Answers to review quizzes marcroeconomics 12e parkin chapter 15

Without international trade, what would be the price of a container of roses and how many containers of roses a year would be bought and sold in the United States?. Without international

W H AT I S E C O N O M I C S ? 2 4 3

A n s w e r s t o t h e

R e v i e w Q u i z z e s

Page 416

1 Describe the situation in the market for a good or service that the United States imports

The goods and services the United States will import are those in which the United States has a higher opportunity cost of production relative to other countries In those markets the U.S no-trade price is higher than the world price With trade the quantity produced in the United States is less than the quantity consumed and the difference is imported

2 Describe the situation in the market for a good or service that the United States exports

The goods and services the United States will export are those in which the United States has a lower opportunity cost of production relative to other countries In those markets the U.S no-trade price is lower than the world price With trade the quantity produced in the United States exceeds the quantity consumed and the excess is exported

Page 417

1 How is the gain from imports distributed between consumers and domestic producers?

Consumers gain from imports and domestic producers lose from imports

2 How is the gain from exports distributed between consumers and domestic producers?

Consumers lose from exports and domestic producers gain from exports

3 Why is the net gain from international trade positive?

The net gain from international trade is positive because the gain to the winners exceeds the losses to the losers For instance, in the case of an imported good, the gain to consumers exceeds the loss to producer so society gains on net The

situation is similar for exports: The gain to producers exceeds the loss to

consumers

Page 423

1 What are the tools that a country can use to restrict international trade?

1 5

INTERNATIONAL TRADE POLICY

243

2 4 4

A country can use tariffs, import quotas, other import barriers such as health, safety, and regulation barriers, and voluntary export restraints to restrict

international trade Export subsidies also decrease other countries’ exports and restrict their international trade

2 Explain the effects of a tariff on domestic production, the quantity bought, and the price

A tariff raises the domestic price of the product The higher price increases

domestic production and decreases the domestic quantity purchased

3 Explain who gains and who loses from a tariff and why the losses exceed the gains

Domestic consumers lose from the tariff Domestic producers gain from the tariff The government also gains revenue from the tariff But the gain to producers plus the gain in government revenue is less than the loss to consumers, so on net a tariff creates a social loss There is a social loss for two reasons: First, high-cost domestic production expands, so society uses more resources producing some high-cost units of the good than it would use if low-cost foreign units were

purchased Second the high price leads domestic consumers to decrease their consumption of the good, thereby robbing society of the benefits these units would have produced

4 Explain the effects of an import quota on domestic production, consumption, and price

An import quota raises the domestic price of the product The higher price

increases domestic production and decreases domestic purchases

5 Explain who gains and who loses from an import quota and why the losses exceed the gains

Domestic consumers lose from the import quota Domestic producers gain from the import quota The importers also gain additional profit from the import quota But the gain to producers plus the importers’ profits is less than the loss to

consumers, so on net an import quota creates a social loss There is a social loss for two reasons: First, high-cost domestic production expands, so society uses more resources producing some high-cost units of the good than it would use if low-cost foreign units were purchased Second the high price leads domestic consumers to decrease their consumption of the good, thereby robbing society of the benefits these units would have produced

Page 427

1 What are the infant industry and dumping arguments for protection? Are they correct?

The attempt to stimulate the growth of new industries is the infant-industry

argument for protection, which states that it is necessary to protect a new industry

from import competition to facilitate the growth of that industry, making it

competitive in the world markets This argument is based on the concept of

dynamic competitive advantage Learning-by-doing is a powerful engine of

productivity growth However the learning-by-doing argument for protection only works if the benefits also spill over into other industries and other parts of the economy This is rarely the case, as the entrepreneurs of infant industries and their financial supporters take this risk into account and all returns usually accrue only

to them, not to other industries And it is more efficient to subsidize the infant industry needing protection than it is to protect it by restricting trade

The dumping argument for protection states that a foreign firm is selling its

exports at a lower price than its cost of production Foreign firms trying to

monopolize the international market may use this practice Once the competition is

244

W H AT I S E C O N O M I C S ? 2 4 5

gone, the foreign firm will raise prices and reap profits This argument fails for several reasons First, it is virtually impossible to detect the occurrence of dumping since it is impossible to verify a firm’s production costs The test most commonly used is if the export price is lower than the import price This test only examines the supply side of the two markets and ignores the demand side If the domestic market is inelastic and the export market is elastic (which is almost always the case) then it is natural for a firm to price the domestic goods higher than the exports Second, it is difficult to see how a global firm could have a monopoly for the goods or services it exports There are too many foreign suppliers (and

potential suppliers), making global competition too extensive for a monopoly to exist in the global market And, even if there is global monopoly it is more efficient

to regulate it than to impose trade restrictions on its products

2 Can protection save jobs and the environment and prevent workers in

developing countries from being exploited?

