Chapter 7: International Trade

What does the Stolper-Samuelson theory predict regarding a country's economy? A) Trade will eventually cause domestic industries to collapse B) Countries will forgo their comparative advantage when facing international threats C) Protectionism benefits industries that use scarce factors of production D) Free trade benefits industries that use scarce factors of production

C) Protectionism benefits industries that use scarce factors of production

NAFTA and the WTO are examples of international organizations that govern A) global human rights and security, respectively B) regional and collective security, respectively C) regional and global trade, respectively D) global trade and security, respectively.

C) regional and global trade, respectively

What is absolute advantage? A) military dominance B) being the first country to start producing a particular good C) the ability to produce more of a good or service than other countries despite using the same effort and resources D) the ability to produce all of a good that you desire to consume internally

C) the ability to produce more of a good or service than other countries despite using the same effort and resources

Programs such as Trade Adjustment Assistance in the United States offer compensation and other social services to those harmed by globalization. Why?

Correct answers: -They reduce support for protectionism and opposition to free trade. -In rich countries, trade may reduce the wages of low-skilled workers. Incorrect Answers: - Globalization harms a majority of the population; hence, compensation is an easy political win for politicians. -Citizens overwhelmingly support free trade.

Which of the following serve as a nontariff barrier to trade? A) quotas on imports B) subsidies to domestic industries C) regulations targeted at foreign goods D) All of these are correct.

D) All of these are correct.

Using the Stolper-Samuelson model, label each group of actors in the described country with its likely preference in trade policy for either openness or protectionism. Low-skilled labor in a developing country where such labor is abundant.

Openness

Match each theory of how different sets of actors will support or oppose trade protectionism with the corresponding example(s). (Either Stopler-Samuelson Theorem, Ricardo-Viner (specific factors) Model, or firm-based trade theory) Industry-specific factors of production such as capital equipment for steel-making in the United States lead this industrial sector to be protectionist when faced with stiff import competition, unlike other capital-intensive industries.

Ricardo-Viner (specific factors) model

Stolper-Samuelson Theorem

The theorem that protection benefits the scarce factor of production. This view flows from the Heckscher‐Ohlin theory: if a country imports goods that make intensive use of its scarce factor, then limiting imports will help that factor. So in a labor‐scarce country, labor benefits from protection and loses from trade liberalization. (323)

Quantitative Restriction (quota)

A limit placed on the amount of a particular good that is allowed to be imported and sold domestically. (316)

__________ refers to the accusation that producers in another country are selling their goods on global markets at prices below the true cost of production in order to drive out competitors. A) Offsetting B) Dumping C) Subsidizing D) Reorganizing.

B) Dumping

What is the effect of trade barriers? A) They make imports cheaper B) They cause domestic economies to collapse C) They make imports more expensive D) They force countries to withdraw from international institutions

C) They make imports more expensive

Protectionism

The imposition of barriers to restrict imports. (316)

Country A has just announced trade protections to limit imports of cotton fabric. Sort the following groups of actors according to whether they stand to gain or lose from this trade protectionism.

Gain from Protectionism - Country A's cotton fabric producers Lose from Protectionism - Country A's apparel industry (i.e., the producers of finished garments) - Country A's consumers - Country A's clothing retailers - Country B's cotton fabric producers

Trade Barriers

Government limitations on the international exchange of goods. Examples include tariffs, quantitative restrictions (quotas), import licenses, requirements that governments buy only domestically produced goods, and health and safety standards that discriminate against foreign goods. (316)

Which of the following is true about comparative advantage? - Comparative advantage means that trade will make one country better off at the expense of another - Trade barriers make domestic production less efficient because they hinder a country's ability to pursue its comparative advantage. - Comparative advantage means a country can produce something better than any other country - Comparative advantage is permanent over time

- Trade barriers make domestic production less efficient because they hinder a country's ability to pursue its comparative advantage. (Explanation: Barriers to trade make it difficult for a country to get those goods it does not have a comparative advantage in producing. Free trade allows countries to focus only on those goods for which they have a comparative advantage.)

