SOLUTIONS TO END OF QUESTIONS IN CHAPTER 8

The United States in the International Economy

Review Questions
1.1 Since the early 1980s, the value of U.S. exports has been smaller than the v
alue of U.S. imports.
In 2008, U.S. exports were about 13 percent of GDP, and U.S. imports were about
16 percent of GDP.
1.2 Although the United States is the world’s leading exporter, Figure 8-3 shows
that exports and
imports as a share of total output (GDP) are smaller for the United States than
for most other
industrialized countries. Because the United States has a large and diverse econ
omy, the gains from
trading with other economies probably aren’t as great as they would be if the Un
ited States were smaller
and less diversified, such as Belgium or South Korea.
Problems and Applications
1.3 Agriculture would see a large decline, as would certain manufacturing indust
ries, such as
computers and software. Many service industries, such as haircuts and medical se
rvices, would not be
affected much because the United States does not export services of these types.
1.4 You should disagree. As Figure 8-3 shows, Japan is the only high-income coun
try that is less
dependent on international trade than is the United States in terms of share of
GDP that is exported.
1.5 Preferences for domestic producers refers to purchasing products made in you
r own country, as
opposed to purchasing imported products, and can be the result of tariffs or oth
er trade restrictions on
imported products. These preferences would put U.S. firms at a “competitive disa
dvantage” because other
countries will concentrate on purchasing products from domestic firms and not U.
S. firms. Over half of
all Caterpillar sales are outside the United States. As a producer of heavy mach
inery, having difficulty
making sales in countries experiencing significant levels of real growth where h
eavy machinery is in
demand, such as China and India, could have a large negative impact on its overa
ll sales levels and its
profitability.
8.2 Comparative Advantage in International Trade
Review Questions
2.1 Comparative advantage is the ability of an individual, business, or country
to produce a good or
service at the lowest opportunity cost. It is powerful because it runs counter t
o most people’s intuition that
trade is based on absolute advantage. Applying the principle of comparative adva
ntage allows us to
analyze which products countries tend to export and which they tend to import. I
t also allows us to see the
immense gains—to rich and poor alike—that can be generated from trading.
2.2 Absolute advantage is the ability to produce more of a good or service than
competitors using the
same amount of resources. Comparative advantage is the ability to produce a good
or service at a lower
opportunity cost than other producers. A country will often import goods in whic
h it has an absolute
advantage. For example, the United States could produce textiles—such as sheets
and towels—with fewer
resources than can China, but China can produce these goods at a lower opportuni
ty cost than the United
States. Importing textile products from China frees up resources with which the
United States can produce
other goods in which it has a comparative advantage.
Problems and Applications
2.3 The goods that countries import and export change over time because the good
s in which they
have a comparative advantage change over time.
2.4 The argument does not make sense because Bolivia must have a comparative adv
antage in
producing at least one good. Remember that comparative advantage compares opport
unity costs of
producing goods between two countries. If the United States has a lower opportun
ity cost in one good,
then it must have a higher opportunity cost in some other good, which would give
Bolivia the
comparative advantage in producing the other good.
2.5 Although workers in the United States produce more output per hour than work
ers in Japan,
indicating that the United States has an absolute advantage in production, Japan
must be able to produce
products it exports to the United States at a lower opportunity cost than could
the United States. This
gives Japan a comparative advantage in producing those products it exports to th
e United States.
2.6 By importing textile products from China, the United States isn’t “surrender
ing” its more efficient
industry. The textile industry in the United States isn’t more efficient than th
e textile industry in China.
U.S. textile firms produce their goods at a higher opportunity cost than do the
corresponding firms in
China. By moving resources out of the textile industry, the United States can do
even better—freeing up
these resources to produce the goods in which it has the comparative advantage a
nd using this output to
trade for goods that can be produced at a lower opportunity cost elsewhere. A co
untry increases its
income by specializing in products where it has a comparative advantage, even if
this means giving up
production of products where it has an absolute advantage, but not a comparative
advantage.