There are many myths about trade restrictions The problem mentions three of them, all false reasons often offered as reasons to restrict international trade These arguments are:

under free trade, consumers in the importing country will have greater

disposable income and citizens in the exporting countries will have greater incomes This means total demand for the goods and services that are

exported by our domestic industry increases, increasing the number of jobs created in the domestic industries under free trade

countries have lax environmental standards Also, a clean environment is a normal good Countries that are relatively poor and have lax pollution

standards do not care as much about the environment because imposing clean air, water, and land standards have a high opportunity cost because they will slow economic development The best way to encourage environmental quality

is not to restrict economic development but to encourage rapid economic growth, which will more quickly increase citizen demand for a cleaner

environment in those developing countries

 Trade restrictions prevent rich countries from exploiting poorer countries:

Importing goods made in countries with low wage levels increases the demand for labor in those countries, increasing the number of jobs available and raising wages over time The more free trade that occurs with these countries, the more quickly the wages will rise and the working conditions will increase in quality and safety

3 What is offshore outsourcing? Who benefits from it and who loses?

Offshore outsourcing occurs when a firm in the United States buys finished goods, components, or services from firms in other countries Workers who have skills for jobs that have been sent abroad lose from offshore outsourcing Consumers who consume the goods and services produced abroad and imported into the United States benefit

4 What are the main reasons for imposing a tariff?

There are two main reasons for imposing tariffs on imports First the government receives tariff revenues from imports, which can be useful when revenues from income taxes and sales taxes are less effective ways of gaining government

revenue Second rent seeking by individuals in industries that would be hurt by foreign competition can influence the government to impose tariffs

5 Why don’t the winners from free trade win the political argument?

245

2 4 6

Trade restrictions are enacted despite the inherent inefficiency because of the political actions of rent seeking groups, which fear that foreign competition might have a negative impact on their industry, firm, or jobs The anti-trade groups are easily organized and have much to gain from trade restrictions, whereas the vast millions of consumers, who would win from free trade, are difficult to organize because each individual has only a small amount of loss when trade restrictions are imposed Hence the winners from trade restrictions frequently out-lobby the winners from free trade

246

A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d

A p p l i c a t i o n s

Use the following data to work Problems

1 to 3

Wholesalers buy and sell roses in

containers that hold 120 stems The

table provides information about the

wholesale market for roses in the United

States The demand schedule is the

wholesalers’ demand and the supply

schedule is the U.S rose growers’

supply Wholesalers can buy roses at

auction in Aalsmeer, Holland, for $125

per container

1 a Without international trade, what would be the price of a container of roses

and how many containers of roses a year would be bought and sold in the United States?

Without international trade, in the United States the price of a container of roses is

$175 and 6 million containers of roses are bought and sold

b At the price in your answer to part (a), does the United States or the rest of the world have a comparative advantage in producing roses?

The price of roses in the United States exceeds the price in the rest of the world, so the rest of the world has a comparative advantage in producing roses

2 If U.S wholesalers buy roses at the lowest possible price, how many do they buy from U.S growers and how many do they import?

The price of roses in the United States is $125 per container At this price, U.S rose growers supply 2 million containers per year and U.S wholesalers demand 12 million containers of roses U.S wholesalers buy the 2 million containers from U.S growers and purchase 10 million containers from foreign sources, which are

imported into the United States

3 Draw a graph to illustrate the U.S

wholesale market for roses Show the

equilibrium in that market with no

international trade and the equilibrium

with free trade Mark the quantity of

roses produced in the United States,

the quantity imported, and the total

quantity bought

In Figure 15.1, the equilibrium without

international trade is determined at the

intersection of the demand curve and

the supply curve Without international

trade the equilibrium price is $175 per

container and 6 million containers per

year are bought and produced With

international trade the world price is

$125 per container, as shown in Figure

15.1 The quantity produced in the

United States is 2 million containers and

the quantity bought in the United States is 12 million containers Imports into the