Suppose that during a World Trade Organization round of negotiations, China agrees to reduce trade barriers to its domestic agricultural market for Brazil, and this access is worth $1,000,000,000 (a billion dollars). Based on WTO norms, we would expect Brazil to offer trade concessions to China equal to approximately what value, in dollars?

1,000,000,000 (Explanation: The norms in WTO rounds attempt to "balance the dollar value of concessions." Brazil should try to match China dollar for dollar.)

World Trade Organization (WTO)

An institution created in 1995 to succeed the GATT and to govern international trade relations. The WTO encourages and polices the multilateral reduction of barriers to trade, and it oversees the resolution of trade disputes. Compare General Agreement on Tariffs and Trade. (343)

General Agreement on Tariffs and Trade (GATT)

An international institution created in 1947 in which member countries committed to reduce barriers to trade and to provide similar trading conditions to all other members. In 1995, the GATT was replaced by the WTO. Compare World Trade Organization. (343)

Under the Heckscher-Olin approach, what is an implication of trade? A) Countries will avoid settling trade disputes B) Countries will begin to leave trade institutions C) Wages will become more similar across countries as trade increases D) Countries will naturally impose tariffs.

C) Wages will become more similar across countries as trade increases

With respect to support for protectionist measures, the American public is A) supportive of measures to protect specific industries only B) opposed to most protectionist measures C) more supportive of protectionism than economists D) less supportive of protectionism than economists

C) more supportive of protectionism than economists

In The Wealth of Nations, Adam Smith argues that __________ best promotes economic growth. A) mercantilism B) fiscal conservatism C) specialization D) socialism

C) specialization

Intra-industry trade via global supply chains, exports based on consumer preferences for brands and reputations, and depth of economic links like a shared currency all influence countries that A) avoid trading with one another B) prefer foreign trade in general C) trade extensively with each other D) are opposed to foreign trade in general.

C) trade extensively with each other

Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, whereas in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Ukraine can produce an automobile component part using man-hours, resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same automobile component costs approximately 60 euros to produce.Using only what you can learn from the information above, label the following statements as either true or false. Austria has absolute advantage in both wheat production and automobile components.

False

Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, whereas in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Ukraine can produce an automobile component part using man-hours, resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same automobile component costs approximately 60 euros to produce.Using only what you can learn from the information above, label the following statements as either true or false. Because Ukraine is poorer than Austria, it would be advantageous to Ukraine to produce both wheat and automobile components for its own domestic market.

False

Match each theory of how different sets of actors will support or oppose trade protectionism with the corresponding example(s). (Either Stopler-Samuelson Theorem, Ricardo-Viner (specific factors) Model, or firm-based trade theory) Large firms with significant exports, like General Motors or Microsoft in the United States, will support further trade liberalization.

Firm-based trade theory

Reciprocity

In international trade relations, a mutual agreement to lower tariffs and other barriers to trade. Reciprocity involves an implicit or explicit arrangement for one government to exchange trade‐policy concessions with another. (342)

Absolute Advantage

The ability of a country or firm to produce more of a particular good or service than other countries or firms do with the same amount of effort and resources. Compare comparative advantage. (310)

Hecksher-Ohlin Trade Theory

The theory that a country will export goods that make intensive use of the factors of production in which it is well endowed. For example, a labor‐rich country will export goods that make intensive use of labor. (311)

*QUESTION ON OTHER SIDE* B; This is added to consumer surplus and comes from the enjoyment of more of the good. (Given the lower price, the quantity demanded is higher.)

This figure shows the shift in consumer and producer surplus after a country moves to free trade. Free trade lowers the price of a good from P to Pw (the world price). Which of the areas on the graph represents the gains from trade (benefit that is created by trade and is not present under autarky)?

Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, whereas in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Ukraine can produce an automobile component part using man-hours, resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same automobile component costs approximately 60 euros to produce.Using only what you can learn from the information above, label the following statements as either true or false. In the absence of already existing trade barriers, Austrian wheat farmers have an incentive to ask their government for protection against cheaper imports

True

Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, whereas in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Ukraine can produce an automobile component part using man-hours, resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same automobile component costs approximately 60 euros to produce.Using only what you can learn from the information above, label the following statements as either true or false. Relative to Ukraine, Austria has a comparative advantage in the production of automobile parts.

True

Two hypothetical countries, Val Verde and Santo Azure, are both land-scarce with agricultural sectors that employ relatively few people and are concentrated in a few rural provinces that nonetheless enjoy the same status as more populous urban province. The two countries also have identical political party structures and electoral rules. -- In Val Verde, the legislature contains an equal number of representatives from each province (like the U.S. Senate). -- In Santo Azure, representation in the legislature is allocated according to the population of each province (like the U.S. House of Representatives). In which country is it more likely that the legislature will enact protectionist measures for agriculture?

Val Verde (Explanation: Val Verde's allocation of representatives in the legislature gives disproportionate representation to agricultural interests, increasing their political power.)

Choose all of the following that are examples of ways in which the negotiation of regional trade agreements (RTAs) can overcome problems of strategic interaction.

Ways RTAs Overcome Problems of Strategic Interaction: - RTAs involve smaller numbers of countries, which may make it easier for members to monitor each other's behavior. - RTAs can allow concessions in trade policies to be made by linking such concessions to other national interests. Not Ways RTAs Overcome Problems of Strategic Interaction: - RTAs allow for more countries to participate than the WTO does. - RTAs avoid skepticism that international trade institutions don't satisfy individual country's interests.

Neo-Mercantilism

A belief that national economic policy should encourage exports and discourage imports, and that the country should aim to run a trade surplus. So called in relationship to the classical mercantilism of the colonial powers, which aimed at running trade surpluses with their colonies. (310)

Ricardo-Viner (specific-factors) model

A model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature of the factor itself. This differentiates it from the Heckscher‐Ohlin theory, for which the nature of the factor—labor, land, capital—is the principal consideration. (325)

Most-Favored Nation (MFN) Status

A status established by most modern trade agreements guaranteeing that the signatories will extend to each other any favorable trading terms offered in agreements with third parties. (342)

Tariff

A tax imposed on imports. Tariffs raise the domestic price of the imported good and may be applied for the purpose of protecting domestic producers from foreign competition. (316)

Regional Trade Agreements (RTAs)

Agreements among three or more countries in a region to reduce barriers to trade among themselves. (346)

*QUESTION ON OTHER SIDE* Answer: Comparative/Absolute (*In Full Sentence*) England has a comparative advantage in producing cloth if the opportunity cost (i.e., the amount of wine that can be produced with the same resources) of producing one bolt of cloth there is less than it would be for production in Portugal. Portugal has an absolute advantage in producing both cloth and wine when it takes fewer person-hours to produce one unit of each than in England.

Analyze the Table and complete the passage. England has a(n) _______________ advantage in producing cloth if the opportunity cost (i.e., the amount of wine that can be produced with the same resources) of producing one bolt of cloth there is less than it would be for production in Portugal. Portugal has a(n) _______________ advantage in producing both cloth and wine when it takes fewer person-hours to produce one unit of each than in England.

When governments agree to exchange trade-policy concessions with another, this is known as ____________, a concept related to the more general ____________ guaranteeing that signatories to a trade agreement will receive the same favorable trading terms that are offered in agreements with third parties.

Answer: Reciprocity, Most-Favored-Nation Status (*In Full Sentence*) When governments agree to exchange trade-policy concessions with another, this is known as reciprocity, a concept related to the more general most-favored-nation status guaranteeing that signatories to a trade agreement will receive the same favorable trading terms that are offered in agreements with third parties.

