Questions for Review

1. What does the domestic price that prevails without
international trade tell us about a nation’s comparative
advantage?

答案：

Because there is no international trade, the market consists solely of domestic buyers and sellers. The domestic price adjusts to balance the quantity supplied by domestic sellers and the quantity demanded by domestic buyers.In essence, comparing the world price and the domestic price before trade indicates whether a nation has a comparative advantage in a certain good. The domestic price reflects the opportunity cost of steel: It tells us how much an nation must give up to get one piece of the good. If the domestic price is low, the cost of producing a good is low, suggesting that the nation has a comparative advantage in producing the good relative to the rest of the world. If the domestic price is high, then the cost of producing the good in a nation is high, suggesting that foreign countries have a comparative advantage in producing the good.

  

2. When does a country become an exporter of a good? An
importer?

答案：

If the world price is higher than the domestic price, then a country would become an exporter. Producers would be eager to receive the higher prices available abroad and would start selling their good to buyers in other countries. Conversely,if the world price is lower than the domestic price, then a country would become an importer. Because foreign sellers offer a better rice, Domestic consumers would quickly start buying from other countries.

 

3. Draw the supply-and-demand diagram for an
importing country. What is consumer surplus and
producer surplus before trade is allowed? What is
consumer surplus and producer surplus with free trade?
What is the change in total surplus?

答案：

Before trade is allowed, the price adjusts to balance domestic supply and domestic demand. Consumer surplus, the area between the demand curve and the before-trade price. Producer surplus, the area between the supply curve and the before-trade price. Total surplus before trade, the sum of consumer and producer surplus. After trade is allowed, the domestic price rises to the world price. Consumer surplus is the area between the demand curve and the world price. Producer surplus is the area between the supply curve and the world price.When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good,consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses. In other words the total surplus will increase with free trade.

 

4. Describe what a tariff is, and describe its economic
effects.

答案：

A tariff—a tax on imports—moves a market closer to the equilibrium that would exist without trade and,therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains.

 

5. What is an import quota? Compare its economic effects
with those of a tariff.

答案：

Import quota is a limit on the quantity of imports.An import quota has effects that are similar to those of a tariff. Under a quota, however, the holders of the import licenses receive the revenue that the government would collect with a tariff.

 

6. List five arguments often given to support trade
restrictions. How do economists respond to these
arguments?

答案：

THE JOBS ARGUMENT：Opponents of free trade often argue that trade with other countries destroys domestic jobs；

THE NATIONAL-SECURITY ARGUMENT：When an industry is threatened with competition from other countries, opponents of free trade often argue that the industry is vital for national security；

THE INFANT-INDUSTRY ARGUMENT：New industries sometimes argue for temporary trade restrictions to help them get started. After a period of protection, the argument goes, these industries will mature and be able to compete with foreign competitors. Similarly, older industries sometimes argue that they need temporary protection to help them adjust to new conditions；

THE UNFAIR-COMPETITION ARGUMENT：A common argument is that free trade is desirable only if all countries play by the same rules. If firms in different countries are subject to different laws and regulations,then it is unfair (the argument goes) to expect the firms to compete in the international marketplace；

THE PROTECTION-AS-A-BARGAINING-CHIP ARGUMENT：Another argument for trade restrictions concerns the strategy of bargaining. Many policymakers claim to support free trade but, at the same time, argue that trade restrictions can be useful when we bargain with our trading partners. They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government.

Ecomomists' response:

To THE JOBS ARGUMENT:Free trade creates jobs at the same time that it destroys them;

To THE NATIONAL-SECURITY ARGUMENT：Economists acknowledge that protecting key industries may be appropriate when there are legitimate concerns over national security. Yet they fear that this argument may be used too quickly by producers eager to gain at consumers’ expense.

To THE INFANT-INDUSTRY ARGUMENT： Economists are often skeptical about such claims. The primary reason is that the infant-industry argument is difficult to implement in practice. To apply protection successfully, the government would need to decide which industries will eventually be profitable and decide whether the benefits of establishing these industries exceed the costs to consumers of protection. Yet “picking winners” is extraordinarily
difficult. It is made even more difficult by the political process, which often awards protection to those industries that are politically powerful. And once a powerful industry is protected from foreign competition, the “temporary” policy is hard to remove.
In addition, many economists are skeptical about the infant-industry argument even in principle. Suppose, for instance, that a industry is young and unable to compete profitably against foreign rivals. Yet there is reason to believe that the industry can be profitable in the long run. In this case, the owners of the firms should be willing to incur temporary losses in order to obtain the eventual profits. Protection is not necessary for an industry to grow.