2.7 Obama was referring to products being produced in countries that have a comp
arative advantage
in the production process. Comparative advantage refers to the ability of an ind
ividual, a firm, or a
country to produce a good or service at a lower opportunity cost than competitor
s. Based on comparative
advantage, some jobs in the United States will be lost to countries that have lo
wer opportunity costs in
producing certain products and services. If T-shirts can be produced at a lower
opportunity cost in another
country, then it makes economic sense for T-shirts to be produced in that countr
y. Although an individual
who loses his job as a result of production from another country may be justifia
bly upset and prefer to pay
a higher price for a product to keep production at home, consumers in general ar
e better off by purchasing
products from countries that have a comparative advantage, as this will allow re
sources in the United
Stated to be more efficiently allocated to products and services in which the Un
ited States has a
comparative advantage.
8.3
How Countries Gain from International Trade Review Questions
3.1 International trade increases a country’s consumption because it allows the
country to specialize
in the goods and services that it can produce at the lowest opportunity cost and
trade for goods and
services for which it has a higher opportunity cost.
3.2 Complete specialization would mean producing only one good. It is not typica
l for a country to
completely specialize because not all goods and services are traded internationa
lly. The production of
most goods involves increasing opportunity costs, which means that before comple
te specialization is
reached, a country may have lost its comparative advantage in producing a good.
Finally, tastes for
products differ across countries, so different countries may have comparative ad
vantages in different
varieties of the same good.
3.3 The main sources of comparative advantage include climate and natural resour
ces, the relative
abundance of various types of labor and capital, technology and know-how, and ex
ternal economies—
reductions in a firm’s costs that result from an expansion in the size of the in
dustry.
Problems and Applications
3.4 a. A country has an absolute advantage over another country when it can prod
uce more of a good
using the same resources. Chile has an absolute advantage in the production of b
oth hats and
beer because it can produce more of both goods (8 hats; 6 barrels of beer) than
can Argentina
(1 hat; 2 barrels of beer) with the same amount of labor input.
b. A country has a comparative advantage when it can produce a good at a lower o
pportunity
cost. To produce 8 hats, Chile must give up 6 barrels of beer. Therefore the opp
ortunity cost to
Chile of producing 1 hat is 6/8, or 0.75 barrels of beer. Argentina must give up
2 barrels of
beer to produce 1 hat, so its opportunity cost of producing 1 hat is 2 barrels o
f beer. Chile has a
comparative advantage in the production of hats because its opportunity cost is
lower. To
produce 6 barrels of beer, Chile must give up 8 hats, so its opportunity cost of
producing 1
barrel of beer is 8/6, or 1.33 hats. Argentina must give up 1 hat to produce 2 b
arrels of beer, so
its opportunity cost of producing 1 barrel of beer is 0.5 hats. Argentina has a
comparative
advantage in the production of beer because its opportunity cost is lower.
c. As was shown in part b, Chile should specialize in producing hats, and Argent
ina should
specialize in producing beer. By specializing, Chile can produce 8,000 hats (1,0
00 labor hours
× 8 hats), and Argentina can produce 2,000 barrels of beer (1,000 labor hours ×
2 barrels of
beer). If Chile trades 700 hats to Argentina for 700 barrels of beer, the countr
ies will end up
with:
3.9 Although middle- and lower-income Americans may be losing jobs or receiving
lower wages due
to cheaper overseas labor, this same group benefits the most from the increased
buying power the imports
from low income countries generate. Lower-income consumers spend a bigger percen
tage of income on
manufactured goods than do higher-income consumers. Because the prices of manufa
ctured goods are
often affected by free trade, lower-income consumers benefit the most from the l
ow prices resulting from
free trade.
3.10 Trade allows a country to specialize in producing the goods in which it has
a comparative
advantage. After trading, the country can consume more. In this sense it can “pr
oduce more with less” and
consumers win. See Table 8-4 in the textbook for a good example of trade leading
to gains for consumers.
3.11 “Free trade” is trade without tariffs, quotas, or other limitations on impo
rts or exports. When a
country practices free trade, economic efficiency and the income of the average
person both increase. But
some firms and those who work for them will lose, as lower priced imports drive
them out of business.
Most Americans think about these adverse effects more than about the large net g
ains from trade.
3.12 While society as a whole benefits, not everyone wins from expanding interna
tional trade. Some
domestic suppliers and their workers lose if they are driven out of the market (
and into new markets) by
lower-priced imports.
