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Global Markets in Action

9. Global Markets in Action. CHECKPOINTS. Checkpoint 9.1. Checkpoint 9.2. Problem 1. Clicker version. Clicker version. Problem 1. Problem 2. Clicker version. Problem 2. Clicker version. Problem 3. Clicker version. Problem 3. Problem 4. Clicker version. Problem 5.

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Global Markets in Action

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  1. 9 Global Markets in Action CHECKPOINTS

  2. Checkpoint 9.1 Checkpoint 9.2 Problem 1 Clicker version Clicker version Problem 1 Problem 2 Clicker version Problem 2 Clicker version Problem 3 Clicker version Problem 3 Problem 4 Clicker version Problem 5

  3. Checkpoint 9.3 Checkpoint 9.4 Problem 1 Problem 1 Problem 2 Problem 2 Clicker version Clicker version Problem 3 Problem 3 Clicker version Problem 4 Problem 4

  4. Practice Problem 1 Suppose that the world price of sugar is 10 cents a pounds, the United States does not trade internationally, and in the United States is the price is 20 cents a pound. The United States then begins to trade internationally. How does the price of sugar in the United States change? Do U.S. consumers buy more or less sugar? Do U.S. sugar growers produce more or less sugar? Does the United States export or import sugar. CHECKPOINT 9.1

  5. Solution With no international trade, the U.S. domestic price of sugar exceeds the world price, so we know that the rest of the world has a comparative advantage at producing sugar. With international trade, the price of sugar in the United States falls to the world price, U.S. consumer buy more sugar, and U.S growers produce less sugar. The United States imports sugar. CHECKPOINT 9.1

  6. Study Plan Problem Suppose that the world price of sugar is 10 cents a pound, the United States does not trade internationally, and the price of sugar in the United States is 20 cents a pound. The United States then begins to trade internationally. The price of sugar in the United States ______. U.S. Consumers buy _____ sugar. U.S. sugar growers produce _____ sugar. The United States _____ sugar. A. rises; less; more; exports B. falls; less; more; imports C. falls; more; less; imports D. rises; more; less; exports CHECKPOINT 9.1

  7. Practice Problem 2 Suppose that the world price of steel is $100 a ton, India does not trade internationally, and the equilibrium price of steel in India is $60 a ton. India then begins to trade internationally. How does the price of steel in India change? How does the quantity of steel produced in India change? How does the quantity of steel bought by India change? Does India export or import steel? CHECKPOINT 9.1

  8. Solution With no international trade, the domestic price of steel in India is below the world price so we know that India has a comparative advantage at producing steel. With international trade, the price of steel in India rises to world price, steel mills in India increase the quantity they produce, and the quantity of steel bought by the Indians decreases. India exports steel. CHECKPOINT 9.1

  9. Study Plan Problem Suppose that the world price of steel is $100 a ton, India does not trade internationally, and the price of steel in India is $60 a ton. Suppose that India now begins to trade internationally. The price of steel in India _____. The quantity of steep produced in India _____. The quantity of steel bought by India ____. India ____ steel. A. falls; increases; decreases; exports B. falls; decreases; increases; imports C. rises; decreases; increases; imports D. rises; increases; decreases; exports CHECKPOINT 9.1

  10. Practice Problem 3 Underwater oil discovery to transform Brazil into a major exporter The discovery of a huge oil field could make Brazil a large exporter of gasoline. Until two years ago Brazil imported oil; then it became self-sufficient in oil. With this discovery, Brazil will become a major exporter of oil. Source: The New York Times, January 11, 2008 Describe Brazil’s comparative advantage in producing oil, and explain why its comparative advantage has changed. CHECKPOINT 9.1

  11. Solution Until two years ago, Brazil did not have a comparative advantage in producing oil. Its cost of producing a barrel of oil was higher than the world market price, so Brazil imported oil. With the discovery of the new oil field, the cost of producing a barrel of oil in Brazil will be below the world price. Now Brazil will have a comparative advantage in the production of oil. With this new comparative advantage, Brazil will become an exporter of oil. CHECKPOINT 9.1

  12. Practice Problem 1 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Does China import or export coal? Who, in China, gains and who loses from international trade in shoes? Does China gain from this trade in coal? CHECKPOINT 9.2

  13. Solution The rest of the world has a comparative advantage in producing coal. China imports coal, Chinese coal users gain, and Chinese coal producers lose. The gains exceed the losses: China gains from international trade in coal. CHECKPOINT 9.2

  14. Study Plan Problem Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. China has a comparative advantage in producing _______. China _____ coal. In China, coal ______ gain and coal ______ lose from international trade in coal. A. coal; imports; producers; users B. coal; exports; users; producers C. shoes; exports; producers; users D. shoes; imports; users; producers CHECKPOINT 9.2

