Macroeconomics - Arnold - Chapter 9
Is free trade more likely to benefit a large, populous country or a small country with fewer people?
A small country with fewer people.
Which of the following describes the extent of international trade in the U.S. economy?
About 66 percent of U.S. manufacturing industries depend on exports for at least 10 percent of jobs.
Why do some people oppose the World Trade Organization (WTO)?
All of the above
Political commentator B. Bruce-Biggs once wrote the following in the Wall Street Journal: "This is not to say that the case for international free trade is invalid; it is just irrelevant. It is an 'if only everybody. . . .' argument. . . . In the real world almost everybody sees benefits in economic nationalism." Choose the correct answer that might refer to "economic nationalism." Do you agree that a country only benefits from free trade if every other country also practices free trade?
All of the above. No
The graph at right shows the effect on consumer surplus, producer surplus, government tariff revenue, and economic surplus of a tariff of $1 per unit on imports of plastic combs into the United States. Use the areas denoted in the graph to answer the following questions. Which area(s) shows the total loss to U.S. consumers as a result of the tariff on combs? Which area(s) shows the amount of surplus transferred from consumers to producers as a result of the tariff on combs? Which area(s) show the deadweight loss to the U.S. economy as a result of the tariff on combs?
A + B + C + D. A B + D
In the 2016 Summer Olympic Games, Ashton Eaton (from the United States) won a gold medal in the decathlon, which requires athletes to compete in 10 different track and field events. In one of these events, Eaton ran a 100-meter race in 10.46 seconds. In a separate event, Usain Bolt (from Jamaica) won a gold medal by running 100 meters in 9.81 seconds. a. The concept of comparative advantage better explains b. Based on their performance at the 2016 Olympic Games, who was the better athlete?
Bolt's performance because he specialized in an event and had the fastest time. This cannot be determined because this is a normative question
Steven Landsburg, an economist at the University of Rochester, wrote the following in an article in the New York Times: "Free trade is not only about the right of American consumers to buy at the cheapest possible price; it's also about the right of foreign producers to earn a living. Steelworkers in West Virginia struggle hard to make ends meet. So do steelworkers in South Korea. To protect one at the expense of the other, solely because of where they happened to be born, is a moral outrage." A few days later, Tom Redburn published an article disagreeing with Landsburg: "It is not some evil character flaw to care more about the welfare of people nearby than about that of those far away--it's human nature. And it is morally--and economically--defensible. . . . A society that ignores the consequences of economic disruption on those among its citizens who come out at the short end of the stick is not only heartless, it also undermines its own cohesion and adaptability." How does the U.S. government protect steelworkers in West Virginia at the expense of steelworkers in South Korea? Which of the two arguments is most convincing?
By imposing a tariff on steel imports, the government protects U.S. steelworkers by reducing imports; however, that means South Korea is exporting less steel, which hurts steelworkers there. Since both of these arguments are based on normative statements, someone could find either argument more convincing.
Suppose the government is considering imposing either a tariff or a quota on canned peaches. Assume that the proposed quota has the same effect on the U.S. price of canned peaches as the proposed tariff. Use the graph at right to answer the following questions. If the government imposes a tariff, which area shows the government tariff revenue? If the government imposes a quota, which area shows the gain to foreign producers of canned peaches? Consumers of peaches would
C C be indiferent between a quota and a tariff because the outcomes are the same for them.
While running for the 2016 Democratic nomination for president, Vermont Senator Bernie Sanders opposed the Trans-Pacific Partnership in part because he believed that as a result of the agreement, "the U.S. will lose more than 130,000 jobs to Vietnam and Japan alone." Do you agree that reducing barriers to trade reduces the number of jobs available to workers in the United States?
Disagree. While some jobs are saved by trade restrictions, many more jobs are lost in industries that use trade restricted goods as inputs.
