Deck 35: International Trade and Comparative Advantage

Question 1

Country A has a mercantilist government that believes it is always best to export more than it imports. As a consequence, it exports more to Country B every year than it imports from Country B. After 100 years of this arrangement, both countries are destroyed in an earthquake. What were the advantages or disadvantages of the surplus to Country A To Country B

Answer 1

Country's trade
Assume country A's exports to country B is always more than its imports from country B.
In this case, country A has more trade surplus and country B has more trade deficit.
When both the countries are destroyed due to earthquake after 100 years of trade, then country B has advantage and country A has disadvantage since country B enjoys more goods than it produced at the cost of country A's export.

Question 2

Under current trade law, the president of the United States must report periodically to Congress on countries engaging in unfair trade practices that inhibit U.S. exports. How would you define an "unfair" trade practice Suppose Country X exports much more to the United States than it imports, year after year. Does that constitute evidence that Country X's trade practices are unfair What would constitute such evidence

Answer 2

Unfair trade practices
Unfair trade practices refer to the practices of any government to increase their sales in the foreign market by making them artificially more competitive through subsidies and other measures.
Since country X exports much more to the United States than its imports year after year, it cannot be claimed that country X has unfair trade practices. There is a possibility that United States can import goods from country X, which may have price advantage and best quality. On the other hand, country X may not need much of imports from United States. So, country X has surplus trade with United States.

Question 3

Suppose the United States finds Country X guilty of unfair trade practices and penalizes it with import quotas. So U.S. imports from Country X fall. Suppose, further, that Country X does not alter its trade practices in any way. Is the United States better or worse off What about Country X

Answer 3

Unfair trade practices
Unfair trade practices refer to the practices of any government to increase sales in the foreign market (or capture the market of other countries) by making them artificially more competitive through subsidies and other measures.
United States will become better off and country X will become worse off
If the United States imposes the import quota to control the exports from country X that is involved in unfair trade practices, then imports from country X will decrease. By controlling the imports from country X, the United States will become better off, whereas country X becomes worse off due to decreases in exports.

Question 4

The following table presents the demand and supply curves for laptop computers in Japan and the United States.

a. Draw the demand and supply curves for the United States on one diagram and those for Japan on another one.
b. If the United States and Japan do not trade, what are the equilibrium price and quantity in the laptop market in the United States In Japan
c. Now suppose trade is opened up between the two countries. What will be the equilibrium price in the world market for laptops What has happened to the price of laptops in the United States In Japan
d. Which country will export laptops How many e. When trade opens, what happens to the quantity of laptop computers produced, and therefore employment, in the computer industry in the United States In Japan Who benefits and who loses initially from free trade

Question 5

You have a dozen shirts and your roommate has six pairs of shoes worth roughly the same amount of money. You decide to swap six shirts for three pairs of shoes. In financial terms, neither of you gains anything. Explain why you are nevertheless both likely to be better off.

Question 6

The following table describes the number of yards of cloth and barrels of wine that can be produced with a week's worth of labor in England and Portugal. Assume that no other inputs are needed.

a. If there is no trade, what is the price of wine in terms of cloth in England
b. If there is no trade, what is the price of wine in terms of cloth in Portugal
c. Suppose each country has 1 million weeks of labor available per year. Draw the production possibilities frontier for each country.
d. Which country has an absolute advantage in the production of which good(s) Which country has a comparative advantage in the production of which good(s)
e. If the countries start trading with each other, which country will specialize and export which good
f. What can be said about the price at which trade will take place

Question 7

In the eighteenth century, some writers argued that one person in a trade could be made better off only by gaining at the expense of the other. Explain the fallacy in this argument.

Question 8

Suppose that the United States and Mexico are the only two countries in the world and that labor is the only productive input. In the United States, a worker can produce 12 bushels of wheat or 2 barrels of oil in a day. In Mexico, a worker can produce 2 bushels of wheat or 4 barrels of oil per day.
a. What will be the price ratio between the two commodities (that is, the price of oil in terms of wheat) in each country if there is no trade
b. If free trade is allowed and there are no transportation costs, which commodity would the United States import What about Mexico
c. In what range would the price ratio have to fall under free trade Why
d. Picking one possible post-trade price ratio, show clearly how it is possible for both countries to benefit from free trade.

Question 9

Country A has a cold climate with a short growing season, but a highly skilled labor force (think of Finland). What sorts of products do you think it is likely to produce What are the characteristics of the countries with which you would expect it to trade

Question 10

After the removal of a quota on sugar, many U.S. sugar farms go bankrupt. Discuss the pros and cons of removing the quota in the short and long runs.