3.13 A movie studio in Southern California can take advantage of the availabilit
y of skilled workers,
the opportunity to interact with other movie studios, and being close to supplie
rs. Economists refer to
these advantages as external economies.
Review Questions
4.1 A tariff is a tax imposed by the government on imports. A quota is a numeric
al limit imposed by
the government on the quantity of a good that can be imported. Non-tariff barrie
rs include governmental
rules—for example, health or safety regulations—that favor domestic firms over f
oreign firms.
4.2 The winners from tariffs are domestic producers and the government. The lose
rs are domestic
consumers and domestic firms that use as an input the product that is protected
by the tariff or quota—as,
for example, the U.S. candy industry loses as a result of the U.S. sugar quota.
The winners from quotas
are domestic producers and whoever holds the import license. The losers, again,
are domestic consumers.
Problems and Applications
4.3 “Fighting protectionism” refers to governments resisting the implementation
of tariffs, quotas,
and non-tariff barriers to protect domestic industries. “Populist policies” refe
r to policies supported by,
and designed to promote the rights and beliefs of, the common people. Adopting p
opulist policies, in this
case, the desire to enact protectionist policies to protect domestic industries,
are not aligned with the
concept of comparative advantage and would result in higher prices, lower consum
ption, and reduced
efficiency, all of which would reduce economic growth and therefore prolong the
recession.
4.4 In this context, economic nationalism refers to using tariffs, quotas, and n
on-tariff barriers to protect
domestic industries. As explained in the text, a country benefits from free trad
e even if other countries do
not engage in it. It gains because, by trading, it can obtain goods and services
at a lower opportunity cost.
4.5 You should disagree. Reducing barriers to trade reduces the number of jobs i
n industries that
shrink due to lower priced imports, but it increases the number of jobs in expor
t industries and in
industries that use as inputs goods that had been protected by tariffs. It benef
its all consumers as it lowers
the prices of imported goods.

4.6 a.
B.
before the tariff, the quantity of beef sold by U.S. producers is Q1; after the
tariff, the quantity
of beef sold by U.S. producers is Q3. Before the tariff, the quantity of beef im
ported = Q2 – Q1;
after the tariff, the quantity of beef imported = Q4 – Q3.
c. The winners from the tariff are domestic producers of beef and the government
, which collects
the tariff revenue. The losers are domestic consumers of beef.
4.7 Firms that use steel as an input will be adversely affected by an increase i
n steel prices in the U.S.
In addition, U.S. firms that sell products in foreign markets may fear that fore
ign countries will retaliate
by imposing their own import restrictions. While “Buy American” restrictions wou
ld likely increase the
number of American jobs in the steel industry, there will be a decrease in the n
umber of jobs in industries
that typically export their goods or services and in industries that use steel a
s an input.
4.8 Consumers pay more than domestic producers receive, because some of the bene
fits are captured
by foreign producers. In addition, consumers bear the cost of the deadweight los
s that a quota imposes on the economy (for example, see Figure 8-7 in the textbo
ok, which shows the effects of the sugar quota). A
“straight handout” would be a direct payment by the government to the firms that
would otherwise
receive protection through a quota. It would be cheaper because it would avoid m
aking consumers pay for
both the gains received by foreign producers and for the deadweight loss that re
presents the economic
inefficiency a quota imposes on the economy.
4.9 Subsidies to U.S. rice farmers increase the supply of rice grown in the Unit
ed States. This in turn
lowers the world price of rice. Farmers in Africa receive less per pound of rice
and their incomes from
rice growing are smaller.
4.10 A quota on steel imports raises the costs of producing goods that use steel
. This causes the prices
of these goods to rise, thereby reducing the quantity sold. As a result, produce
rs in these industries will
reduce their production and lay off some workers. Heavy steel users, such as the
automobile industry, and
those exporting goods made with steel would be most affected.
4.11 The student’s reasoning is flawed. As we saw in the chapter, placing a tari
ff on imports of a good
will raise the price of the good. The prices charged by U.S. producers will rise
by as much or more if
foreign competition is entirely eliminated than if a tariff is imposed. Also, if
the imported goods are a
different style or quality than the U.S. goods, then U.S. consumers will have a
reduced variety of goods
from which to choose.
