Chapter 26

a. 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, Big Country needs to give up

3/4 of a unit of Y for 1 unit of X and should produce good X. Small Nation needs to give up 1 unit of X for 1 unit of Y and should produce good Y.

In Country A, a worker can make 5 bicycles per hour. In Country B, a worker can make 7 bicycles per hour. Which country has an absolute advantage in making bicycles?

Country B.

Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ____________ should specialize in producing fish while ___________ should specialize in producing lumber.

Iceland; Canada

a. The World Trade Organization (WTO) is

a group that oversees trade agreements reached by member nations and arbitrates trade disputes among them.

d. NAFTA is

a trade bloc made up of the United States, Canada, and Mexico whose purpose is to reduce tariffs and other trade barriers among the three countries.

b. The European Union (EU) is

a trading bloc of 28 European countries who have agreed to abolish tariffs and import quotas on most products and have liberalized the movement of labor and capital.

b. 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. The limits of the terms of trade between these two countries will be

between 1 unit of good X for a unit of good Y and 4/3 units of good X for a unit of good Y.

a. The use of artificial trade barriers, such as tariffs and import quotas,

can increase domestic output and employment in the short run, but that is not likely to last in the long run.

b. Tariffs and import quotas can reduce unemployment in a U.S. import industry, but

foreign countries could impose nontariff barriers on U.S. goods, reducing jobs in an export industry.

b. The net outcome of either tariffs or quotas for the world economy is

negative, since the costs to consumers substantially exceed the gains to producers and government.

a. A quota that results in the same level of imports as a tariff is more detrimental to an economy because

the government loses tax revenue.