To THE UNFAIR-COMPETITION ARGUMENT：The gains of the consumers from buying at the low price would exceed the losses of the producers.

To THE PROTECTION-AS-A-BARGAINING-CHIP ARGUMENT：The problem with this bargaining strategy is that the threat may not work. If it doesn’t work, the country has a difficult choice. It can carry out its threat and implement the trade restriction, which would reduce its own economic welfare. Or it can back down from its threat, which would cause it to lose prestige in international affairs. Faced with this choice, the country would probably wish that it had
never made the threat in the first place.

 

7. What is the difference between the unilateral and
multilateral approaches to achieving free trade? Give an
example of each.

答案：

A country can take one of two approaches to achieving free trade. It can take a unilateral approach and remove its trade restrictions on its own. This is the approach that Great Britain took in the nineteenth century and that Chile and South Korea have taken in recent years. Alternatively, a country can take a multilateral approach and reduce its trade restrictions while other countries do the same. In other words, it can bargain with its trading partners in an attempt to reduce trade restrictions around the world.One important example of the multilateral approach is the North American Free Trade Agreement (NAFTA), which in 1993 lowered trade barriers among the United States, Mexico, and Canada.

 

 

Problems and Applications

1. The United States represents a small part of the world
orange market.
a. Draw a diagram depicting the equilibrium in the
U.S. orange market without international trade.
Identify the equilibrium price, equilibrium quantity,
consumer surplus, and producer surplus.

答案：

Because there is no international trade, the market consists solely of domestic buyers and sellers. The domestic price adjusts to balance the quantity supplied by domestic sellers and the quantity demanded by domestic buyers.Consumer surplus, the area between the demand curve and the before-trade price. Producer surplus, the area between the supply curve and the before-trade price.
b. Suppose that the world orange price is below the
U.S. price before trade, and that the U.S. orange
market is now opened to trade. Identify the new
equilibrium price, quantity consumed, quantity
produced domestically, and quantity imported.
Also show the change in the surplus of domestic
consumers and producers. Has domestic total
surplus increased or decreased?

答案：

Because that the world orange price is below the U.S. price so U.S.should be a importer of orange if trade is allowed. The new equilibrium price will be the world price which is lower than the price before trade and the quantity consumed will be increased while the quantity produced domestically will be decreased.The quantity imported equals the gap between the increased consumer demand and decreased domestic supply. The domestic consumers surplus will be better off while the domestic producer surplus worse off.The gains of consumers surplus is bigger than the loss of producer surplus so the domestic total surplus has increased.

 

2. The world price of wine is below the price that would
prevail in the United States in the absence of trade.
a. Assuming that American imports of wine are a
small part of total world wine production, draw a
graph for the U.S. market for wine under free trade.
Identify consumer surplus, producer surplus, and
total surplus in an appropriate table.

答案：

After trade is allowed, the domestic price rises to the world price. Consumer surplus is the area between the demand curve and the world price. Producer surplus is the area between the supply curve and the world price. The consumer surplus is better off while the producer surplus is worse off. The total gains bigger than the loss.The total surplus is the consumer surplus plus the producer surplus, which is bigger than without trade.

b. Now suppose that an unusual shift of the Gulf
Stream leads to an unseasonably cold summer in
Europe, destroying much of the grape harvest
there. What effect does this shock have on the
world price of wine? Using your graph and table
from part (a), show the effect on consumer surplus,
producer surplus, and total surplus in the United
States. Who are the winners and losers? Is the
United States as a whole better or worse off? 

答案：

Due to the cold weather the grape supply is reduced.The consumer demand is remain the same while the producer supply is decreased. The supply curve shifts to the left and raise the equilibrium point that will make the world price higher than before.Because the world price is increased the consumer will be worse off while the producer will be better off. The total surplus is the sum of consumer surplus and producer surplus. If the new equilibrium point is higher than the equilibrium point without trade the total surplus in the U.S.can be possibly higher than before. If the new equilibrium price is lower than the price without trade the total surplus is less than before. The winners of this grape disaster is the grape growers out of Europe while the lossers of this is the consumer around the world and the grape grower in Europe. As I mentioned before in the total surplus in the U.S. whether the United States as a whole is better off or worse off depends on the new world price.Because if the new world price is high enough it will make the United States an exporter of grape and that will increase the producer surplus and can possibly make U.S. as a whole to be better off.

 

3. The world price of cotton is below the no-trade price in
Country A and above the no-trade price in Country B.
Using supply-and-demand diagrams and welfare tables
such as those in the chapter, show the gains from trade
in each country. Compare your results for the two
countries.

