Deck 19: International Trade Policy, comparative Advantage, and Outsourcing

Question 1

How can learning by doing and economies of scale play a role in deciding to impose trade restrictions? What name do we give to the argument for trade restrictions that is based on learning by doing and economies of scale?

Answer 1

Learning by doing and economies of scale can lead to trade restrictions.The reason is that a country may want to protect its domestic industries from foreign competition while they are doing their learning and growing large enough to exploit economies of scale.These two effects form the basis for the "infant industry" argument for trade restrictions.

Question 2

Explain why economists' and laypeople's' views of outsourcing differ.

Answer 2

Laypeople often do not recognize the gains from trade,such as a decline in prices,while they easily identify the loss of jobs caused by trade adjustments as countries shift their patterns of production in accordance with comparative advantage.Economists point out that it is because of these low prices that we can afford the high level of consumption that we enjoy.Laypeople often believe that since countries,like China,have lower wages,they must have a comparative advantage in just about everything.Economists point out that if one country (e.g.China)has a comparative advantage in one set of goods,then other countries must have a comparative advantage in another set of goods.Laypeople often think of trade only in terms of manufactured goods.Economists point out that trade also includes services (including the services provided by traders).(LO4)

Question 3

Why does the distribution of costs and benefits from trade sometimes result in calls for trade restrictions?

Answer 3

The gains from trade tend to be widely dispersed and some of the benefits,such as greater efficiency,only accrue in the long run.In contrast the costs of trade (such as domestic jobs lost)tend to be short run and relatively concentrated.This often results in those hurt by trade calling for restrictions.

Question 4

You are an influential CEO of a company like Wal-Mart,who imports foreign made clothing.The government wants to restrict the quantity of the product that your company imports.Should you use your political influence to lobby the Congress to impose a tariff on the product or a quota?

Question 5

What has happened to the size of international trade (relative to US GDP)since the late 1920's? With what countries or regions does the United States trade the most?

Question 6

List six reasons why countries impose trade restrictions.

Question 7

What does it mean for a country to be a debtor nation? What has to happen for a country to change from a debtor nation to a creditor nation?

Question 8

Define tariffs and quotas,and explain the similarities and differences between them.

Question 9

What are free trade associations? Explain why they help or hinder international trade.

Question 10

There are four main reasons why economists typically oppose the use of trade restrictions.(1).From a global perspective,free trade increases total output.(2).International trade provides competition for domestic companies.(3).Restrictions based on national security are often abused.(4).Trade restrictions are addictive.Discuss each of these reasons.

Question 11

What are trade adjustment assistance programs? Describe the arguments for and against them.

Question 12

What are the benefits of being a debtor nation? What are the costs?

Question 13

Eight reasons why countries impose trade restrictions are (1).Unequal internal distribution of the gains from trade.(2).Haggling by companies over the gains from trade.(3).Haggling by countries over trade restrictions.(4).Learning by doing and economies of scale.(5).Macroeconomic aspects of trade.(6).National security.(7).International politics.(8).Increased revenue brought in by tariffs.Discuss four of these reasons.

Question 14

What are the six main methods used by governments to restrict trade?

Question 15

With what countries or regions does the United States trade the most?

Question 16

Explain the principle of comparative advantage.Does it tell us how the gains from trade will be distributed?

Question 17

What are strategic trade policies,and when can they become a problem?

Question 18

Define the term "the trade balance." Does the United States have a trade balance that is in deficit or surplus?

Question 19

Is a small or large country likely to gain more by trading? Why?

Question 20

What is a trade deficit? What might cause an economy to have one?

Question 21

What is the WTO? What is the GATT? How are they related?

Question 22

In this problem you will demonstrate your understanding of the principles of comparative advantage.You will be given data that correspond to points on the production possibility curve of two countries.From this data,you will be asked to draw the graph of the production possibility curves.For simplicity,assume the production possibility curves of these countries are straight lines.To draw these production possibility curves you need only two points on your graph.A straight line connecting these points,and extended to the axes,will represent the production possibility curve.
(a)Country A and country B are potential trading partners.Each country produces two goods: fish and wine.If country A devotes all its resources to producing fish it can produce 1,000 fish,and if it devotes all its resources to producing wine,it can produce 2,000 bottles of wine.Draw the production possibility curve for country A.In country A,what is the opportunity cost of one bottle of wine in terms of fish?
(b)If country B devotes all its resources to producing fish it can produce 3,000 fish,and if it devotes all its resources to producing wine it can produce 3,000 bottles of wine.Draw the production possibility curve for country B.In country B,what is the opportunity cost of one bottle of wine in terms of fish?
(c)Do you see any possibility of gains from trade between these two countries? Does country A have any advantage in producing either wine or fish and trading for the other good? Is this advantage an absolute or a comparative advantage?
(d)Suggest a trade between these two countries which will make them both better off.Illustrate on their production possibility curves how this will make both countries better off,by allowing them to consume a mix of wine and fish that is outside their production possibility curves.

Question 23

What are the main reasons why economists typically oppose the use of trade restrictions?

Question 24

What role do appeals to national security play in arguments to justify trade restrictions? What forms do these restrictions take?

Question 25

Why are trade restrictions less likely to be imposed during a booming economy than during a recession?

Question 26

What is dumping and why do countries dislike it?

Question 27

Seamus "Skip" Cavanaugh often travels between Switzerland and Ireland.During his travels he has noticed that the two countries rarely trade with each other.He also noticed that the opportunity cost of producing a watch in Switzerland is 1/5 of a sweater and that the opportunity cost of producing a watch in Ireland is 5 sweaters.At the current time Switzerland's production is 30 sweaters and 200 watches,while Ireland's production is 200 sweaters and 30 watches.
(a)Which country has a comparative advantage in the production of which good? Explain.
(b)Describe how Skip can make a profit.
(c)Illustrate your answer to part (b)with a numerical example.

Question 28

What is the major reason why developing countries often impose tariffs on imports rather than quotas?

Question 29

How are tariffs and quotas similar? How are they different? Explain verbally and demonstrate graphically.

Question 30

Consider the following information about production of wine and food in England and France:
(a)Using the grids below,plot each country's production possibilities curve.
(b)Which country has a comparative advantage in the production of food? Of wine? Explain.
(c)Suppose that currently England and France are not trading with each other.England is producing (and consuming)200 tons of food and 30 gallons of wine.France is producing (and consuming)30 tons of food and 200 gallons of wine.As an international trader,how could you take advantage of this situation and make the big bucks?

Question 31

The United States dominates world markets for computer software,producing about 80 percent of the total world computer software,whereas Europe and Japan lag significantly behind.
(a)What possible reasons would account for this?
(b)Would you expect this to continue?

Question 32

Consider the following supply and demand diagram shown for a small domestic country.Note that at the world free-trade price of P* illustrated in the diagram,there are imports of Q₁ - Q₀.
If a government wanted more tariff revenue,given the same tariff,t,would it desire elastic or inelastic demand of the imported good? Explain.Be sure to illustrate your explanation with an appropriate diagram.