Choose all of the following that are historical examples of trade liberalization. - the Western world after 1945 - the 30 years following the outbreak of World War I in 1914 - large developing countries such as Brazil and India after the 1980s - the 300 years after 1492

Correct Answers: - large developing countries such as Brazil and India after the 1980s - the Western world after 1945 Incorrect Answers: - the 300 years after 1492 - the 30 years following the outbreak of World War I in 1914

In Country A, a political party representing labor interests was elected. It promptly instituted protectionist measures. In Country B, a political party representing labor interests was similarly elected, but it promptly decreased tariffs and other barriers to trade. Which explanation of the different policy decisions in Country A and Country B are consistent with the Stolper-Samuelson model?

Country A is labor-scarce, and country B is labor-abundant (Explanation: According to the Stolper-Samuelson theory, labor in a labor-scarce country will be comparatively disadvantaged and will benefit from protectionism. Labor will benefit from trade in a labor-abundant country.)

In the wake of World War II, the nations of Western Europe initiated a project of greater cooperation and economic integration. Place these events in chronological order from earliest to most recent. - Vote in which the British public chose to leave the European Union - Creation of a customs union - Introduction of the European Central Bank and a common currency for many of the member states - Cooperation on coal and steel production

- Cooperation on coal and steel production - Creation of a customs union - Introduction of the European Central Bank and a common currency for many of the member states - Vote in which the British public chose to leave the European Union

One way that institutions can make cooperation easier is by setting standards that allow all countries to know if another country is abiding by its agreements. Which of the following in an example of how the World Trade Organization (WTO) sets standards? - Liberalizing trade across all sectors of concern to both developed and developing countries - Allowing large trading states to dominate the agenda - Limiting the number of actors to facilitate cooperation - Creating rules about when and how countries can use safeguards to protect domestic industries

- Creating rules about when and how countries can use safeguards to protect domestic industries (Explanation: By establishing the conditions under which these safeguards can be used and setting time limits on them, these standards allow countries to react to domestic political pressures and economic problems.)

Choose all of the following that are nontariff barriers to trade that act to restrict imports. - Quantitative restrictions (quotas) on goods imported - A tax on imports levied at the border and paid by the importer - "Buy American" laws that govern what federal, state, or local governments can buy - Regional trade agreements (RTAs) that allow members to bid for government procurement contracts in other member states

Correct: - Quantitative restrictions (quotas) on goods imported - "Buy American" laws that govern what federal, state, or local governments can buy Incorrect: - A tax on imports levied at the border and paid by the importer - Regional trade agreements (RTAs) that allow members to bid for government procurement contracts in other member states

Why is the concept of comparative advantage important? A) It contends that international trade will disproportionately benefit the wealthiest countries B) It asserts that trade barriers are important means to protect workers and the environment C) It suggests that countries that are trading partners are less likely to go to war D) It implies that all countries can benefit from trade even if one country has an absolute advantage in the production of all goods.

D) It implies that all countries can benefit from trade even if one country has an absolute advantage in the production of all goods.

__________ is a central organizing principle for groups like the World Trade Organization, which holds that concessions granted by one government will be met by concessions from the others. A) Mutuality B)Brinksmanship C) Collectivism D) Reciprocity

D) Reciprocity

Match each theory of how different sets of actors will support or oppose trade protectionism with the corresponding example(s). (Either Stopler-Samuelson Theorem, Ricardo-Viner (specific factors) Model, or firm-based trade theory) Farmers in land-poor Japan are protectionist, but farmers in land-rich Argentina will be free traders.

Stolper-Samuelson Theorem

Comparative Advantage

The ability of a country or firm to produce a particular good or service more efficiently than the other goods or services that it can produce, such that its resources are most efficiently employed in this activity. The comparison is to the efficiency of other economic activities that the actor might undertake, given all the products it can produce—not to the efficiency of other countries or firms. Compare absolute advantage. (310)

Which of the following is true about World Trade Organization (WTO) rules? - WTO rules provide no recourse for countries that believe foreign exporters or importers are not complying with the rules - WTO rules allow countries to apply safeguards that temporarily protect domestic industries from trade pressures. - WTO rules allow smaller countries to pursue their interests more effectively than larger countries - WTO rules are uncontroversial because they promote trade that benefits all trading partners

- WTO rules allow countries to apply safeguards that temporarily protect domestic industries from trade pressures. (Explanation: Although the goal is to lower barriers to trade, WTO rules do allow countries, under some circumstances, to invoke temporary trade protections.)

