The US Economy

How is the U.S. economy affected by international trade?

U.S. consumers buy

    increasing  

 quantities of goods and services produced in other countries. At the same time, U.S. businesses sell

increasing  

 quantities of goods and services to consumers in other countries.

International trade has always played a role in the U.S. economy. Is this role increasing or decreasing (in terms of exports and imports)?

International trade is

C.

increasing because

shipping costs have decreased

Exports    

are goods and services produced domestically but sold to other countries.

Imports    

are goods and services bought domestically but produced in other countries.

    Tariffs  

are taxes imposed by a government on imports of a good into a country.

The United States is

one of the largest exporters  

in the world. International trade remains

    less important  

to the United States than it is to most other countries.

Suppose

France

and

Spain

produce only cloth and wine. Assume that each country uses only labor to produce each good, and that the cloth and wine made in

France

and

Spain

are exactly alike. The table below shows how much each country can produce of each good with one hour of labor.

Output per Hour of Labor

 

Cloth

Wine

FranceFrance

18

16

SpainSpain

3

9

According to the table, the opportunity cost to

France

of producing one more unit of cloth is

.0.89

units of wine), and the opportunity cost to

Spain

of producing one more unit of cloth is

.3

units of wine.

Thus, we can conclude that

B.

France

has a comparative advantage in producing cloth and

Spain

has a comparative advantage in producing wine.

Suppose the United States and Japan produce only cell phones and digital music players, like Apple's iPod. Assume that each country uses only labor to produce eachgood, and that Japanese and U.S. cell phones and digital music players are exactly the same.

Output per Hour of Work

 

Cell Phones

Digital Music Players

Japan

1

2

United States

6

3

Determine the missing opportunity costs in the table below and fill in the missing values. (Enter your responses rounded to one decimal place.)

Opportunity Costs

 

Cell Phones

Digital Music Players

Japan

2.0

0.5

United States

.0.5

2.0

From the tables above it is clear that _____ has an absolute advantage in the production of both goods and that _____ has a comparative advantage in cell phones, while _____ has a comparative advantage in digital music players.

C.

the United States,the United States,Japan

Comparative advantage

C.

is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Suppose the United States and

JapanJapan

produce only cell phones and digital music players. Assume that each country uses only labor to produce each good, and that the cell phones and digital music players made in the United States and

JapanJapan

are exactly alike. The table below shows how much each country can produce of each good with one hour of labor.

 

Output per Hour of Labor

 

Cell Phones

Digital Music Players

United States

3

9

JapanJapan

23

17

     

According to the table,

Japan  

has an absolute advantage in producing cell phones, and

Japan  

 has an absolute advantage in producing digital music players.  

At the same time,

    Japan  

has a comparative advantage in producing cell phones, and

    the United States  

has a comparative advantage in producing digital music players.

Assume the table below shows the quantities of wine and cheese that a worker can produce in an hour in France and Italy.

 

Wine (bottles)

Cheese (ounces)

France

4

11

Italy

8

27

Italy  

has an absolute advantage producing wine and

Italy  

 has an absolute advantage producing cheese.

France  

 has a comparative advantage producing wine and

Italy 

has a comparative advantage producing cheese.

Assume the table below shows the quantities of computers and cell phones that a worker can produce in an hour in Japan and South Korea.

 

Computers

Cell Phones

Japan

6

28

South Korea

2

11

The opportunity cost of producing a computer in Japan is

4.67

cell phones and the opportunity cost of producing a computer in South Korea is

.5.50

cell phones

    Japan  

has a comparative advantage producing computers and

    South Korea    

has a comparative advantage producing cell phones.

Comparative advantage

A.

may change as time passes and circumstances change.

Among the main sources of comparative advantage are the following:

B.

climate and natural resources, relative abundance of labor and capital, technology, external economies.

We do not see complete specialization in the real world because

B.

not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ.

f both countries specialize completely by producing only that for which they have a comparative advantage and then trade

2,000

automobiles for

14,000

computers, what will each country's consumption of automobiles and computers be?

