4.16 Assume that the United States, as a steel importing nation, is large enough so that changes in the quantity of its imports influence the world price of steel. The U.S. supply and demand schedules for steel are illustrated in Table 4.12, along with th
a. $400, 12 tons, 2 tons, 10 tons.
b-1. Sd+w shifts upward by the amount of the tariff, $250.
b-2. $600, 10 tons, 4 tons, 6 tons.
b-3. $2200, $200, $200, $600, $1200, $400.
b-4. $350, improve, increase, $300.
b-5. The United States suffers a welfare loss
4.15. Assume the nation of Australia is "small" and thus unable to influence world price. Its demand and supply schedules for TV sets are shown in Table 4.11. Using graph paper, plot the demand and supply schedules on the same graph.
a. Determine Australi
a. P = $250; Q = 25. Consumer surplus = $3125; producer surplus = $3125.
b. Qs = 10, Qd = 40, Imports = 30. Consumer surplus = $8000; producer surplus = $500.
c. P = $200, Qs = 20, Qd = 30, Imports = 10. $3500. Consumption effect = $500, protective effect
4.14. What is meant by the term bonded warehouse and foreign trade zone? How does each of these help importers mitigate the effects of domestic import duties?
A bonded warehouse is a storage facility for imported goods which allows imported goods to be put into storage without the paying duties. Goods may be later sold overseas duty free or withdrawn for domestic sale on payment of import duties.
A foreign trad
4.13 Would a tariff placed on U.S oil imports promote energy development and Conservation for the United States?
By forcing up the price of oil in the U.S. with an oil tariff, domestic production would be encouraged while domestic consumption would be discouraged.
4.12. Suppose the production of 1,000,000 worth of steel in Canada requires $100,000 worth of taconite. Canadas nominal tax rates for importing these goods are 20% for steel and 10% for taconite. Given this information calculate the effective rate of prot
The effective tariff rate equals 21%.
4.11. What impact does the imposition of a tariff normally have on a nation's terms of trade and volume of trade?
Terms of trade improve if the price a nation pays for its imports decreases & trade volume declines.
4.10. Although tariffs may improve the welfare of a single nation, the worlds welfare may decline. Under what conditions would this be true?
By increasing the price of trade goods, tariffs lower the volume of trade. For the world as a whole, there is no favorable terms of trade effect to offset the trade volume effect.
4.9. Which of the arguments for tariffs do you feel are most relevant in today's world?
Economists generally agree most arguments for trade restrictions can't withstand thorough analysis. The infant industry & national security arguments have some validity.
4.8. A nation that imposes tariffs on imported goods may find its welfare improving should the tariff result in a favorable shift in the terms of trade. Explain.
Given a large country model, a country which imposes a tariff on imports finds its terms of trade improving. Should the favorable terms of trade effect more than offset the deadweight losses resulting from the tariff, national welfare improves.
4.7. What factors influence the size of the revenue, protective, consumption, and redistributive effects of a tariff.
In general, the size of the welfare responses to tariffs is determined by the impact of the tariffs on domestic prices & the response of domestic producers & consumers to these price changes.
4.6. When a nation imposes a tariff on the importation of a commodity, economic inefficiencies develop that detract from the national welfare. Explain.
A tariff detracts from the nation's welfare via its consumption effect & protective effect.
4.5. Distinguish between consumer surplus and producer surplus. How do these concepts relate to a country's economic welfare?
Consumer surplus represents the difference between what buyers are willing & able to pay & the amount they actually do pay. An inverse relationship exists between changes in market price & consumer surplus. Producer surplus represents the revenue producer
4.4. Less developed nations sometimes argue that the industrialized nations' tariff structures discourage the less developed nations from undergoing industrialization.
Raw materials are often imported at zero or low tariff rates, i.e. the nominal & effective protection increases at each stage of production & thus processed goods have higher import tariffs. This tariff structure encourages developing nations to expand co
4.3. Under what conditions does a nominal tariff applied to an import product overstate or understate the actual, or effective, protection afforded by the nominal tariff? hen the tariff on the finished product exceeds the tariff on the imported input, the
When the tariff on the finished product is greater than the tariff on the imported input (raw materials), the effective rate of protection is greater than the nominal tariff. When the tariff on the finished product is less than the tariff on the imported
4.2. What methods do customs appraisers use to determine the values of commodity imports?
In the US we use free on board meaning the value of the product before it leaves its origin country. And in Europe they use Customs-insurance-freight which takes into account the cost of freight and insurance.
4.1. Describe a specific tariff an ad velorem tariff and a compound tariff. What are the advantages and disadvantages of each?
Specific Tariff- is expressed in terms of a fixed amount of money per physical unit pf the imported product.
Advantages: easy to apply and administer: Particularly to standardized commodities and staple products where the value of dutiable goods cannot be
3.1. Transportation costs affect the location of an industry since firms recognize that transportation costs along with production costs affect profitability. A firm achieves its best location when it can minimize its total operating costs, including prod
Transportation costs affect the location of an industry since firms recognize that transportation costs along with production costs affect profitability. A firm achieves its best location when it can minimize its total operating costs, including productio
3.2 Explain how the international movement of products and of factor inputs promotes an equalization of the factor prices among nations.