Who gains and who loses when a country imposes a tariff or a quota on imports of a good? Suppose the United States imposes a tariff or quota on sugar imports. For each of the following, enter the letter G if it will gain from the tariff or quota or enter the letter L if it will lose from the tariff or quota.
Domestic sugar producers and their workers G Consumers L Industries that use sugar and their workers L The U.S. economy L
Exports are goods and services produced domestically but sold to other countries. Imports are goods and services bought domestically but produced in other countries. Tariffs are taxes imposed by a government on imports of a good into a country.
Exports Imports Tariffs
Patrick J. Buchanan, a former presidential candidate, argues in his book on the global economy that there is a flaw in David Ricardo's theory of comparative advantage "Classical free trade theory fails the test of common sense. According to Ricardo's law of comparative advantage. . . if America makes better computers and textiles than China does, but our advantage in computers is greater than our advantage in textiles, we should (1) focus on computers, (2) let China make textiles, and (3) trade U.S. computers for Chinese textiles The doctrine begs a question. If Americans are more efficient than Chinese in making clothes . . . why surrender the more efficient American industry? Why shift to a reliance on a Chinese textile industry that will take years to catch up to where American factories are today?" According to comparative advantage, why is Buchanan's argument incorrect?
His argument is incorrect because the United States should free up resources to produce the goods in which it has the comparative advantage.
Briefly explain whether you agree with the following argument: "Unfortunately, Bolivia does not have a comparative advantage LOADING... with respect to the United States in the production of any good or service." (Hint: You do not need any specific information about the economies of Bolivia or the United States to be able to answer this question.)
If the U.S. trades at all with Bolivia, then the argument above is false. There would be no trade unless both countries were made better off, and this would imply Bolivia has the comparative advantage in the production of at least one good or service.
Alzuria and Narnia are two open economies that produce goods A and B. The productivity of workers in industry B in Narnia is higher than the productivity of the Alzurian workers producing B. This led industry experts to claim that Narnia should specialize in the production of B and export it to Alzuria in exchange for good A. Which of the following, if true, would strengthen the argument that Narnia should specialize in the production of B and export it?
Industry A in Narnia employs more people than it really needs.
Which of the following is not a main source of comparative advantage?
Internal economies of scale.
What is meant by a country specializing in the production of a good? Is it typical for countries to be completely specialized?
It shifts resources toward producing only those goods where it has a comparative advantage; No
Which of the following is an example of positive economic analysis?
Measuring the effect of the sugar quota on the U.S. economy.
Suppose you are explaining the benefits of free trade and someone states, "I don't understand all the principles of comparative advantage and gains from trade. I just know that if I buy something produced in America, I create a job for an American, and if I buy something produced in Brazil, I create a job for a Brazilian." Are they correct in asserting that free trade costs U.S. jobs? All of the following statements correctly describe the outcomes when the U.S. imports products in which it does not have a comparative advantage, except that
No, since free trade creates more jobs for the U.S. economy than it costs the U.S. the number of jobs in the U.S is reduced Jobs in the American cell phone industry may suffer but jobs in the American computer industry manufacturing tablet computers increase and in the overall American economy, more jobs are created
People in two neighboring villages of Safi and Shillong either produce chocolates at the chocolate factories in their respective villages, or work in the local bakeries to produce bread. Labor is the only input used in both industries. The following table shows the total daily production of chocolates and bread loaves in each village: Stanley Williams, a member of the village council at Shillong, is of the opinion that this village has an absolute advantage in the production of both chocolates and bread. His colleague, Amanda Jones, however feels that Shillong only has an absolute advantage in the production of bread. Stanley is assuming that
Shillong does not use more resources than Safi to produce chocolates and bread.
What events led to the General Agreement on Tariffs and Trade? Why did the World Trade Organization eventually replace GATT?
The Great Depression and the Smoot-Hawley Tariff; Trade in services and in products incorporating intellectual property grew in importance.
