Deck 17: International Trade

Question 1

How does relaxing the assumption of constant costs affect the comparative advantage argument for trade?

Answer 1

In the simplified analysis of comparative advantage,opportunity costs are assumed to be constant.In other words,the production possibilities curves of nations are linear.The more realistic representation is nations with increasing costs and concave-to-the-origin production possibilities curves.This change,however,does not affect the general conclusion of comparative advantage.To improve efficiency in the allocation of resources,nations must still specialize in the areas of their comparative advantage.The specialization,however,is not complete.While nations increase their production of goods in which they have a comparative advantage,they do not completely eliminate production of other products.

Question 2

Why has international trade grown rapidly since World War II?

Answer 2

International trade has grown because of three main factors.First,transportation costs have fallen substantially.Second,communication costs are also much lower as a result of computers and other technological developments.Third,trade barriers have declined as a result of trade negotiations such as the General Agreement on Tariffs and Trade.For example,Canada's tariffs are 5% of imports,down from over 20 percent in the mid-1930s.

Question 3

Explain and evaluate the validity of the self-sufficiency argument for trade protection.

Answer 3

The basic argument is that domestic industries that are vital to national defence and security should be protected against foreign competition because otherwise the industries will not be able to compete or be economically viable.Nations do not want to be dependent on other nations for national defence.The argument is generally one of need for political-military self-sufficiency as opposed to economic efficiency.
The problem with the argument is that nearly every industry is critical in one way or another to national defence and security.It is difficult to select "defence" industries to protect.Every industry can claim that it is directly or indirectly vital to national defence.Also,imposing tariffs imposes costs only on those consumers who purchase an industry's products because the prices of those products will be above competitive levels.Thus,only the people who buy the protected products bear the burden of protecting the domestic industries considered vital to national defence and security.It would be more economical and more equitable for government to subsidize those industries that are deemed vital to national defence and security.

Question 4

Suppose that by devoting all of its resources to the production of X,nation L can produce 40 X.By devoting all of its resources to Y it can produce 20 Y.Comparable figures for nation M are 15 X and 15 Y.According to the principle of comparative advantage,which nation will specialize in which product? What are the limits to the terms of trade?

Question 5

What are the economic benefits of free trade?

Question 6

How important is international trade for Canada?

Question 7

Cite three important reasons why nations trade.

Question 8

In 2010,what were the top five exporting nations (measured in dollars)?

Question 9

What are the limitations to the diversification for stability argument for trade protection?

Question 10

Answer the following questions regarding international trade:
(a)What is the common myth regarding the benefits from international trade?
(b)What is the associated implication arising from this myth?
(c)What is the true benefit from international trade?

Question 11

Identify the four basic types of trade barriers and describe each of them.

Question 12

How can supply and demand analysis be used to explain the equilibrium price and quantity of exports and imports for aluminum when there is trade between two nations (e.g. ,the United States and Canada)?

Question 13

Who gains and who loses from a protective tariff? Explain.

Question 14

In what ways are national economies linked?

Question 15

What are the net costs of tariffs and quotas on consumption and income distribution?

Question 16

What are Canada's top four exports and imports?

Question 17

What are the similarities and differences in the economic effects of tariffs and quotas?

Question 18

How do protectionist policies affect consumers,workers,producers,and the government? Explain.

Question 19

"The international flow of goods helps compensate for the international immobility of resources." Analyze and explain.

Question 20

Which is more effective in blocking imports,a tariff or a quota?

Question 21

Evaluate the argument: "Restricting imports from other nations will save Canadian jobs."

Question 22

Critique the argument that trade protection is needed to protect Canadian jobs.

Question 23

Evaluate the validity of the argument that a new industry in a nation needs protection from foreign competition if it is to prosper.

Question 24

Of all the reason for protests against the WTO,which are most substantive?

Question 25

Why might trade barriers be a highly ineffective technique for increasing domestic employment?

Question 26

What is the problem associated with the importing of goods by high-income nations from low-income nations? Explain how consumer organisations in high-income nations have tried to circumvent this problem.

Question 27

What is the problem with protecting industries in Canada from the dumping of foreign products on the domestic market?

Question 28

Evaluate the statement: "Tariffs and quotas are needed to protect Canadian products from dumping."

Question 29

Evaluate this argument for a trade barrier: "Canada needs protection from cheap foreign labour."

Question 30

How can Canada compete successfully with relatively low-wage nations such as India and China?

Question 31

What are the benefits of having a common currency such as the Euro?