1. The countries of Macrostan and Micrastan have the
production possibilities tables for sheep and hogs shown in the
tables below. Without trade Macro would produce at Alternative D
and Micra would also produce Alternative D. Note that the costs of
producing sheep and hogs are constant in both countries.
MACROSTAN'S PRODUCTION POSSIBILITIES TABLE
|
Product Alternative(lbs)
|
A
|
B
|
C
|
D
|
E
|
F
|
|
Sheep
|
25
|
20
|
15
|
10
|
5
|
0
|
|
Hogs
|
0
|
5
|
10
|
15
|
20
|
25
|
MICRASTAN'S PRODUCTION POSSIBILITIES
TABLE
|
Product Alternative (lbs)
|
A
|
B
|
C
|
D
|
E
|
F
|
|
Sheep
|
20
|
16
|
12
|
8
|
4
|
0
|
|
Hogs
|
0
|
3
|
6
|
9
|
12
|
15
|
(a) In Macro, the cost of producing:
5 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.
(b) In Micra, the cost of producing:
4 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.
(c) Which country has the comparative
advantage in sheep production and which country has the
comparative advantage in hog production?
(d) If each nation specializes in the product
where it has a comparative advantage and trades with the other,
what will be the limits to the terms of trade for each sheep
unit?
(e) If the nations do not specialize and
trade but remain at alternative D in Macrostan and D in
Micrastan, the combined production of Macro and Micrastan will
be how many sheep and how many hogs?
(f) However, if the two nations specialize,
the combined production of Macro and Micrastan will be how many
sheep and how many hogs?
(g) What will be the total gain of sheep and
hogs if the countries specialize and trade?
2. (Textbook Key Question
5-4 ) The following are production possibilities
tables for China and the United States. Assume that before
specialization and trade the optimal product-mix for China is
alternative B and for the United States alternative U.
|
|
|
|
Product
|
China’s
production possibilities
|
|
|
|
|
|
|
|
|
|
Apparel
(in 1000s)
Chemicals
(in tons)
|
A
30
0
|
B
24
6
|
C
18
12
|
D
12
18
|
E
6
24
|
F
0
30
|
|
Product
|
U.S.
production possibilities
|
|
|
|
|
|
|
|
|
|
Apparel
(in 1000s)
Chemicals
(in tons)
|
R
10
0
|
S
8
4
|
T
6
8
|
U
4
12
|
V
2
16
|
W
0
20
|
a. Are comparative cost conditions such that the two
areas should specialize? If so, what product should each
produce?
b. What is the
total gain in apparel and chemical output that results from
this specialization?
c. What are the
limits of the terms of trade? Suppose actual terms of
trade are 1 unit of apparel for 1-1/2 units of chemicals and
that 4 units of apparel are exchanged for 6 units of
chemicals. What are the gains from specialization and
trade for each area?
d. Explain why
this illustration allows you to conclude that specialization
according to comparative advantage results in more efficient
use of world resources?
ANSWERS:
(a) Yes, because
the opportunity cost of apparel is less (1A = 1C) in China than
in the United States (1A = 2C). China should produce apparel
and the United States should produce chemicals.
(b) If they
specialize, the United States can produce 20 tons of chemicals
and China can produce 30,000 units of apparel. Before
specialization China produced alternative B and the United
States alternative U for a total of 28,000 units of apparel
(24,000 + 4,000) and 18 tons of chemicals (6 tons + 12
tons). The gain is 2,000 units of apparel and 2 tons of
chemicals.
(c) The limits of
the terms of trade are determined by the comparative cost
conditions in each country before trade: 1A = 1C in South
Korea and 1A = 2C in the United States. The terms of
trade must be somewhere between these two ratios for trade to
occur.
If the terms of
trade are 1A = 1-1/2C, China would end up with 26,000 units of
apparel (= 30,000 - 4,000) and 6 tons of chemicals. The
United States would have 4,000 units of apparel and 14 tons of
chemicals (= 20 - 6). China has gained 2,000 units of
apparel. The United States has gained 2 tons of
chemicals.
(d) Through the specialization and trade
illustrated in this example, the world is obtaining more output
from its fixed resources.
3. Refer to the domestic production
possibilities curve below for Abernorelco. The gain to Abernorelco
from specialization and international trade is represented by a
move from:
A) A to B.
B) C to A.
C) C to D.