  15. Practice Problem 2 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Draw a graph to illustrate the market for coal in China before and after china trades coal internationally. Show on your graph the gains, losses, and net gain or loss from international trade in coal. CHECKPOINT 9.2

  16. Solution The figure shows the market for coal in China. The price before trade is P0. With trade, the price falls to the world price, P1. Consumers gain the area A + B. Producers lose the area B. Net gain from trade in coal is A. CHECKPOINT 9.2

  17. Study Plan Problem The figure shows the market for coal in China. With no international trade, the price of coal in China is $60 a ton. With free international trade, Chinese consumers of coal _____, Chinese producers of coal ______, and China’s net gain from trade in coal is _____. A. lose area B + D; gain area B; zero B. gain area B + D; lose area B; area D C. gain area B + D; gain area B + D; area D D. gain area A + B + D; lose area D; zero CHECKPOINT 9.2

  18. Practice Problem 3 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Does China import or export shoes? Who, in China, gains and who loses from international trade in shoes? Does China gain from this trade in shoes? CHECKPOINT 9.2

  19. Solution China has a comparative advantage in producing shoes. China exports shoes, Chinese shoe producers gain, and Chinese shoe consumers lose. The gains exceed the losses: China gains from international trade in shoes. CHECKPOINT 9.2

  20. Study Plan Problem Suppose that the world price of sugar is 10 cents a pound, the United States does not trade internationally, and the price of sugar in the United States is 20 cents a pound. Then the United States begins to trade internationally. The price of sugar in the United States ______. U.S. consumers buy _____ sugar. U.S. sugar growers produce _____ sugar. The United States _____ sugar. A. rises; less; more; exports B. falls; less; more; imports C. falls; more; less; imports D. falls; more; less; exports CHECKPOINT 9.2

  21. Practice Problem 4 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Draw a graph to illustrate the market for shoes in China before and after China trades shoes internationally. Show on your graph the gains, losses, and net gain or loss from international trade in shoes. CHECKPOINT 9.2

  22. Solution The figure shows the market for shoes in China. The price before trade is P0. With trade, the price rise to the world price, P1. Producers gain the area A + B. Consumers lose the area B. Net gain from trade in coal is A. CHECKPOINT 9.2

  23. Study Plan Problem Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. China _______ shoes. In China, _____ gain and _____ lose from international trade in shoes. A. exports; shoe producers; shoe consumers B. exports; shoe consumers; shoe producers C. import; show consumers; shoe producers D. imports; shoe producers; shoe consumers CHECKPOINT 9.2

  24. Practice Problem 5 Commodities post big drop World commodity prices have fallen in the past six weeks. Natural gas plunged 8.6%, wheat prices fell 7.8%, and corn slumped 3.8%. Source: National Post, June 3, 2009 The United States imports natural gas and exports wheat. How do the price changes reported here change the U.S. gains from trade in each good and the distribution of those gains? CHECKPOINT 9.2

  25. Solution The United States imports natural gas, so it does not have a comparative advantage in producing natural gas. The fall in the world price increases U.S. purchases of natural gas and decreases U.S. production of natural gas. Imports of natural gas increases. Consumer surplus increases, producer surplus decreases, but the increase in consumers’ gains exceeds the producers’ loss. CHECKPOINT 9.2

  26. The United States exports wheat, so it has a comparative advantage in producing wheat. The fall in the world price decreases U.S. production of wheat and increases U.S. purchases of wheat. Producer surplus decreases, consumer surplus increases, but the decrease in producer surplus exceeds the increase in consumer surplus. CHECKPOINT 9.2

  27. Practice Problem 1 Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA. U.S. tariffs on imports from Mexico and Mexican tariffs on imports from the United States are gradually being removed. Explain how the price that U.S. consumers pay for goods imported from Mexico and the quantity of U.S. imports from Mexico have changed. Who, in the United States, are the winners and who are the losers from this free trade? CHECKPOINT 9.3

  28. Solution The price that U.S. consumers pay for goods imported from Mexico has fallen. The quantity of U.S. imports from Mexico has increased. The winners are U.S. consumers of goods imported from Mexico. The losers are U.S. producers of the goods that compete with the goods imported from Mexico. CHECKPOINT 9.3

  29. Practice Problem 2 Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA. U.S. tariffs on imports from Mexico and Mexican tariffs on imports from the United States are gradually being removed. Explain how the quantity of U.S. exports to Mexico and the U.S. government’s tariff revenue from trade with Mexico have changed. CHECKPOINT 9.3

  30. Solution The quantity of U.S. exports to Mexico has increased. The U.S. government’s tariff revenue from trade with Mexico has fallen to zero. CHECKPOINT 9.3

