Deck 16: Gaining From International Trade

Question 1

Why do American households and businesses buy things from foreigners? What are the characteristics of the items we buy from foreigners? What are the characteristics of the things we sell to foreigners?

Answer 1

Most of the countries in the world are interdependent, which means they depend on each other to maintain their economies. Each country needs other countries to purchase their goods and services to generate money to buy goods and services that are not produced in their own country. The main reason behind this idea, that countries can specialize in producing a good or service at very low cost and the products which they cannot produce efficiently can import from other countries specialized producing that good.
American household and businesses buy certain things from other countries in which they are not specialized in producing those goods and services; the opportunity cost of producing these goods is higher as compared to the other countries. This creates difficulties for domestic producer to compete with foreign producers.
We buy goods from foreign countries in which we are not specialized , and the opportunity cost of producing these goods in domestic market is higher than other countries, and sell those goods in which we are specialized and can produce at very low cost in domestic market. Normally, any country produces goods for which they have abundant resources and buy those goods for which the resources are scarce.
On the other hand, strategic advantage plays an important role to decide whether to buy or sell the particular product or goods from other countries. If a country has strategic advantage in particular industry like, IT then it will export IT products to other countries and will buy those goods in which the country does not have strategic advantage.

Question 2

* "Trade restrictions limiting the sale of cheap foreign goods in the United States are necessary to protect the prosperity of Americans." Evaluate this statement made by an American political leader.

Answer 2

The source of economic prosperity is the availability of goods and services at cheaper price in domestic market. When a good is relatively cheaper in a foreign country than it can be produced at home, then the country can increase the quantity of goods and services offered for consumption in which the country is specialized in the production of goods in which it is a low-cost producer and exchange them for the cheaper foreign goods. Trade restrictions will limit the capacity of consumers of America to buy low-cost goods from foreign countries smother this procedure and thus reduce the living standard of Americans.

Question 3

Suppose as the result of the Civil War that the United States had been divided into two countries and that, through the years, high trade barriers had grown up between the two. How might the standard of living in the "divided" United States have been affected? Explain.

Answer 3

Trade barriers between two countries will reduce the supply of goods and services, which leads to increase in the price of imported goods in the domestic market.
The imposition of any kind of trade barriers will increase the price of the traded goods. If two or more countries constantly use trade barriers with each other, this will create the trade war between the two nations.
Most of the economists generally agree that any kind of trade restrictions are harmful and reduce the whole economic efficiency. Trade restrictions lead to increase in the scarcity of the product in the market, which further increase the price of goods and services produced in the domestic market. The consumer surplus will decline and the producer surplus will increase. This has distributional significances, but it is clear that the whole nation will be hurt by the increased scarcity of products in the domestic market, that goes along with the trade restraints.

Question 4

* Can both of the following statements be true? Why or why not?
a. "Tariffs and import quotas promote economic inefficiency and reduce the real income of a nation. Economic analysis suggests that nations can gain by eliminating trade restrictions."
b. "Economic analysis suggests that there is good reason to expect that trade restrictions will exist in the real world."

Question 5

"Imports destroy jobs; exports create them. The average American is hurt by imports and helped by exports." Do you agree or disagree with this statement? Explain.

Question 6

* "An increased scarcity of a product benefits producers and harms consumers. In effect, tariffs and other trade restrictions increase the domestic scarcity of products by reducing the supply from abroad. Such policies benefit domestic producers of the restricted product at the expense of domestic consumers." Evaluate this statement.

Question 7

Suppose that a very high tariff was placed on steel imported into the United States. How would that affect employment in the U.S. auto industry? ( Hint: Think about how higher steel prices will impact the cost of producing automobiles.)

Question 8

* "Getting more Americans to realize that it pays to make things in the United States is the heart of the competitiveness issue." (This is a quote from an American business magazine.)
a. Would Americans be better off if more of them paid higher prices in order to "buy American" rather than purchase from foreigners? Would U.S. employment be higher? Explain.
b. Would Californians be better off if they bought goods produced only in California? Would the employment in California be higher? Explain.

Question 9

How do tariffs and quotas differ? Can you think of any reason why foreign producers might prefer a quota rather than a tariff? Explain your answer.

Question 10

* It is often alleged that Japanese producers receive subsidies from their government permitting them to sell their products at a low price in the U.S. market. Do you think we should erect trade barriers to keep out cheap Japanese goods if the source of their low price is a government subsidy? Why or why not?

Question 11

The European Union has virtually eliminated trade restrictions among its members, and most members now use a common currency. What impact have these changes had on European economies?

Question 12

* Does international trade cost Americans jobs? Does interstate trade cost your state jobs? What is the major effect of international and interstate trade?

Question 13

"The United States is suffering from an excess of imports. Cheap foreign products are driving American firms out of business and leaving the U.S. economy in shambles." Evaluate this view.

Question 14

* The United States uses an import quota to maintain the domestic price of sugar well above the world price. Analyze the impact of the quota. Use supply and demand analysis to illustrate your answer. To whom do the gains and losses of this policy accrue? How does the quota affect the efficiency of resource allocation in the United States? Why do you think Congress is supportive of this policy?

Question 15

S. trade with low-wage countries like Mexico increases, will wages in the United States be pushed down? Why or why not? Are low-wage workers in the United States hurt when there is more trade with Mexico? Discuss.

Question 16

* "Tariffs not only reduce the volume of imports, they also reduce the volume of exports." Is this statement true or false? Explain your answer.

Question 17

"Physical obstacles like bad roads and stormy weather increase transaction costs and thereby reduce the volume of trade. Tariffs, quotas, exchange rate controls, and other human-made trade restrictions have similar effects." Evaluate this statement. Is it true? Why or why not?
* Asterisk denotes questions for which answers are given in Appendix B.