Price (dollars per container)

Quantity demanded Quantitysupplied (millions of containers

per year)

100 15 0

125 12 2

150 9 4

175 6 6

200 3 8

225 0 10

United States account for the difference between the quantity bought and the

quantity produced, 10 million containers

4 Use the information on the U.S wholesale market for roses in Problem 1 to

a Explain who gains and who loses from free international trade in roses

compared to a situation in which Americans buy only roses grown in the

United States

U.S rose wholesalers, who are the consumers in the problem, gain from free

international trade U.S rose growers lose from free international trade

b Calculate the value of the roses imported into the United States

The United States imports 10 million containers of roses per year The price of a

container is $125, so the value equals (10 million containers) × ($125 per

container), $1.25 billion

Use the information on the U.S wholesale market for roses in Problem 1 to work

Problems 5 to 10

5 If the United States puts a tariff of $25 per container on imports of roses,

explain how the U.S price of roses, the quantity of roses bought, the quantity produced in the United States, and the quantity imported changed

The U.S price of roses rises from $125 per container (the price with free trade) to

$150 per container The quantity of roses produced in the United States increases from 2 million containers (the quantity produced with free trade) to 4 million

containers The quantity of roses consumed in the United States decreases from 12 million containers (the quantity consumed with free trade) to 9 million containers The quantity imported decreases from 10 million containers to 5 million

containers

6 Who gains and who loses from this tariff?

U.S rose consumers lose from the tariff U.S rose producers gain from the tariff

The U.S government gains revenue from the tariff

7 Draw a graph of the U.S market for roses to illustrate the gains and losses

from the tariff and on the graph identify the gains and losses, and the tariff

revenue

Figure 15.2 shows the effect of the

tariff The amount of the tariff is equal

to the height of the light gray arrow In

the United States, the price of a

container of roses rises from $125 per

container to $150 per container

Before the tariff U.S rose producers

grew 2 million containers per year;

after the tariff they increase their

production to 4 million containers per

year This change is shown in the

figure by the movement from point a

to point b Before the tariff U.S rose

wholesalers, the consumers in this

problem, purchased 12 million

containers per year; after the tariff

they decrease their consumption to 9

million containers per year This

change is shown in the figure by the

movement from point c to point d The quantity of roses imported decreases from

10 million containers per year before the tariff to 5 million per year after the tariff

I N T E R N AT I O N A L T R A D E P O L I C Y 1 9 7

and a tariff of $25 per container is imposed The tariff revenue is equal to 10 million containers × $25 per container, which is $250 million and is illustrated in Figure 15.5 as the area of the grey rectangle

8 If the United States puts an import quota on roses of 5 million containers, what happens to the U.S price of roses, the quantity of roses bought, the quantity produced in the United States, and the quantity imported?

The U.S price of roses rises to $150 per container 9 million containers of roses are purchased in the United States and 4 million containers of roses are produced in the United States The difference, 5 million containers, is imported into the United States

9 Who gains and who loses from this quota?

U.S rose growers and importers of roses gain from the quota U.S rose

wholesalers lose from the quota

1 9 8 C H A P T E R 1 5

10 Draw a graph to illustrate the gains and losses from the import quota and on the graph identify the gains and losses, and the importers’ profit

Figure 15.3 shows the effect of the

import quota The amount of the

quota is equal to the length of the

grey arrow The price in the United

States rises from $125 per container

to $150 per container Before the

million containers per year; after the

import quota they increase their

production to 4 million containers per

year This change is shown in the

figure by the movement from point a

to point b Before the import quota

U.S rose wholesalers, the consumers

in this problem, purchased 12 million

containers per year; after the import

quota they decrease their

consumption to 9 million containers

per year This change is shown in the

figure by the movement from point c to point d The quantity of roses imported

decreases from 10 million containers per year before the import quota to 5 million per year after the tariff U.S producers receive $150 per container while foreign

producers receive the world price, $125 per container The difference, $25 per

container, goes to the importers as added profit The total added profit is equal to

10 million containers × $25 per container, which is $250 million and is illustrated

in Figure 15.5 as the area of the grey rectangle

11 Chinese Tire Maker Rejects Charge of Defects

U.S regulators ordered the recall of more than 450,000 faulty tires The

Chinese producer of the tires disputed the allegations and hinted that the

recall might be an effort to hamper Chinese exports to the United States

Source: International Herald Tribune, June 26, 2007

a What does the news clip imply about the comparative advantage of

producing tires in the United States and China?