A political commentator makes the following statement: "The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United States and Japan. Rich countries have educated workers and large quantities of machinery and equipment. These advantages allow them to produce every product more efficiently than poor countries can. Poor countries like Kenya and Bolivia have nothing to gain from international trade based on comparative advantage." Is the commentator correct or incorrect?
The commentator is incorrect.
To encourage the domestic production of soybean oil, the Indian government imposed a 20% tariff on the import of soybean oil. The world price, when the tariff was imposed, was (in terms of the Indian currency, rupees) Rs.1,000 per ton of oil. The figure to the right shows the domestic supply and the level of imports before and after the imposition of the tariff. Which of the following is most supported by the information given?
The deadweight loss because they are forced to buy from less efficient domestic producers is Rs.300 million.
ountry Y exports a good to country X where it is sold at $15 per unit. The same good is sold in the home market at $17 per unit and in another market at a higher price still. Industry experts in country X claim that the good is being dumped and the government should intervene and protect the domestic industry. Which of the following, if true, would weaken the argument that dumping has occurred?
The demand for the good is much more elastic in country X than in the home country
Using the numbers in the table, determine which country has a comparative advantage in producing each product. Which of the following statements is true?
The opportunity cost for Canada to produce one Smartphone is 1.40 Fitness Bracelet. (Canada Fitness brazelet QTY divided by Canada smartphones QTY) Canada should produce Smartphones and Switzerland should produce Fitness Bracelets.
Country Y exports a good to country X where it is sold at $15 per unit. The same good is sold in the home market at $17 per unit and in another market at a higher price still. Industry experts in country X claim that the good is being dumped and the government should intervene and protect the domestic industry. Which of the following, if true, would weaken the argument that protection is required?
The price of the local variety of the same good is lower than the imported variety.
To encourage the domestic production of soybean oil, the Indian government imposed a 20% tariff on the import of soybean oil. The world price, when the tariff was imposed, was (in terms of the Indian currency, rupees) Rs.1,000 per ton of oil. The figure to the right shows the domestic supply and the level of imports before and after the imposition of the tariff. Suppose as result of the higher price of soybean oil, new domestic firms enter the market, causing an increase in the demand for Soybeans. Which of the following is the most likely implication of this?
The tariff revenue earned by the Indian government will decline.
The government of a country faced substantial pressure from different sectors to reduce tariffs. Many groups, including the media, were lobbying for an overall reduction in import tariffs imposed by the government. According to them, the country would gain if free trade were encouraged. While certain sectors reported increased exports after a reduction in trade restrictions, many firms went out of business in other sectors as imports increased. People who lost their jobs complained that the reduction in tariffs had done the nation more harm than good. Which of the following, if true, would support the claim of the people who lost their jobs?
The country's trading partners have not reduced their trade barriers.
What do most economists find to be the most persuasive argument in favor of protectionism?
Trade barriers protect infant industries that initially have relatively high costs.
Hal Varian, chief economist at Google, has made two observations about international trade. 1. Trade allows a country "to produce more with less." 2. There is little doubt who wins [from trade] in the long run: consumers.
True True
How is the U.S. economy affected by international trade?
U.S. consumers buy INCREASING quantities of goods and services produced in other countries. At the same time, U.S. businesses sell INCREASING quantities of goods and services to consumers in other countries.
Every year, the Gallup poll asks a sample of people in the United States whether they believe foreign trade provides "an opportunity for economic growth through increased U.S. exports," or whether they believe foreign trade represents "a threat to the economy from foreign imports." The table shows the responses for two years. Which of the following statements is most true? The general public's opinion of foreign trade might be substantially different during an economic recession as opposed to during an economic expansion because during an economic recession, Typically polls show that people in the United States under 30 years of age have a more favorable opinion of foreign trade than do people age 65 and over did. Younger people might have a more favorable view of foreign trade than older people because
When trade occurs, countries are better off, but some individuals may be worse off. unemployment is higher and workers will more likely resent foreign competition younger people have less career risk as a result of trade policy.
Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism?
Winners: Workers in trade protected industries. Losers: Industries that use trade protected goods as inputs.
Almia and Adjikistan are two open economies producing goods A and B. Many people in Almia, including the leading economists, are lobbying for trade. They feel that the country has a comparative advantage in good A that could be traded with good B from Adjikistan. The government of Adjikistan is also under pressure from various groups to encourage trade with Almia. However, when both countries begin to trade, gains from exporting good A to Adjikistan turn out to be much lower than what Almia's economists had anticipated. Which of the following, if true, would explain this outcome?
With the introduction ofWi trade, Adjikistan now has access to Almia's advanced production technology in A.
An article in the New York Times quoted an economist as arguing that "global free trade and the European single market...encourage countries to specialize in sectors where they enjoy comparative advantage. Germany's [comparative advantage] is in cars and machine tools." For the author's observation to be correct, must Germany be able to produce more cars and machine tools per hour worked than do France, Italy, the United Kingdom, and Germany's other trading partners? For Germany to have a comparative advantage in a product relative to France or another country, it would have
a lower opportunity cost of producing the product than the other country.
How does the World Trade Organization (WTO) allow countries to determine whether dumping has occurred? The WTO allows countries to determine that dumping has occurred if
a product is exported for a lower price than it sells for on the home market
Dumping is selling a product BELOW its cost of production. Who benefits and who loses from dumping? What problems arise when implementing anti-dumping laws?
below Consumers benefit while competing firms lose; The true production costs are not easy for foreign governments to calculate.
World Trade Organization publication calls comparative advantage "arguably the single most powerful insight in economics." The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as Referring to your answer above, what makes it such a powerful insight?
comparative advantage It explains why if individuals, firms, and countries specialize and trade they will be better off.
If the U.S. firms succeed in having tariffs imposed on imports of paper,
consumers will lose as paper prices rise but domestic paper firms will gain.
What is the name given to the sale of a product for a price below its cost of production?
dumping
Instagram is a smartphone app now owned by Facebook. According to an article that discusses the climate for software firms in the San Francisco Bay Area, the success of Instagram "is a tale about the culture of the Bay Area tech scene, driven by a tightly woven web of entrepreneurs and investors who nurture one another's projects with money, advice and introductions to the right people." Being located in the Bay Area gives start-up software firms an advantage because of
external economies likely to persist over time because more software firms will locate there, enhancing the external economies.
The opponents of globalization contend that
globalization destroys cultures.
According to an editorial in the Washington Post: "Sugar protectionism is a burden on consumers and a job-killer." a. The United States practices "sugar protectionism" by b. In what way is sugar protectionism a burden on consumers? "Sugar protectionism" is viewed as a "job killer" because c. If sugar protectionism has the bad effects as stated in the editorial, which of the following is a likely reason why Congress and the president do not eliminate it?
imposing a quota on sugar imports. it raises the prices of sugar and candy that consumers have to pay and leads to a loss of consumer surplus it leads to job losses in the candy industry and various food manufacturing industries that use sugar. All of the above
While running for president, Barack Obama made the following statement: "Well, look, people don't want a cheaper T-shirt if they're losing a job in the process." What did Obama mean by the phrase "losing a job in the process"? Obama was suggesting that a job would be lost if the T-shirt were cheaper because Using the economic concept of comparative advantage, explain under what circumstances it would make sense for the United States to produce all of the T-shirts purchased in the United States. The United States should produce all of the T-shirts purchased in the United States if the U.S. could produce
it would be produced in another country T-shirts at lower opportunity cost than other countries. Producers in industries in which the U.S. Pr has a comparative advantage would likely not agree with Obama.
Comparative advantage
may change as time passes and circumstances change.
We do not see complete specialization in the real world because
not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ.
