Question 1

If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices, the Swedish economy would be worse off.

Accepted Answer

If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices, the Swedish consumers would benefit from lower prices, which may increase their disposable income and purchasing power. However, Swedish producers of wool blankets may suffer from competition and face reduced profits, which could impact their ability to invest in new technologies or employ workers. Additionally, the Swedish government may lose tax revenue from the reduced profits of local producers. Overall, the impact on the Swedish economy would depend on various factors such as the size of the subsidy, the level of competition, and the elasticity of demand for wool blankets. Therefore, it cannot be concluded that the Swedish economy would be worse off without further analysis.

Question 2

William and Jamal live in the country of Dumexia. As a result of Dumexia's legalization of international trade in bananas, William becomes better off and Jamal becomes worse off. It follows that William is a seller, and Jamal is a buyer, of bananas.

Accepted Answer

The statement does not necessarily follow because the impact of international trade on individuals depends on their roles in the market. William could be a more efficient producer benefiting from export opportunities, while Jamal could be a less efficient producer facing increased competition. Alternatively, Jamal could be a consumer facing higher prices due to import tariffs or supply constraints, not necessarily a buyer in the sense of a commercial purchaser.

Question 3

NAFTA is an example of a multilateral approach to achieving free trade.

Accepted Answer

NAFTA (North American Free Trade Agreement) is a trilateral agreement between the United States, Canada, and Mexico to eliminate trade barriers and promote free trade between the countries. It is a multilateral approach because it involves multiple countries working together to achieve a common goal.

Question 4

Most economists support the infant-industry argument because it is so easy to implement in practice.

Accepted Answer

Most economists do not support the infant-industry argument because it can lead to protectionism and inefficiency in industries that would otherwise not be competitive. It also requires government intervention in the market, which can be difficult to implement effectively.

Question 5

The results of a 2008 Los Angeles Times poll suggest that the percentage of Americans who believe trade is harmful to the economy exceeds the percentage of Americans who believe trade is beneficial to the economy.

Accepted Answer

The statement indicates that the percentage of Americans who believe trade is harmful exceeds the percentage who believe it is beneficial, which suggests a negative perception of trade's impact on the economy.

Question 6

Free trade causes job losses in industries in which a country does not have a comparative advantage, but it also causes job gains in industries in which the country has a comparative advantage.

Accepted Answer

This is a well-established economic principle known as the principle of comparative advantage. Countries specialize in producing goods and services that they can produce more efficiently or at a lower opportunity cost than other countries. Free trade allows countries to trade with each other based on their comparative advantages, leading to overall gains in economic efficiency and output, but at the same time causing job losses in industries where a country does not have a comparative advantage.

Question 7

Policymakers often consider trade restrictions in order to protect domestic producers from foreign competitors.

Accepted Answer

Policymakers may choose to impose trade restrictions like tariffs, quotas, or embargoes in order to protect domestic industries from cheaper foreign goods and maintain jobs and profits within their borders.

Question 8

The results of a 2008 Los Angeles Times poll suggest that a significant majority of Americans believe that free international trade helps the American economy.

Accepted Answer

The 2008 Los Angeles Times poll actually found that a significant majority of Americans believed that free international trade was bad for the American economy, reflecting concerns about job losses and the impact on domestic industries.

Question 9

Economists view free trade as a way to raise living standards both at home and abroad.

Accepted Answer

Economists generally believe that free trade promotes economic growth, increases efficiency, and allows countries to specialize in producing goods in which they have a comparative advantage, ultimately leading to higher living standards for all participating countries.

Question 10

GATT is an example of a successful unilateral approach to achieving free trade.

Accepted Answer

GATT stands for General Agreement on Tariffs and Trade, which was a multilateral agreement between countries to reduce trade barriers and promote free trade. It was not a unilateral (one-sided) approach, but rather a collaborative effort between multiple countries.

Question 11

Economists feel that national security concerns never provide a legitimate rationale for trade restrictions.

Accepted Answer

Economists recognize that national security concerns can have implications for trade and may justify trade restrictions in certain circumstances, such as safeguarding critical technologies, materials or services related to national defense. However, there is often debate over whether these concerns are genuinely justified or merely an excuse for protectionism.

Question 12

William and Jamal live in the country of Dumexia. When Dumexia legalized international trade in bananas, the price of bananas in Dumexia increased. As a result, William became better off and Jamal became worse off. It follows that William is a seller, and Jamal is a buyer, of bananas.

Accepted Answer

Since the price of bananas in Dumexia increased, it indicates that there was greater demand for bananas, and William, being a seller, benefited from this increase in demand. On the other hand, Jamal, being a buyer, had to pay more for bananas and became worse off.

Question 13

For Country A, the world price of textiles exceeds the domestic equilibrium price of textiles. As a result, international trade allows sellers of textiles in Country A to experience greater producer surplus than they otherwise would experience.

Accepted Answer

When the world price of textiles exceeds the domestic equilibrium price of textiles, it means that sellers in Country A can sell their textiles to other countries at a higher price. This allows them to increase their producer surplus and benefit from international trade.

Question 14

Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because of foreign competition.

Accepted Answer

Economists generally argue for free trade, even if it means some domestic jobs could be lost, as they believe it leads to overall economic growth and benefits for consumers.

Question 15

For a given country, comparing the world price of aluminum and the domestic price of aluminum before trade indicates whether that country's demand for aluminum exceeds the demand for aluminum in other countries.

Accepted Answer

Comparing the world price of aluminum to the domestic price before trade indicates whether the country is a net importer or exporter of aluminum, not whether its demand exceeds that of other countries. Demand is determined by the quantity of aluminum that consumers in the country want to buy at various prices, not by the comparison of prices.

Question 16

The rules established under the General Agreement on Tariffs and Trade GATT) are enforced by an international body called the World Trade Organization WTO).

Accepted Answer

The statement is true. The WTO was established in 1995 to replace GATT and enforce the rules on international trade.

Question 17

A multilateral approach to free trade has greater potential to increase the gains from trade than a unilateral approach, because the multilateral approach can reduce trade restrictions abroad as well as at home.

Accepted Answer

A multilateral approach to free trade involves negotiations and agreements between multiple countries, which can lead to the reduction of trade barriers in all participating countries. In contrast, a unilateral approach only involves a single country removing its own trade restrictions, which may not necessarily result in increased gains from trade as other countries may still have their own barriers in place.

Question 18

Free trade allows firms to realize economies of scale, resulting in higher costs of production.

Accepted Answer

Free trade allows firms to access larger markets and specialized inputs, resulting in lower costs of production and increased efficiency. This can lead to economies of scale, which result in lower costs per unit of production.

Question 19

For Country A, the world price of soybeans exceeds the domestic equilibrium price of soybeans. As a result, international trade allows buyers of soybeans in Country A to experience greater consumer surplus than they otherwise would experience.

Accepted Answer

International trade under these conditions would lead to Country A exporting soybeans, as the world price is higher than the domestic price, benefiting domestic producers more and potentially reducing consumer surplus due to higher prices.

Question 20

Most economists view the United States as an ongoing experiment that raises serious doubts about the virtues of free trade.

Accepted Answer

This statement is not accurate. Most economists actually support the principles of free trade and see it as beneficial for economic growth and prosperity.

Quiz 9: Application: International Trade