Macroeconomics - Arnold - Chapter 9

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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.


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