International Trade

18 International Trade CHAPTER CHECKPOINTS

Checkpoint 18.2 Checkpoint 18.4 Checkpoint 18.3 Problem 1 Problem 1 Problem 1 Problem 2 Problem 2 Problem 2 Clicker version Clicker version Problem 3 Problem 3 Problem 3 Clicker version Problem 4

Practice Problem 1 During the Cold War, the United States and Russia did not trade with each other. Suppose that The United States could produce 100 million units of manufactured goods or 50 million units of farm produce. Russia could produce 30 million units of manufactured goods or 510 million units of farm produce. What were the opportunity costs of 1 unit of farm produce in the United States and in Russia? CHECKPOINT 18.2

Solution The U.S. opportunity cost of 1 unit of farm produce was 2 units of manufactured goods. The Russian opportunity cost of 1 unit of farm produce was 3 units of manufactured goods. CHECKPOINT 18.2

Practice Problem 2 During the Cold War, the United States and Russia did not trade with each other. Suppose that The United States could produce 100 million units of manufactured goods or 50 million units of farm produce. Russia could produce 30 million units of manufactured goods or 510 million units of farm produce. Which country has a comparative advantage in producing farm produce? CHECKPOINT 18.2

Solution The opportunity cost of 1 unit of farm produce was 2 units of manufactured goods in the United States and 3 units of manufactured goods in Russia. The opportunity cost is lower in the United States, so the United States has a comparative advantage in producing farm produce. CHECKPOINT 18.2

Practice Problem 3 During the Cold War, the United States and Russia did not trade with each other. Suppose that The United States could produce 100 million units of manufactured goods or 50 million units of farm produce. Russia could produce 30 million units of manufactured goods or 510 million units of farm produce. With the end of the Cold War, the United States and Russia began to trade, which good the United States import from Russia? CHECKPOINT 18.2

Solution The United States has a comparative advantage in producing farm produce. Russia has a comparative advantage in producing manufactured goods. So the United States exported farm produce to Russia and imported manufactured goods from Russia. CHECKPOINT 18.2

Practice Problem 4 During the Cold War, the United States and Russia did not trade with each other. Suppose that The United States could produce 100 million units of manufactured goods or 50 million units of farm produce. Russia could produce 30 million units of manufactured goods or 510 million units of farm produce. With the end of the Cold War, the United States and Russia began to trade. Which country gained from this trade? CHECKPOINT 18.2

Solution Both countries gained from trading with each other because each country ended up with more goods than it could produce in the absence of trade. When countries produce the good in which each country has a comparative advantage and they trade, both countries gain. CHECKPOINT 18.2

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 18.3

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 18.3

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 18.3

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 18.3

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 18.3

Practice Problem 3 Suppose that in 2008, tomato growers in Florida lobby the U.S. government to impose a quota on Mexican tomatoes. Explain who, in the United States, would gain and who would lose from such a quota. CHECKPOINT 18.3

Solution With a 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 18.3

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 18.3

Practice Problem 1 Japan sets quotas on imports of 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 18.4

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 quota does limit competition and the quota 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 18.4

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 18.4

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 18.4

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 18.4

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 18.4

International Trade