Economic theory suggests countries benefit from international trade by producing more of those good and services for which they have a comparative advantage (and less of that for which a country does not have a comparative advantage). However, countries rarely specialize completely. Why? Even with international trade, countries rarely specialize completely because
production of most goods involves increasing opportunity costs.
The use of trade barriers to shield domestic companies from foreign competition is called
protectionism
Protectionism is the use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of several arguments which include:
saving jobs, protecting infant industries, and protecting national security.
In 1999, at a meeting of the World Trade Organization in Seattle, Washington, a large number of people protested attempts to reduce trade barriers. What is a reason why some would want to prevent trade barriers from being reduced? Some want to prevent trade barriers from being reduced because they
seek to protect domestic jobs.
In 2015, several U.S. paper manufacturers asked the federal government to impose tariffs on paper imported from China, Indonesia, Brazil, Portugal, and Australia. According to an article in the Wall Street Journal, firms in these countries were accused of "dumping certain types of uncoated paper on the U.S. market, including that used for such things as computer printers, book publishing, junk mail and envelopes." . "Dumping" is
selling a product for a price below its cost of production.se
If the government wants to protect import competing industries and its workers from foreign competition, it can impose a tax on imports called a Another restriction with a similar outcome would be to impose a limit on the amount of a specific good that can be imported. This restriction is called a Which of the following is not a non-tariff barrier to trade?
tariff quota Ad valorem tax on imports
The primary difference between a quota and a voluntary export restraint (VER) is that
the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations.
Although international trade leads to substantial net benefits, not everyone gains from international trade. Which of the following groups is most likely to lose from trade?
the workers and companies in the industries that compete with the imports
Globalization is the process of countries becoming more open to foreign Some people are opposed to globalization because they
trade and investment All of the above.
Protectionism is the use of _________ to shield domestic firms from foreign competition.
trade barriers
At one time, Eastman Kodak was the world's largest producer of photographic film, employing nearly 145,000 workers worldwide, including thousands at its headquarters in Rochester, New York. The firm eventually laid off most of those workers because its sales declined as it failed to adjust to digital photography as quickly as many of its foreign competitors. A member of Congress from Rochester described the many new firms that were now located in buildings that were formerly owned by Kodak. A New York Times columnist concluded, "Which, of course, is precisely the way globalization is supposed to work." When the New York Times columnist concluded that this was, "... precisely the way globalization is supposed to work" he meant that The outcome in Rochester shows that globalization
when an industry changes, jobs will be created in other sectors. is good for some, like the consumers of digital cameras, and bad for others, like the unemployed Kodak workers.
An article in the New Yorker magazine states, "the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. But...the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries." Explain how it is possible that middle- and lower-income Americans are both the biggest losers and at the same time the biggest winners from free trade. Source: James Surowiecki, It would be possible for middle- and lower-income Americans to be both the biggest losers and at the same time the biggest winners from free trade if they are the ones most likely to
work in industries that produce at higher opportunity cost than in other countries and purchase those goods that can be produced at lower opportunity cost in other countries
In addition to tariffs and quotas, governments sometimes erect other barriers to trade. For example, all governments require that imports meet certain health and safety requirements. Many governments also restrict imports of certain products on national security grounds. Explain whether you agree or disagree with the following statement: Sometimes, however, governments use these requirements to shield domestic firms from foreign competition.
yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms.
According to the analysis by Hufbauer and Lowry, of the additional $1.1 billion consumers spent on tires as a result of the tariff on Chinese tires, the workers whose jobs were saved in the U.S. tire industry received only about $48 million in wages. Would it have been cheaper for the federal government to have raised taxes on U.S. consumers and given the money to tire workers rather than to have imposed a tariff? The federal government did not adopt this alternative policy because
Yes, because Hufbauer and Lowry concluded that the tariff cost U.S. consumers more than $900,000 per year for each job saved in the tire industry. the United Steelworkers Unions had sufficient political power to persuade Congress to pass this tariff.
