Krugman/Wells

1. 5 >> International Trade Krugman/Wells CHECK YOUR UNDERSTANDING

2. Check Your Understanding 5-1Question 1 In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 ton of corn.

3. 1a*) In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 ton of corn. What is the opportunity cost of 1 bicycle in the U.S? • 0 • 0.01 tons of corn • 0.02 tons of corn • 50 tons of corn

4. 1b*) In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 ton of corn. What is the opportunity cost of 1 ton of corn in China? • 0 • 1 bicycle • 50 bicycles • 100 bicycles

5. 1a) In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 ton of corn. Which of the following statements is true? • The U.S. has a comparative advantage in the production of both corn and bicycles. • The U.S. has a comparative advantage in the production of corn, while China has a comparative advantage in the production of bicycles. • China has a comparative advantage in the production of both corn and bicycles. • The U.S. has a comparative advantage in the production of bicycles, while China has a comparative advantage in the production of corn..

6. 1bi) In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. If the U.S. can produce 200,000 bicycles if no corn is produced, how many tons of corn can the U.S. produce if no bicycles are produced? • 1,000,000 tons of corn • 100,000 tons of corn • 4000 tons of corn • 3000 tons of corn

7. 1bii) In China the opportunity cost of 1 bicycle is 0.01 ton of corn. If no bicycles are produced, China can produce 3000 tons of corn. If no corn is produced, how many bicycles can China produce? • 1,000,000 bicycles • 300,000 bicycles • 4000 bicycles • 3000 bicycles

8. 1ci) After specialization and trade, the U.S. consumes 1000 tons of corn and 200,000 bicycles. What does the U.S. gain from trade? • 200,000 bicycles • 100,000 bicycles • 1000 tons of corn • 2000 tons of corn

9. 1cii) After specialization and trade, China consumes 3000 tons of corn and 100,000 bicycles. What does China gain from trade? • 200,000 bicycles • 100,000 bicycles • 1000 tons of corn • 2000 tons of corn

10. Check Your Understanding 5-1Question 2 Explain the following patterns of trade using the Heckscher-Ohlin model.

11. 2a) Explain the following patterns of trade using the Heckscher–Olin model: France exports wine to the United States and the United States exports movies to France. • This occurs because consumers in the United States like movies more than they like wine. • This occurs because the United States has a larger endowment of factors of production for movies relative to France, while France has a relatively larger endowment of factors of production for wine. • This occurs because the alternative is autarky, which the Heckscher–Olin model describes as being a worse state than international trade.

12. 2b) Explain the following patterns of trade using the Heckscher–Olin model: Brazil exports shoes to the U.S. and the U.S. exports shoe-making machinery to Brazil. • This occurs because consumers in the United States like shoes more than they like shoe-making machinery. • This occurs because the United States has a larger endowment of factors of production for machinery relative to Brazil, while Brazil has a relatively larger endowment of factors of production for shoes. • This occurs because the alternative is autarky, which the Heckscher–Olin model describes as being a worse state than international trade.

13. Check Your Understanding 5-2Questions 1and 2 Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes.

14. 1a) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on U.S. grape consumers’ surplus? • Surplus falls. • Surplus increases. • Surplus stays constant.

15. 1b) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on U.S. grape producers’ surplus? • Surplus falls. • Surplus increases. • Surplus stays constant.

16. 1c) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on U.S. total surplus? • Surplus falls. • Surplus increases. • Surplus stays constant.

17. 2a) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on Mexican grape producers? • No change. • Sales rise. • Sales fall.

18. 2b) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on Mexican grape pickers? • No change. • Wages rise. • Wages fall.

19. 2c) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on Mexican grape consumers? • No change. • Grape prices in Mexico rise. • Grape prices in Mexico fall.

20. 2d) Due to a strike by truckers, trade in food between the United States and Mexico is halted. In autarky, the price of Mexican grapes is lower than that of U.S. grapes. What effect does the strike have on U.S. grape pickers? • No change. • Wages rise. • Wages fall.

21. Check Your Understanding 5-3Questions 1 & 2 Suppose the world price of butter is $0.50 per pound and the domestic price in autarky is $1.00 per pound.

22. 1a) Suppose that the world price of butter is $0.50 per pound and the domestic price in autarky is $1.00 per pound. What is the effect of a tariff of $0.50 per pound? • Imports increase to C1 • Imports decrease to C2 – QA • Imports decrease by C1 – Q1 • The price of butter is $0.75 per pound

23. 1b) Suppose that the world price of butter is $0.50 per pound and the domestic price in autarky is $1.00 per pound. What is the effect of a tariff of more than $0.50 per pound? • Imports increase to C1 • Imports decrease to C2 – QA • The price of butter is $1.00 per pound • The price of butter is $0.75 per pound

24. 2) Suppose the government imposes an import quota rather than a tariff on butter. What quota limit would generate the same quantity of imports as a tariff of $0.50 per pound? • A quota of 0 • A quota of Q3 • A quota of Q2 • A quota of Q4

25. Check Your Understanding 5-4Questions 1 and 2

26. 1) In 2002 the U.S. imposed tariffs on steel imports, which are an input in a large number and variety of U.S. industries. Why is political lobbying likely to be more effective in eliminating these tariffs than eliminating tariffs on consumer goods, such as sugar or clothing? 1. It’s easier for a few businesses to coordinate a success lobbying effort than it is for many consumers. 2. It’s easier for consumers to organize a lobbying effort because they are voters.

27. 2) The WTO has increasingly found itself adjudicating trade disputes that involve not just tariffs and quotas, but restrictions based on quality, health, and environmental considerations. These restrictions are likely to be in violation of a free-trade agreement when the domestic producers are subject to the same restrictions as foreign competitors. • True • False