.S. government? What percentage do U.S. consumers ultimately pay because of a higher price generated by the tariff?
Panel (a) of Figure 32-4 shows that once the $50-per-unit tariff is in place, U.S. consumers buy
8 million tablet devices per period, so each period the U.S. government collects tariff revenues of $50 times 8 million, or $400 million. The amount these revenues contributed by U.S. consumers is $25 times 8 million, or $200 million, so U.S. consumers pay 50 percent.
Selected References
Carbaugh, Robert J., International Economics, 4th ed., Belmont, CA: Wadsworth, 1992.
Dillard, Dudley, The Economic Development of the North Atlantic Community, Englewood Cliffs,
NJ: Prentice-Hall, 1967.
Kreinin, M. K., International Economics: A Policy Approach, New York: Harcourt Brace Jovanovich, 1987.
Krugman, Paul R. and Maurice Obstfeld, International Economics, 2nd ed., New York: Harper
Collins, 1991.
Ricardo, David, Principles of Political Economy and Taxation, London, 1817.
Root, Franklin R., International Trade and Investment, 6th ed., Cincinnati, OH: South-Western, 1990.
Salvatore, Dominick, International Economics, 4th ed., New York: Macmillan, 1993.