To answer this question, fill in the table below with the amounts of automobiles and computers the United States and Japan will consume with specialization and trade.   (Enter your responses as whole numbers.)

 

Automobiles

Computers

United States

2,000.

42,000

Japan

6,000

14,000

If both countries specialize completely by producing only that for which they have a comparative advantage and then trade, what would be the terms of trade that would benefit both countries?

A.

Both countries would benefit from trade if

Philippines

were to trade

20,000

bananas for

16,000

pineapples with

ColumbiaColumbia.

Economic theory suggests countries benefit from international trade by producing more of those good and services for which they have a comparative advantage (and less of that for which a country does not have a comparative advantage).  However, countries rarely specialize completely.  Why?

Even with international trade, countries rarely specialize completely because

B.

goods and services cannot be traded internationally.

If

ChinaChina

trades

2,600

cell phones for

2,600

digital music players with

Germany,

then, with trade,

China

will be able to consume the same number of digital music players and

.2000

additional cell phones), and

Germany

will be able to consume the same number of cell phones and

1040

additional digital music players.

Autarky_____ is a situation in which a country does not trade with other countries. The terms of trade_____ is the ratio at which a country can trade its exports for imports from other countries

By trading, countries are able to consume more than they could without trade. This outcome is possible because

All of the Above

Who is harmed when individual nations move from autarky to free trade?

A.

The owners of the firms that went out of business.

One effect of tariffs and quotas

A.

is to cost jobs outside the industries immediately affected.

The diagram below shows the actual statistics for the U.S. sugar market in 2008 reflecting a quota of 3.6 billion pounds placed on U.S. imports. Complete the table below illustrating the welfare effects of this quota.

Loss of Consumer Surplus

=

Gain by U.S.

Sugar Producers

+

Gain to Foreign Sugar Producers

+

Deadweight Loss

A + B + C + D  

 

   A  

 

B

 

    C + D  

As illustrated in the diagram to the right, when a nation moves from autarky to freetrade, economic surplus increases by the areas represented by

B.

C and D.

As a result of the

Tariff   consumers will be

    worse  

off in terms of consumer surplus, and producers will be

better   off in terms

The primary difference between a quota and a voluntary export restraint (VER) is that

A.

the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations.

The diagram on the right represents a tariff imposed on an individual market. The total deadweight loss (loss in economic surplus) from this tariff is illustrated by areas

C and D

Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.

D.

This statement is false; the U.S. economy would gain from t

Dumping

C.

is selling a product for a price below its cost of production.

What were the economic effects of the North American Free Trade Agreement (NAFTA)?

C.

increased about $400 per year for a family of four.

What do most economists find to be the most persuasive argument in favor of protectionism?

A.

Trade barriers protect infant industries that initially have relatively high costs.

Protectionism is the use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of several arguments whichinclude:

B.

saving jobs, protecting infant industries, and protecting national security.

One reason some oppose free trade and the reduction of trade barriers is protectionism.

What does old-fashioned protectionism seek to protect?

Protectionism traditionally seeks to use trade barriers to protect

A.

domestic

jobs

In 1999, at a meeting of the World Trade Organization in Seattle, Washington, a large number of people protested attempts to reduce trade barriers.

What is a reason why some would want to prevent trade barriers from being reduced?

Some want to prevent trade barriers from being reduced because they

D.

seek to protect domestic

infant industries

Many economists discourage restrictions on trade, emphasizing the costs associated with tariffs and quotas.  However, the U.S. government still receives pressure from some to erect trade barriers, and some trade barriers are still in place.

Why would policymakers (such as those in Congress) understand the potential benefits from trade yet support trade restrictions?

B.

The costs of trade restrictions per consumer are small.

Why do some people oppose the World Trade Organization (WTO)?

All of the above

The World Trade Organization (WTO)

All of the Above

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