Deck 19: International Trade, Comparative Advantage, and Protectionism

Question 1

Suppose an attorney has hired a very well-educated secretary that is not only more productive in filing briefs but also more productive at typing than he is. Can you provide any explanation for why it might still make sense for him to continue filing briefs while the secretary continues to do the typing?

Answer 1

Even though the attorney may be less productive at filing briefs than his own secretary it might be that he is able to do this at a lower opportunity cost than his secretary. On the other hand the secretary's opportunity cost of typing may be less than that of the attorney.

Question 2

Assume the United States has an absolute advantage in the production of everything compared to the African nation of Berundi. Can you think of any reason why both nations would still find it to their mutual advantage to trade with each other?

Answer 2

Comparative advantage is the driving force behind why nations trade, not absolute advantage. What that means is that even though one nation has an absolute advantage in everything compared to another it can't possibly have a comparative advantage in everything. Likewise, even though in this case Berundi has an absolute disadvantage in the production of everything it will have a comparative advantage in at least one thing.

Question 3

Using the above figure determine which country has the comparative advantage in the production of corn. In addition, determine which has the comparative advantage in the production of barley.

Answer 3

The United States has the comparative advantage in the production of barley. The reason is that the opportunity cost to the United States for producing one bushel of barley is one bushel of corn. By contrast, Mexico's opportunity cost of one bushel of barley is two bushels of corn. Since the opportunity cost of producing one bushel of corn in Mexico is one-half of a bushel of barley that gives Mexico the comparative advantage in the production of corn.

Question 4

Explain absolute advantage.

Question 5

Scenario 1
Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small.
Based on Scenario 1 above critically evaluate the following statement. "Because of the disparities in skills between these two men it will not be beneficial for them to trade with one another."

Question 6

bushels of corn. Draw the production possibilities for both countries assuming constant costs.

Question 7

What is the theory of comparative advantage?

Question 8

Using the Figure above for Australia and New Zealand determine which country has the comparative advantage in the production of cotton and which the comparative advantage in the production of wheat.

Question 9

Explain comparative advantage.

Question 10

Critically evaluate the following statement. "Only if a country enjoys an absolute advantage in the production of a particular good will that country find it beneficial to trade it with another country.

Question 11

Compare and contrast absolute advantage and comparative advantage.

Question 12

Define trade surplus and trade deficit.

Question 13

Discuss the Corn Laws and their purpose.

Question 14

Explain what happens when nations don't trade. In addition, explain what happens after they decide to trade.

Question 15

Scenario 1
Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small.
Based on Scenario 1 above critically evaluate the following statement. "Because of the productivity differential between the two men we can conclude that the young man has a comparative advantage in the production of everything over the older man.

Question 16

Why might a nation that has an absolute advantage in the production of a good or a service still not be able to find a trading partner?

Question 17

Critically evaluate the following statement. "It is possible to calculate comparative advantage even when prices are not known."

Question 18

Assume the following information for the United States and Mexico. The United

Question 19

Assume a manager of a major league baseball team has a player that is the best pitcher on team the team. However, he decides to to have him play right field instead. It turns out that he is not the best right fielder on the team. How might this manager defend his decision?

Question 20

According to the table above determine which country has the absolute advantage in corn and which in soybeans. In addition, determine which country has the comparative advantage in corn and which in soybeans. Make sure to support your answer by deriving the opportunity costs of each.

Question 21

What are factor endowments?

Question 22

What is protection as it refers to international trade?

Question 23

Explain what the free market will do if exchange rates end up in the "right ranges."

Question 24

When trade is free (unimpeded by government-instituted barriers) how are the patterns of trade and trade flows determined?

Question 25

What are the assumptions of the Heckscher-Ohlin theorem?

Question 26

Define the exchange rate.

Question 27

List the three most common forms of trade barriers.

Question 28

Why is it difficult for one country to determine if another country is guilty of the practice of dumping?

Question 29

What is meant by the statement "People trade, not nations."

Question 30

Explain dumping.