答案：

Country A price is higher than the world price.Country A will be a importer.In this case the consumer surplus in Country A will increase because the domestic price will drop to the world prce.The producer surplus will decrease. The gains is bigger than the loss and the total surplus of Country A will increase. Country B price is lower than the world price.Country B will be an exporter and the domestic price will rise to the world price. In this case the consumer surplus in Country B will decrease and the producer surplus will increase in Country B. The gains of the producer will bigger than the loss of consumer and the total surplus of Country B will increase.Both Country A and Country B will benefit from trade.

 

4. Suppose that Congress imposes a tariff on imported
autos to protect the U.S. auto industry from foreign
competition. Assuming that the U.S. is a price taker in
the world auto market, show on a diagram: the change
in the quantity of imports, the loss to U.S. consumers,
the gain to U.S. manufacturers, government revenue,
and the deadweight loss associated with the tariff. The
loss to consumers can be decomposed into three pieces:
a transfer to domestic producers, a transfer to the
government, and a deadweight loss. Use your diagram
to identify these three pieces.

答案：

The import quantity before the tariff is Q4-Q1;After the tariff the import quantity is Q3-Q2;The loss to U.S.consumers is B+E+F+G;The gains to U.S.producer is B;The government revenue is F;The deadweight loss associated with the tariff is E+G;Accordingly the loss to consumers which transfers to domestic producers equals B,to the government equals F,to the deadweight loss equals E+G;

 

5. According to an article in The New York Times (Nov. 5,
1993), “many Midwest wheat farmers oppose the [North
American] free trade agreement [NAFTA] as much as
many corn farmers support it.” For simplicity, assume
that the United States is a small country in the markets
for both corn and wheat, and that without the free trade
agreement, the United States would not trade these
commodities internationally. (Both of these assumptions
are false, but they do not affect the qualitative responses
to the following questions.)

a. Based on this report, do you think the world wheat
price is above or below the U.S. no-trade wheat
price? Do you think the world corn price is above
or below the U.S. no-trade corn price? Now analyze
the welfare consequences of NAFTA in both
markets.

答案：

Based on this report, I think the world wheat price is below the U.S. no-trade wheat price while the world corn price is above the U.S. no-trade corn price. NAFTA will cut the U.S.wheat farmers surplus but increase wheat consumers surplus. NAFTA will cut the U.S. corn consumers surplus while increase the corp farmers surplus. In both case the total surplus of U.S. will be increased.
b. Considering both markets together, does NAFTA
make U.S. farmers as a group better or worse off?
Does it make U.S. consumers as a group better or
worse off? Does it make the United States as a
whole better or worse off?

答案：

Considering both markets together it's hard to say whether NAFTA makes U.S. farmers as a group better or worse off.Because wheat farmers surplus is increased while corp farmers surplus is decreased so we cann't decide the total surplus of the U.S farmers is increased or decreased. For the same reason the total surplus of  U.S. consumers as a group is uncertain either. Because the gains of wheat consumer is bigger than the loss of wheat farmer and the gains of corp farmer is bigger than the loss of corp consumer, so the United State as a whole will be better off because of NAFTA. And because the total surplus of the United States is increased so at lease farmers as a group or consumers as a group are better off. It could be possible that both the farmers as a group and consumers as a group are better off but it is not possible that both groups are worse off. 

 

6. Imagine that winemakers in the state of Washington
petitioned the state government to tax wines imported
from California. They argue that this tax would both
raise tax revenue for the state government and raise
employment in the Washington state wine industry. Do
you agree with these claims? Is it a good policy?

答案：

I don't quite agree with these claims.Firstly a tax on imports moves a market closer to the
equilibrium that would exist without trade and,therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains.If the tarrif is too high the the importers will lose the incentive to import and that will make no increase in tax revenue. Secondly import will also creates new jobs so the shrink in import will make job losses. So based on the above mentioned two points it is not a good policy.

 

7. Senator Ernest Hollings once wrote that “consumers do
not benefit from lower-priced imports. Glance through
some mail-order catalogs and you’ll see that consumers
pay exactly the same price for clothing whether it is
U.S.-made or imported.” Comment.

答案：

I think consumers will benefit from lower-priced imports.Firstly it will give the customer more choices;Secondly because of these lower-priced imports the domestic producers will lower the price of their products to the level of these imports in order to be competitive and that will increase the consumers surplus. Even though the price of the U.S.made and imported clothing appeared to be same but in fact without the imports local demand will remain high while local supply relatively low and the price will rise accordingly, so the consumers will be worse off.

 

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