Because the tires were produced in China, the news clip suggests that China has

the comparative advantage in producing tires

b Could product quality be a valid argument against free trade? If it could,

explain how

Product quality is not a valid argument against free trade Quality is a valid

concern for consumers If consumers cannot judge quality themselves, then

government inspection might be necessary But in that case government

inspection of both imported and domestically produced goods is required To single out imported goods or services makes little sense By questioning the quality of

tires, U.S producers create questions in the minds of U.S consumers regarding the safety of imported tires, thereby increasing the demand for domestically produced tires

I N T E R N AT I O N A L T R A D E P O L I C Y 1 9 9

Answers to Additional Problems and Applications

12 Suppose that the world price of rice is 40 cents a kilogram, China does not trade internationally, and the equilibrium price of rice in China is 60 cents a kilogram China then begins to trade internationally

a How does the price of rice in China change?

The price of rice in China falls

b Do Chinese consumers buy more or less rice?

As a result of the lower price, Chinese consumers buy more rice

c Do Chinese rice growers produce more or less rice?

As a result of the lower price, Chinese growers produce less rice

d Does China export or import rice and why?

China imports rice The quantity of rice demanded increases while quantity

supplied decreases The difference is made up by imports

13 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

a How does the price of steel in India change?

The price of steel in India rises to equal the world price

b How does the quantity of steel produced in India change?

Producers respond to the higher price by increasing the quantity of steel produced

c How does the quantity of steel bought by India change?

Steel users in India respond to the higher price by decreasing the quantity of steel bought

d Does India export or import steel and why?

Because the price of steel in India is lower than the world, India has a comparative advantage in the production of steel India will export steel

14 A semiconductor is a key

component in your laptop, cell

phone, and iPod The table provides

information about the market for

semiconductors in the United

States Producers of semiconductors

can get $18 a unit on the world

market

a With no international trade, what

would be the price of a

semiconductor and how many semiconductors a year would be bought and sold in the United States?

With no international trade the price of a semiconductor in the United States is $12 per unit 20 billion units are bought and sold in the United States

b Does the United States have a comparative advantage in producing

semiconductors?

The United States has a comparative advantage in producing semiconductors because the U.S price is lower than the price in the world market

Price (dollars per unit)

Quantity demanded Quantitysupplied (billions of units per year)

10 25 0

12 20 20

14 15 40

16 10 60

18 5 80

20 0 100

2 0 0 C H A P T E R 1 5

15 America’s Oil Bonanza

The shale revolution has increased the oil and gas flow in America

tremendously The International Energy Agency has predicted that the United States would become the world’s largest oil producer by 2020, leaving Saudi Arabia and Russia behind

Source: The Economist, November 17, 2012

a What is the effect of the shale revolution in the U.S on the world price of oil?

The shale oil revolution increased the world supply of oil, thereby reducing its

price

b How does the change in the world price of oil affect the quantity of oil

produced by members of the OPEC with a comparative advantage in

producing oil, the quantity it consumes, and the quantity that it either

exports or imports?

The lower world price of oil increases the consumption of oil and decreases the

production of oil in OPEC countries Because they have a comparative advantage they will export oil The lower price

causes them to decrease their

exports

16 Draw a graph of the market for corn

in the poor developing country in

Problem 15(b) to show the changes

in the price of corn, the quantity

produced, and the quantity

consumed by people in that country

In Figure 15.4, the initial world price

of corn was $6 per bushel After the

U.S and European policies, the world

price rises to $8 per bushel The

higher world price increases the

production of corn Production moves

from point a on the supply curve to

point b; that is, production in the

poor country increases from 5 million

bushels to 6 million bushels

Consumption of corn, however,

decreases Consumption in the poor

country moves from point c on the demand curve to point d; that is, consumption

decreases from 3 million bushels per year to 2 million bushels

I N T E R N AT I O N A L T R A D E P O L I C Y 2 0 1