Question 31

According to the table above, would there be trade flows in both directions if the exchange rate were $1 = 1 peso?

Question 32

If a lower exchange rate spurs exports then why wouldn't it be a good idea of policymakers to intervene to push the exchange rate as low as they can?

Question 33

According to the table above what would the flows of trade be between both countries if the exchange rate were $1 = 2.5 pesos?

Question 34

What are export subsidies?

Question 35

Explain the Heckscher-Ohlin theorem.

Question 36

What is a tariff?

Question 37

Define the terms of trade.

Question 38

Assume the United States televison manufacturing industry accuses the Japanese television manufacturers of dumping. Why should consumers not necessarily be worried about this practice?

Question 39

Suppose country X can produce a personal computer at an opportunity cost of 1000 t-shirts. Assume that country X has a comparative advantage in the production of t-shirts. Would country X ever agree to terms of trade with country Y such that one personal computer would be exchanged for 1100 t-shirts?

Question 40

What is the Doha Development Agenda?

Question 41

Assume that the European Union passes a new trade policy that will only allow trade with South American countries that pass environmental laws that are the same as those of member countries in the EU. The argument that is made is that this will provide a level playing field for the EU in competing with South American nations in international trade. Critically evaluate this argument.

Question 42

Explain the "Unfair Trade Practices" argument as a case against free trade.

Question 43

What is a quota?

Question 44

Discuss the Smoot-Hawley tariff and its economic repercussions.

Question 45

One popular case for protectionism is the "Protection Saves Jobs" argument. What is the nature of this argument? What is its weakness?

Question 46

Critically evaluate the following statement. "I am definitely in favor of free trade but only if it means fair trade."

Question 47

Discuss the national security argument as a case against free trade. What is the problem with this argument?

Question 48

In general, what is the final result of trade barriers?

Question 49

What is NAFTA?

Question 50

What is the basis of the "Cheap Foreign Labor" argument and what are its weaknesses?

Question 51

Identify the two losses of efficiency associated with the imposition of a tariff.

Question 52

Let's assume that two countries have imposed high tariffs on each other's products and services to the point where all trade between the two countries has disappeared. Assume a newly elected member of parliament in one of the countries makes a proposal for unilateral tariff reduction regardless of whether the other country wishes to follow suit. Explain why such a policy change would actually be a good idea.

Question 53

What was the GATT?

Question 54

What is meant by the phrase "economic integration?"

Question 55

Related to the Economics in Practice on p. 366 [678]: What is the impetus for many countries to cut tariffs on food when in the past these tariffs were vigorously supported by farmers?

Question 56

It is well documented that traveling on our nation's highways at lower speeds saves money on fuel and reduces accidents. Assume that a driver understands this but is unwilling to drive slower until he observes everyone else doing it. Can you make a parallel between this attitude and the case where countries will refuse to lower their tariffs unless their trading partners do the same?

Question 57

Economists will often argue that an individual trade barrier designed to help a particular industry will work even though on net it won't help the economy as a whole. Explain what this means.

Question 58

Related to the Economics in Practice on p. 369 [681]: Explain what Frederick Bastiat is trying to with his satirical petition.

Question 59

Assume that the above figure represents the domestic supply and demand for coffee.The domestic price with no trade is represented by $5.50. The price with free trade is represented by $4.00. Assume that the government places a $1 per pound tariff on imported coffee, which decreases the domestic quantity demanded of coffee by 100 million pounds and increases domestic production by 100 million pounds. Draw the rectangle that would represent the amount of tax revenue that the government would realize from this tax and calculate the dollar figure.

Question 60

Assume a candidate for president makes the argument that the United States should not trade with countries that have lower wages than we do because by doing so it will result in an export of American jobs abroad. Critically evaluate this claim.

Question 61

Some people argue that protection discourages dependency. Explain this argument.

Question 62

Explain the infant industry argument case against free trade.

Question 63

Sometimes you will hear economists argue that the infant industry argument against free trade is a weak one because these industries never seem to "grow up." What is meant by this argument?