Problems

11 . Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain. 12 . How does comparative advantage lead to gains from trade? 13 . What is intra-industry trade? 14 . What are the two main sources of economic gains from intra-industry trade? 15 . What is splitting up the value chain? 16 . Are the gains from international trade more likely to be relatively more important to large or small countries?

Critical Thinking Questions

17 . Are differences in geography behind the differences in absolute advantages? 18 . Why does the United States not have an absolute advantage in coffee? 19 . Look at Exercise 20.2. Compute the opportunity costs of producing sweaters and wine in both France and Tunisia. Who has the lowest opportunity cost of producing sweaters and who has the lowest opportunity cost of producing wine? Explain what it means to have a lower opportunity cost. 20 . You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond? 21 . Look at Table 20.9. Is there a range of trades for which there will be no gains? 22 . You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem? 23 . Does intra-industry trade contradict the theory of comparative advantage? 24 . Do consumers benefit from intra-industry trade? 25 . Why might intra-industry trade seem surprising from the point of view of comparative advantage? 26 . In World Trade Organization meetings, what do you think low-income countries lobby for? 27 . Why might a low-income country put up barriers to trade, such as tariffs on imports? 28 . Can a nation’s comparative advantage change over time? What factors would make it change?

Problems

29 . France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week. a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week. b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes. c. Identify which country has the comparative advantage. d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans? 30 . In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios. a. Who has the absolute advantage in the production of rubber or radios? How can you tell? b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios? c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber? d. In this example, does each country have an absolute advantage and a comparative advantage in the same good? e. In what product should Japan specialize? In what product should Malaysia specialize? 31 . Review the numbers for Canada and Venezuela from Table 20.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question. a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons. b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber. c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade. 32 . In Exercise 20.31, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada? 33 . From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade. 34 . Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of $10 per phone and South Korea can produce 50 million mobile phones at $5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade? 35 . If trade increases world GDP by 1% per year, what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint: To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount the additional increase in global incomes due to trade and compare that number to Sri Lanka’s GDP.

FIGURE 21.1Flat Screen Competition The market for flat-panel displays in the United States is huge. The manufacturers of flat screens in the United States must compete against manufacturers from around the world. (Credit: modification of “IMG_4674” by “Jemimus”/Flickr Creative Commons, CC BY 2.0)

In this chapter, you will learn about:

• Protectionism: An Indirect Subsidy from Consumers to Producers
• International Trade and Its Effects on Jobs, Wages, and Working Conditions
• Arguments in Support of Restricting Imports
• How Trade Policy Is Enacted: Globally, Regionally, and Nationally
• The Tradeoffs of Trade Policy

BRING IT HOME What’s the Downside of Protection? Governments are motivated to limit and alter market outcomes for political or social ends. While governments can limit the rise in prices of some products, they cannot control how much people want to buy or how much firms are willing to sell. The laws of demand and supply still hold. Trade policy is an example where regulations can redirect economic forces, but it cannot stop them from manifesting themselves elsewhere. Flat-panel displays, the displays for laptop computers, tablets, and flat screen televisions, are an example of such an enduring principle. In the early 1990s, the vast majority of flat-panel displays used in U.S.-manufactured laptops were imported, primarily from Japan. The small but politically powerful U.S. flat-panel-display industry filed a