  31. Study Plan Problem In 1995, Mexico joined NAFTA and all tariffs on trade between the United States and Mexico are gradually being removed. The quantity of U.S. exports to Mexico has _____ and the U.S. government’s tariff revenue from trade with Mexico has _____. A. increased; decreased B. increased; increased C. decreased; increased D. decreased; decreased CHECKPOINT 9.3

  32. Practice Problem 3 Suppose that in 2008, tomato growers in Florida lobby the U.S. government to impose an import quota on Mexican tomatoes. Explain who, in the United States, would gain and who would lose from such a quota. CHECKPOINT 9.3

  33. Solution With an import quota, the price of tomatoes in the United States would rise and the quantity bought would decrease. Consumer surplus would decrease. Growers would receive a higher price, produce a larger quantity, and producer surplus would increase. The U.S. total surplus in the tomato market would be redistributed from consumers to producers, but it would decrease. CHECKPOINT 9.3

  34. Study Plan Problem Suppose that in 2008, tomato growers in Florida lobby the U.S. government to impose a quota on Mexican tomatoes. ______ would gain, and ______ would lose. A. The people who live in Florida; U.S. consumers of tomatoes B. U.S. growers and consumers of tomatoes; all U.S. consumers C. U.S. growers of tomatoes; U.S. consumers of tomatoes D. U.S. consumers of tomatoes; U.S. growers of tomatoes CHECKPOINT 9.3

  35. Practice Problem 4 U.S. tariff angers French Just days before Obama took office, the United States raised the tariff on imports of French sheep’s-milk cheese to 300% from 100%—with the hope that the domestic price will be so high that imports of the cheese will cease. Source: The Guardian, January 17, 2009 Explain how this tariff influences the price that U.S. consumers pay for sheep’s-milk cheese, the quantity of sheep’s-milk cheese produced in the United States, and its effect on U.S. gains from trade with France. Who, in the United States, gains from the tariff and who loses? CHECKPOINT 9.3

  36. Solution The tariff raises the price of sheep’s-milk cheese in the United States to 400 percent of the world price (world price + 300 percent of the world price). U.S. imports decrease, U.S. production of sheep’s-milk cheese increases, and the U.S. government collects a tariff revenue. CHECKPOINT 9.3

  37. With the higher U.S. domestic price, consumer surplus decreases—consumers lose. Producer surplus increases—producers gain. Some of the loss of consumer surplus goes to the government as tariff revenue and some becomes a deadweight loss. CHECKPOINT 9.3

  38. Practice Problem 1 Japan sets an import quota on rice. California rice growers would like to export more rice to Japan. What are Japan’s arguments for restricting imports of California rice? Are these arguments correct? Who loses from this restriction in trade? CHECKPOINT 9.4

  39. Solution The main arguments are that Japanese rice is a better quality rice and that the quota limits competition faced by Japanese farmers. The arguments are not correct. If Japanese consumers do not like the quality of Californian rice, they will not buy it. The import quota limits competition, which allows Japanese farmers to use their land less efficiently. The big losers are the Japanese consumers who pay about three times the U.S. price for rice. CHECKPOINT 9.4

  40. Practice Problem 2 The United States has, from time to time, limited imports of steel from Europe. What argument has the United States used to justify this quota? Who wins from this restriction? Who loses? CHECKPOINT 9.4

  41. Solution The U.S. argument is that European producers dump steel on the U.S. market. With a quota, U.S. producers will face less competition in the market for steel and U.S. jobs will be saved. Workers in the steel industry and owners of steel companies will win at the expense of the U.S. buyers of steel. CHECKPOINT 9.4

  42. Practice Problem 3 The United States maintains a quota on imports of sugar. What is the argument for this quota? Is this argument flawed? If so, explain why. CHECKPOINT 9.4

  43. Solution The argument is that the quota protects the jobs of U.S. workers. The argument is flawed because the United States does not have a comparative advantage in producing sugar and so a quota allows the U.S. sugar industry to be inefficient. With free international trade in sugar, the U.S. sugar industry would exist but it would be much smaller and more efficient. CHECKPOINT 9.4

  44. Practice Problem 4 U.S., China agree on free farm trade Despite the failure of the Doha Round, the United States and China agree on the need to resist protectionist farm tariffs even in the face of the world economic crisis. In 2007, the United States exported $9.4 billion of farm and processed food products to China and imported $8 billion of farm products from China. Source: USA Today, December 6, 2008 With the world in a global economic crisis, what arguments against free trade might U.S. producers of the farm products put forward? What would be wrong with the argument you suggest? CHECKPOINT 9.4

  45. Solution With the United States in recession, a likely argument against free trade with China in farm products would be “impose restrictions to save U.S. jobs.” By reducing imports of farm products, U.S. growers will receive a larger producer surplus, but U.S. total surplus will decrease. CHECKPOINT 9.4

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