Pre Built Chapter 8 EcoN

True or false? Wages in China are lower than those in the United States. This means that China has a comparative advantage in everything.

False. Comparative advantage refers to relative cost; therefore, if China has a comparative advantage in producing a set of goods, its trading partner will have a comparative advantage in producing another set of goods.

What are three sources of comparative advantage that the United States has and will likely maintain over the coming decade?

Skills of the U.S. labor force. U.S. governmental institutions. U.S. physical and technological infrastructure.

Would the United States want to raise or lower the world supply of the good? Why?

The United States would want to raise the world supply to the point where the world supply would equal the domestic demand and supply at the domestic equilibrium price; imports would be exactly offset by exports.

Why does competition among traders affect how much of the gains from trade are given to the countries involved in the trade?

Traders will compete with one another, giving countries greater and greater amounts of the gains from trade to gain their business.

Will a country do better importing or exporting a good for which it has a comparative advantage?

A country will do better exporting a good for which it has a comparative advantage.

From the standpoint of adjustment costs to trade, which would a country prefer—inherent or transferable comparative advantage? Why?

A country would prefer an inherent comparative advantage because it would not lose that comparative advantage or face the adjustment costs that accompany the change of comparative advantages.

How does a depreciation of a currency change the price of imports and exports? Explain using the U.S. dollar and the Chinese yuan.

A depreciation of the U.S. dollar will lead to an increase in the relative price of goods from China.

How would The United States would raise the world supply to the point where the world supply would equal the domestic demand and supply at the domestic equilibrium price; imports would be exactly offset by exports.

An increase in the domestic economy's exchange rates relative to a decrease in wages or improvements in comparative advantage can eliminate the trade deficit and raise the world supply.

What are reasons why economists' and laypeople's view of trade differ?

Economists can identify both the costs and benefits of trade. Laypeople often do not recognize that the decline in product prices is the result of trade, while they can readily identify that lost jobs are the costs. Economists know that comparative advantage implies that each country is better at producing at least one good. Laypeople worry that since wages are lower in China, it has a comparative advantage in all goods and the United States will lose all its jobs. Economists recognize that trade occurs in more sectors than manufacturing. They see the comparative advantage that the United States has in trading services. Laypeople tend to see trade as trade in manufactured goods only.

How has globalization made the rich richer and poor poorer in the United States?

Globalization led to outsourcing of low income manufacturing jobs while increasing demand for high income financial jobs.

What are some reasons why a small country might not get the gains of trade?

If traders face little competition.

How do inherent comparative advantages differ from transferable comparative advantages?

Inherent comparative advantages are those that are based on factors that are relatively unchangeable, while transferable comparative advantages are those based on factors that can change relatively easily.

Why do smaller countries usually get most of the gains from trade?

More trade opportunities are opened up for small countries.

How does the outsourcing of manufacturing production benefit production in the United States?

Outsourcing hurts some U.S. workers, but since it improves global income, it can lead to additional demand for goods produced in the United States.

Would you expect the resource curse to improve or worsen the distribution of income in a country?

The resource curse will reduce the comparative advantage of other tradable goods.