2. The factor endowment theory suggests that a capital abundant nation enjoys relatively cheap capital & thus specializes in & exports capital intensive goods. This leads to increased demand for capital which increases the price of capital & thus the pric
3.3 How does the factor-endowment theory differ from Ricardian theory in explaining international trade patterns?
3. The Heckscher Ohlin, H-O factor endowment theory, emphasizes factor endowments as the basis for trade while Ricardo emphasizes the role of labor productivity.
3.4 The factor-endowment theory demonstrates how trade affects the distribution of income within trading partners. Explain.
4. H-O theory says that exports of products representing large amounts of relatively cheap, abundant factors makes those factors less abundant domestically. This leads to higher prices & thus an increased share of national income for these factors.
3.5 How does the Leontief paradox challenge the overall applicability of the factor-endowment model?
5. The Leontief paradox questioned the applicability of the factor-endowment theory & concluded that U.S. exports were less capital-intensive than import-competing goods. Leontief's findings directly contradicted the factor-endowment theory which we now k
3.6 According to Staffan Linder, there are two explanations for international trade patterns�one for manufactures and another for primary (agricultural) goods. Explain.
6. Stefan Linder maintains that the factor-endowment theory is valid for trade in primary products, but that the theory of overlapping demands best applies to trade in manufactured goods.
3.7 Do recent world trade statistics support or refute the notion of a product life cycle for manufactured goods?
7. Recent empirical evidence supports the product life cycle theory for manufactured goods.
3.8 How can economies of scale affect world trade patterns?
8. Adam Smith recognized that the division of labor is limited by the size of the market. Global trade allows for longer production runs for domestic manufacturers which leads to increasing efficiency & competitiveness.
3.9 Distinguish between intra-industry trade and inter-industry trade. What are some major determinants of intra-industry trade?
9. Inter-industry trade refers to the exchange between nations of products of different industries. Intra-industry trade refers to two-way trade in a similar product & is driven overlapping demand segments in trading countries. Advanced industrial nations
3.10 What is meant by the term industrial policy? How do governments attempt to create comparative advantage in sunrise sectors of the economy? What are some problems encountered when attempting to implement industrial policy?
10. Industrial policy refers to government policy intended to create comparative advantages in order to revitalize, improve and/or develop an industry. Examples of industrial policy include tax incentives, R&D subsidies, loan guarantees, low rate loans, &
3.11 How can governmental regulatory policies affect an industry's international competitiveness?
11. Governmental regulations imposed on domestic producers lead to higher production costs & a decrease in competitiveness. Nations that impose more stringent & costly governmental regulations on their producers, relative to those abroad, tend to lessen t
3.12 International trade in services is determined by
what factors?
12. Trade in business services is governed by factors including: (a) employee skills & compensation levels, (b) a firm's ability to organize its employees productively, (c) availability of capital equipment & (d) potential for economies of scale made poss
3.13 Table 3.6 illustrates the supply and demand schedules for calculators in Sweden and Norway. On graph paper, draw the supply and demand schedules of each country.
a. In the absence of trade, what are the equilibrium price and quantity of calculators p
a. Sweden ? P = $15, Q = 600; Norway ? P = $30, Q = 600.
Sweden has the comparative advantage in calculators.
b. P = $22.50 & 600 calculators are traded at that price.
Sweden ? Qs = 900, Qd = 300.
Norway ? Qs = 300, Qd = 900.
c. Sweden ? P = $20; Norway ?
2.1 Identify the basic questions with which modern trade theory is concerned.
1.1. Modern trade theory addresses the following questions
a) What constitutes the basis for trade?
b) At what terms of trade do nations export and import certain products?
c) What are the gains from trade in terms of production & consumption?
2.2 How did Smith's views on international trade differ from those of the mercantilists?
2.The mercantilists maintained that government should stimulate exports & restrict imports so as to increase a nation's holdings of gold. A nation could only gain at the expense of other nations because not all nations could simultaneously have a trade su
2.3 Develop an arithmetic example that illustrates how a nation could have an absolute disadvantage in the production of two goods and still have a comparative advantage in the production of one of them.
3.Assume that by devoting all of its resources to the production of steel, France can produce 40 tons of steel & 60 televisions. Comparable figures for Japan are 20 tons of steel & 10 televisions. In this example, France has an absolute advantage in both
2.5 How does the comparative-cost concept relate to a nation's production possibilities schedule? Illustrate how differently shaped production possibilities schedules give rise to different opportunity costs.
5.The principle of comparative advantage can be explained by opportunity cost which indicates the amount of one product that must be sacrificed in order to be able to produce one more unit of another product. The slope of the production possibilities curv
2.6 What is meant by constant opportunity costs and increasing opportunity costs? Under what condi- tions will a country experience constant or increasing costs?