What does the Heckscher-Olin theory predict about exports? A) A country will export goods that use its abundant factors of production B) A country will not export if it is geographically isolated C) A country will export only to its neighbors D) A country will export goods that use its scarce factors of production.

A) A country will export goods that use its abundant factors of production

What is a tariff? A) a tax on imports B) a way to promote free trade C) a form of diplomacy D) a limit on how many imports come in

A) a tax on imports

Economists postulate that states can thrive in trade by producing those goods they can make the most cost-effectively, given their own resources. This is in contrast to the notion that they must produce them more cost-effectively than other countries, which is known as A) absolute advantage B) comparative disadvantage C) relative export advantage D) global cost-effectiveness.

A) absolute advantage

What is most-favored nation status? A) an institutional arrangement under which a country gives all signatories to an agreement the same benefits of trade B) an institutional arrangement under which a country builds an embassy in another country C) an institutional arrangement under which a country becomes president of the UN Security Council D) an institutional arrangement under which a country invites another country to join a military alliance

A) an institutional arrangement under which a country gives all signatories to an agreement the same benefits of trade

The Stolper-Samuelson theorem would predict that in the United States, organized labor would generally oppose free-trade agreements with which of the following? A) developing countries with abundant supplies of inexpensive labor B) countries that produce high-tech consumer goods C) countries that rely on expensive, specialized labor D) countries with a high level of agricultural production

A) developing countries with abundant supplies of inexpensive labor

True or False: The Heckscher-Ohlin trade theory primarily explains why countries frequently trade more with allies than with hostile nations.

False (Explanation: The Heckscher-Ohlin theory predicts that countries will import and export based on their different factor endowments (which determine their comparative advantage). It has less to say about how other factors can influence trade.)

True or False: Trade protectionism finds more support among economists than among the public.

False! (Explanation: The public favors trade protectionism at much higher rates than do economists. Trade barriers tend to reflect specific interests and not necessarily what is seen by economists on as optimal.)

In what way might regional trade agreements (RTAs) fail to contribute to an overall goal of global free trade?

Regional trade agreements might limit trade with countries outside the RTA

Because the members of the U.S. Congress respond to the needs of their specific constituents rather than the broader national interests, A) they are generally more protectionist than most U.S. presidents B) they are as protectionist as most U.S. presidents C) they are more in favor of foreign trade than most U.S. presidents D) their position on foreign trade varies with party loyalty.

A) they are generally more protectionist than most U.S. presidents

Unlike the Stolper-Samuelson model, the Ricardo-Viner model focuses on A) the institutions of the state that control the economy B) sectors in which factors of production are employed C) time periods D) military power.

B) sectors in which factors of production are employed

Countries are more likely to enter bilateral or regional trade agreements when A) they have larger numbers, secrecy is maintained during negotiations, a brief history of trade ties increases the anticipation of further trade, and trade relations are not linked to other economic and noneconomic issues B) they have smaller numbers, information about the potential partners is readily available, the partners have a long history of interactions, and trade relations are linked to other economic and noneconomic issues C) they have smaller numbers, secrecy is maintained during negotiations, the partners are trying to establish trade ties, and trade relations are not linked to other economic and noneconomic issues D) they have larger numbers, information about the potential partners is readily available, the partners have a long history of interactions, and trade relations are not linked to other economic and noneconomic issues.

