Chapter 5

Question 1

Comparative advantage (Ricardian) model of intern’l trade

Answer 1

the analysis of intern’l trade under the assumption that opportunity costs are constant, which makes PPFs straight lines

Question 2

Autarky

Answer 2

a situation in which a country does not trade with other countries

Question 3

Sources of comparative advantage

Answer 3

1. high skilled labor
2. technology
3. availability of natural resources
4. amount of labor
5. climate

Question 4

Heckscher-Ohlin Model

Answer 4

A country that has an abundance supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor

Question 5

World price

Answer 5

an assumption in which there are unlimited quantities of a 1. 1. good that can be purchased from abroad at a fixed price; 2. under this assumption, the world price is assumed to be lower than the price of the good in autarky (domestic price).
3. when a country opens to trade, it is assumed that the domestic price will fall toward the world price.

Question 6

World quantity

Answer 6

1. it is assumed that the domestic quantity for a good is lower than the world quantity
2. the quantity of a good demanded by domestic consumers rises from the quantity in autarky to the quantity demanded after open up for trade (the total demand with being open to world trade)
3. the quantity supplied by domestic producers falls from the quantity in autarky to quantity supplied domestically
4. the difference between the domestic quantity demanded and the domestic quantity supplied, Qd-Qs, is filled by imports

Question 7

Effects of imports on consumer/producer surplus

Answer 7

1. Imports of a good lead to fall in their domestic price
2. Consumer surplus rises
3. Producer surplus falls

Question 8

Effect of exports

Answer 8

1. For exports, the world price is assumed to be higher than autarky or domestic price
2. purchases of domestic goods from abroad drive the domestic price up until it is equal to the world price
3. Quantity demanded by domestic consumers falls from Qa to Qd (final quantity demanded?)
4. Quantity supplied by domestic producers rises from Qa to Qs.
5. This difference between domestic production and domestic consumption, Qs-Qd, is exported

Question 9

Effect of exports on consumer/producer surplus

Answer 9

1. Consumer surplus falls

2. Producer surplus rises

Question 10

Effects of international trade on income distribution (example)

Answer 10

1. Economy opens up to auto part imports from Mexico; domestic auto parts industry declines, hires fewer accountants
2. But accounting has employment opps in many industries so higher paying jobs might be found; job opportunities expand for accountants as a result of international trade
3. Accountants are affected by auto part imports only to the extent that these imports change wages of accountants in the economy as a whole
4. Wage rate of accountant is a factor price (the price employers have to pay for the services of a factor of production)

Question 11

Factors of production and the Heckscher-Ohlin Model

Answer 11

If internat’l trade increases the demand for a factor of production, that factor’s price will rise; if intenat’l trade reduces the demand for a factor of production, that factor’s price will fall.

Question 12

International trade and demand for factors

Answer 12

1. H-O model says that a country tends to export goods that are intensive in its abundant factors and to import goods that are intensive in its scarce factors
2. Int’l trade tends to increase demand for factors that are abundant in our country and decrease demand for factors that are scarce

Question 13

H-O and Wages

Answer 13

1. If int’l trade has the effects predicted by the H-O, its growth raises the wages of highly educated American workers and reduces wages of low-educated workers
2. Trade reduces income inequality between countries as poor countries improve their standard of living by exporting to rich countries

Question 14

Effects of a Tariff

Answer 14

1. Raises both the price received by domestic producers and the price paid by domestic consumers
2. When tariff is imposed, no longer profitable to import goods unless domestic price received by importer is greater than or equal to world price plus the tariff
3. Domestic price rises to Pt (Pw + tariff)
4. Domestic production rises to Qst, domestic consumption falls to Qdt, imports fall to Qdt-Qst
5. Higher domestic price increases producer surplus, reduces consumer surplus
6. Producers gain, consumers lose, and government gains
7. Consumer losses are greater than sum of producer and government gains, leading to net reduction in total surplus equal to areas B+D

Question 15

Deadweight loss

Answer 15

1. Created by a tariff or quota
2. Mutually beneficial trades are prevented from occurring
3. For tariff: DL is equal to loss in total surplus
4. Some mutually beneficial trades go unexploited, some consumers who are willing to pay more than world price, Pw, do not purchase the good, even though Pw is true cost of a unit of the good to the economy
5. Economy’s resources wasted on inefficient production: some producers whose cost exceeds Pw produce the good, even though an additional unit of the good can be purchased abroad for Pw

Question 16

Effects of import quota

Answer 16

1. Usually issued through licenses: a number of licenses are issued, each giving the license-holder the right to import a limited quantity of goods each year
2. Same effect as tariff, with one difference: the money that would otherwise have accrued to the gov. as tax revenue under a tariff becomes license-holders’ revenue under quota- “quota rents”
3. Who receives import licenses and collects quota rents? In US, these are foreign govs- because quota rents for most US import quotas go to foreigners, the cost to US of quotas is higher than that of a comparable tariff
4. Losses = B+C+D, the difference between consumer losses and producer gains