6.Constant opportunity costs occur when the cost of each additional unit of one product in terms of another product remains the same. Constant costs occur when resources are completely adaptable to alternative uses. Under increasing cost conditions, howev
2.7 Why is it that the pre-trade production points have a bearing on comparative costs under increasing-cost conditions but not under conditions of constant-costs?
7.Where a nation produces along its production possibilities curve in autarky affects the nation's comparative costs under increasing cost conditions. This is because the slope of a bowed out production possibilities curve, which indicates the marginal ra
2.8 What factors underlie whether specialization in production will be partial or complete on an international basis?
8.Under constant opportunity cost conditions, specialization is complete. A country can devote all of its resources to the production of a good without losing its comparative advantage. Under increasing cost conditions, specialization tends to be partial.
2.9 The gains from specialization and trade are discussed in terms of production gains and consumption gains. What do these terms mean?
9.Production gains from trade refer to the increased output of goods and services made possible by the international division of labor and specialization. Consumption gains from trade refer to the increased amount of goods made available to consumers as t
2.10 What is meant by the term trade triangle?
10.The trade triangle includes a nation's exports, its imports & international terms of trade.
2.11 With a given level of world resources, international trade may bring about an increase in total world output. Explain.
11.The free trade argument maintains that international trade permits international division of labor and specialization and results in resources being transferred to their highest productivity. World output thus rises above autarky levels.
2.12The maximum amount of steel or aluminum that Canada and France can produce if they use all the factors of production at their disposal with the best technology available to them is shown (hypothetically) in Table 2.8.Assume that production occurs unde
12.
a. Canada's MRT of steel into aluminum equals 1/3 ton of steel per ton of aluminum while France's MRT of steel into aluminum equals 1 � tons of steel per ton of aluminum. Canada specializes in the production of aluminum while France specializes in the
2.14 Table 2.10 gives hypothetical export price indexes and import price indexes 1990 100 for Japan, Canada, and Ireland. Compute the commodity terms of trade for each country for the period 1990-2006. Which country's terms of trade improved, worsened, or
2.14 Japan's commodity terms of trade improved to 107.
Canada's commodity terms of trade remained constant at 100.
Ireland's commodity terms of trade worsened to 88.
2.15 Why is it that the gains from trade could not be determined precisely under the Ricardian trade model?
2.15 The gains a country enjoys from free trade depend on the equilibrium terms of trade, which is determined by world supply & demand conditions. By recognizing only the role of supply, Ricardo was unable to determine the equilibrium terms of trade.
2.16 What is meant by the theory of reciprocal demand? How does it provide a meaningful explanation of the international terms of trade?
2.16 The theory of reciprocal demand suggests that if we know the domestic demands of both trading partners for both products, we can determine the equilibrium terms of trade.
2.17 How does the commodity terms of trade concept attempt to measure the direction of trade gains?
2.17 The commodity terms of trade considers the direction of the gains from trade by measuring the relationship between the prices a country gets for its exports & the prices it pays for its imports over a given time period.
1.1 What factors explain why the world's trading nations have become increasingly interdependent, from an economic and political viewpoint, during the post-World War II era?
1. Interdependence among today's economies reflects the evolution of the world's economic & political order. Since the end of World War II, Europe & Japan have re-industrialized which, along with the formation of the EU & OPEC & the rise of multinational
1.2 What are some of the major arguments for and against an open trading system?
2. Proponents of an open trading system maintain that free trade leads to lower prices, the development of more efficient production methods & a greater range of consumer choices. Free trade allows resources to move from their lowest to their highest prod
1.3 What significance does growing economic inter- dependence have for a country like the United States?
3. For the U.S, growing economic interdependence has resulted in exports & imports (trade) increasing as a share of the national output (GDP). Profits of domestic companies & domestic wages are increasingly affected by foreign competition.
1.5 Identify the major fallacies of international trade.
5. The chapter describes three fallacies of international trade:
a. Trade is a zero sum activity
b. Imports reduce employment & burden the economy
c. Tariffs & quotas will save jobs & promote a higher level of employment
1.6 What is meant by international competitiveness? How does this concept apply to a firm, an indus- try, and a nation?
6. International competitiveness refers to the extent to which the goods of a firm or industry can compete in the global market. No nation can be competitive & thus a net exporter of everything. Given resource scarcity, the ideal is for them to be used in
1.7 What do researchers have to say about the relation between a firm's productivity and exposure to global competition?
7. Researchers have found that global competitiveness is a bit like sports. Companies get better just like athletes through competition which means companies exposed to intense global competition tend to be more productive than those which aren't.
1.8 When is international trade an opportunity for workers? When is it a threat to workers?
8.International trade benefits many workers globally, but especially those in export industries. In addition to providing jobs & income, it allows workers to shop for consumption goods raising their living standards. Workers in import-competing industries
1.9 Identify some of the major challenges confronting the international trading system.
9. Among the challenges confronting the international trading system are maintaining fair labor standards & promoting environmental quality.
1.10 What problems does terrorism pose for globalization?
10. The threat of international terrorism tends to slow globalization while making it costlier to do business around the world. Terrorism drives higher insurance & security costs for overseas staff, property & other assets. Heightened border inspections c