4.12 Economists usually measure the standard of living by the goods and services
that the typical
person in a country is able to purchase. In this case, the Chinese government wi
ll have reduced the
standard of living of its own people and raised the standard of living of people
in the United States. The
standard of living in the United States is raised because U.S. consumers are abl
e to purchase Chinese
goods at a price below their true cost of production. The standard of living in
China is reduced because
the government has used some of the country’s resources to cover the cost of goo
ds that are sent to the
United States. Subsidizing exports is essentially giving money away to foreign c
onsumers.
4.13 The sugar quota helps domestic sugar growers by increasing the price of the
ir product. It harms
sugar refineries because the total amount of sugar to be refined (domestic produ
ction plus imports s) is
lower. It harms candy manufacturers and other food manufacturers because they mu
st pay more for their
inputs and can’t compete as well with foreign suppliers who can buy sugar more c
heaply. It hurts
consumers, who must pay more for sugar and goods with sugar in them. It hurts fa
rmers in developing
countries because they can’t export as much to the U.S. market.
Review Questions
5.1 The collapse of world trade during the Great Depression and the desire to cr
eate a stable,
prosperous world economy after World War II, led to the General Agreement on Tar
iffs and Trade. The
WTO eventually replaced GATT when it was felt that a permanent international org
anization would do a
more effective job at expanding international trade and working out agreements o
n trade in services and
intellectual property rights.
5.2 Globalization is the process of countries becoming more open to foreign trad
e and investment.
Some people oppose it because they believe it will make them worse off or will h
arm other people they
care about—especially poor workers in developing countries.
5.3 Protectionism is the use of trade barriers to shield domestic companies and
their workers from
foreign competition. The beneficiaries are the protected domestic companies and
their workers. The losers
are domestic consumers and other domestic producers who cannot buy their inputs
as cheaply. The main
arguments for protectionism are that it saves jobs and protects high wages, that
it allows “infant
industries” a chance to get started and grow, and that it protects national secu
rity. It is important to weigh
the benefits of each of these against the costs.
5.4 Dumping is selling a product for a price below its cost of production. The l
osers from dumping
are competitors of the firm that dumps (and the dumping firm itself if it is sel
ling below its marginal
cost). Consumers are the beneficiaries. The biggest problems in implementing ant
i-dumping laws are that
it is difficult to measure firms’ costs, so it is difficult to know if they are
dumping. Also, there are often
good reasons for selling goods below the cost of production. Domestic firms do t
his, so it is unclear why
foreign firms should not.
Problems and Applications
5.5 Clinton was probably referring to minimum wage laws, the rights to form unio
ns, and laws to
protect the health and safety of workers. The governments of most developing cou
ntries have resisted
these proposals. They argue that when the currently rich countries were poor, th
ey lacked these types of
labor standards, and their workers received low wages. They argue that it is eas
ier for rich countries to
afford high wages and other labor protections than it is for poor countries. The
y also point out that many
jobs that seem very poorly paid and unsafe by industrial country standards are o
ften better than the
alternatives available to workers in developing countries.
5.6 When the U.S. government puts a tariff on steel imports, it protects steelwo
rkers in West Virginia
at the expense of steelworkers in South Korea (and elsewhere) by artificially in
creasing the demand in the
United States for steel produced by U.S. firms. Landsburg is expressing an opini
on of how things ought to
be, so he is making a normative statement. Redborn is also expressing an opinion
and making a normative
statement.
5.7 The “Buy American” provision in the economic stimulus bill was definitely co
ntroversial, as is
demonstrated by the conflicting statements from both contributors. Both Simmerma
ker and Folsom are
expressing opinions, and are therefore making normative statements.
5.8 No, free trade is likely to have no effect on the total number of jobs in a
country, though
compared with the situation where trade is interfered with through the impositio
n of tariffs and quotas,
there will be a change in composition of jobs as some industries that compete ag
ainst imported goods
decline and industries that export goods expand.
5.9. No, free trade is likely to have no effect on the total number of jobs in a
country, though
compared with the situation where trade is interfered with through the impositio
n of tariffs and quotas,
there will be a change in composition of jobs as some industries that compete ag
ainst imported goods
decline and industries that export goods expand.