B) they have smaller numbers, information about the potential partners is readily available, the partners have a long history of interactions, and trade relations are linked to other economic and noneconomic issues

Choose all of the following that are examples of the factors that the Heckscher-Ohlin trade theory uses to explain national comparative advantage and trading patterns. - trading between branches of a company, such as when a Ford engine factory in the United States sends an engine to a Ford assembly plant in Mexico - the United States exporting capital-intensive machinery to Mexico, while labor-rich Mexico sends labor-intensive manufactured products to the United States - China and India exporting their labor-intensive manufactures to North America and Western Europe and importing capital-intensive industrial goods—including the complex machinery needed to operate domestic factories - the United States exporting agricultural products during the nineteenth century

Correct Answers: - the United States exporting capital-intensive machinery to Mexico, while labor-rich Mexico sends labor-intensive manufactured products to the United States (Explanation: Heckscher-Ohlin trade theory predicts that sparsely populated countries with abundant fertile land will specialize in producing farm goods.) - China and India exporting their labor-intensive manufactures to North America and Western Europe and importing capital-intensive industrial goods—including the complex machinery needed to operate domestic factories - the United States exporting agricultural products during the nineteenth century Incorrect: - trading between branches of a company, such as when a Ford engine factory in the United States sends an engine to a Ford assembly plant in Mexico

Nontariff barriers to trade

Obstacles to imports other than tariffs (trade taxes). Examples include restrictions on the number of products that can be imported (quantitative restrictions, or quotas); regulations that favor domestic over imported products; and other measures that discriminate against foreign goods or services. "Buy American" laws that govern what state and local governments can buy, for example, are an implicit—but nontariff—obstacle to the purchase of imports. (316)

Using the Stolper-Samuelson model, label each group of actors in the described country with its likely preference in trade policy for either openness or protectionism. Capitalists in a wealthy, developed country.

Openness

Using the Stolper-Samuelson model, label each group of actors in the described country with its likely preference in trade policy for either openness or protectionism. Farmers in a land-scarce country

Protectionism

Using the Stolper-Samuelson model, label each group of actors in the described country with its likely preference in trade policy for either openness or protectionism. Low-skilled labor in a wealthy, developed country.

Protectionism

Ukraine and Austria both produce wheat. Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Based solely on this information, which of the following statements is accurate? - Ukraine has comparative advantage in wheat production - Relative to Austria, Ukraine has absolute advantage in wheat production. - Austria has comparative advantage in wheat production

Relative to Austria, Ukraine has absolute advantage in wheat production. (Explanation: Absolute advantage ability is the "ability of a country or firm to produce more of a particular good or service than other countries or firms do with the same amount of effort and resources." This information clearly states that Ukraine can produce just as much wheat as Austria with fewer resources.)

Trade policy in the United States is largely influenced by the organization and representation of different interests. In the following pairs of competing interest which is better organized or better represented in Congress. Rural Interest versus Urban Interests Food Consumers versus Farmers

Rural Interest and Farmers

Match each theory of how different sets of actors will support or oppose trade protectionism with the corresponding example(s). (Either Stopler-Samuelson Theorem, Ricardo-Viner (specific factors) Model, or firm-based trade theory) In the unskilled-labor-scarce and capital-abundant United States, unskilled workers will support trade barriers, while investors and skilled workers oppose them.

Stolper-Samuelson theorem

*QUESTION ON OTHER SIDE* Correct Answers: - As trade in a good opens up, the price for that good falls. - At the lower price for a freely traded good, domestic consumer demand increases. Incorrect Answers: - With freer trade, producer surplus increases. - Aggregate welfare—the combination of producer and consumer surplus—decreases with free trade.

Which of the following statements about Figure A.2 are correct? - With freer trade, producer surplus increases. - Aggregate welfare—the combination of producer and consumer surplus—decreases with free trade. - As trade in a good opens up, the price for that good falls. - At the lower price for a freely traded good, domestic consumer demand increases.

In the following paragraph, which of the actions or policies by the government of Country A have the effect of sheltering domestic producers from foreign competition. Country A is a small, open country. It gained World Trade Organization membership in the last five years. Country A exports agricultural goods and imports manufactured goods. As part of the WTO accession process, the government negotiated to keep a long-standing tariff on textiles for the next ten years. Country A's government provides subsidized fertilizer for its agriculture producers. It also requires state and local governments to purchase paper products made domestically.

tariff on textiles AND requires state and local governments to purchase paper products made domestically