D) B to E.
costs to society - the net costs of trade protection
in 8 industries:
|
Industry
|
Annual loss to economy from barriers = Cost
|
Net employment loss if barrier is removed = jobs
"saved"
|
Annual cost PER JOB SAVED
|
|
Textile and apparel
|
$ 10.04 billion
|
55,000
|
$ 182,545
|
|
Maritime transport
|
$ 2.79 billion
|
2,450
|
$ 1,138,775
|
|
Dairy
|
$ 1.01 billion
|
2,083
|
$ 484,878
|
|
Motor vehicles
|
$ 710 million
|
3,400
|
$ 208,824
|
|
Sugar
|
$ 661 million
|
1,694
|
$ 390,200
|
|
Meat
|
$ 185 million
|
100
|
$ 1,850,000
|
|
Steel mills
|
$ 162 million
|
1,265
|
$ 128,063
|
|
Nonrubber footwear
|
$ 147 million
|
1,316
|
$ 111,702
|
From McConnell and Brue, 2002
Source: compiled from United States International Trade Commission
data released December 1995. Data are for 1993
"The
gains which trade barriers create for protected industries come at
the expense of much greater losses for the economy as a whole. The
result is economic (productive) inefficiency"
(McConnell and Brue 2005, p. 368)
1. Why do trade barriers "look good"?
If tariffs contribute to inefficiency in the international
allocation of resources and lower output and income, why have
nations enacted tariffs?
2. Impact on income distribution
http://www.globaldevelopmentmatters.org/qa-trade.asp#8
3. Trade restrictions and poor countries
http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/03/business_trade_and_poor_countries/html/1.stm
http://news.bbc.co.uk/1/hi/business/4527056.stm#
Types of trade barriers
- tariffs
- import quotas
- nontariff barriers
- voluntary export restrictions
- export subsidies
A.
|
Should the US use trade restrictions to protect
American jobs?
READ:
Could your job go to China?
While U.S. employment leaps ...
September 7, 2001 Posted: 12:07 PM EDT (1607
GMT)
[http://www.cnn.com/2001/CAREER/trends/09/06/china.trade.jobs/index.html]
By Porter Anderson
CNN Career
(CNN) -- Just as Friday's new
Labor Department report shows the United States
unemployment rate soaring in August to 4.9 percent
from 4.6 percent, a newly released, federally
funded study reveals that a significant number of
production jobs are shifting from the American
workplace to China.
Labor Department statistics
suggest that U.S. employers cut far more jobs in
August than private economists had anticipated --
113,000 non-farm positions. And this is after
American layoffs passed the 1-million mark in
July.
But what concerns Stephanie
Luce, Ph.D., about her research data is not just
her figure of at least 34,900 jobs -- and maybe
twice that -- moving from the States to China in a
seven-month period as a result of warming
Washington-Beijing trade relations.
"What makes it worse," she says,
"is that some of these are higher-wage jobs, the
type jobs that U.S. cities have been fighting to
win. And now they're leaving. Many of those jobs
were held by people who'd been working in them for
many years, and in some cases their whole
lifetimes."
QUESTIONS:
AFTER READING, WHAT DO YOU THINK?
- Should the US use trade restrictions to
protect American jobs? What is YOUR answer
to this question? YES / NO
- How would most economists answer this
question? YES / NO
- According to economic studies which of the
following is true for countries that restrict
trade?
- The benefits of trade restrictions
are much greater than their costs
(i.e. countries GAIN from trade)
- The costs of trade restrictions
are much greater than the benefits
(i.e. countries LOSE when they trade with
other countries)
- If YOU answered NO to the first question,
how do you reconcile your answer with the news
article above? OR what could be done instead of
trade restrictions?
|
B. Please listen to the following National Public Radio report
by clicking on the link below and then click on the LISTEN or REAL
MEDIA button. In it you will learn about a proposal to:
- reduce agricultural tariffs around the world to promote
trade and efficiency
- eliminate agricultural export subsidies in the rich
countries
- reduce agricultural price supports that pay farmers in
the rich countries to produce more
|
Global Trade Talks Aim to Reduce Agriculture
Subsidies
http://www.npr.org/templates/story/story.php?storyId=853690
by Kathleen Schalch
All Things Considered, November 22, 2002 ·
In Doha, Qatar, World Trade Organization talks
focus on dramatically reducing or eliminating
agriculture subsidies. Some analysts say subsidies
make it difficult for developing countries to
compete in growing and exporting crops. NPR's
Kathleen Schalch reports.
|
Also read the following BBC report on how subsidies to US
cotton farmers affect poor farmers around the world.
C. Arguments for trade restrictions
- Military Self-Sufficiency
- Increase Domestic Employment
- Diversification-for-Stability
- Infant Industry
- Protection Against Dumping
- Cheap Foreign Labor
Military Self-Sufficiency Argument
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
Increase Domestic Employment?
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
Diversification for Stability
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
Infant-Industry Argument
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
strategic trade policy - modified infant
industry
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
Protection Against "Dumping"
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?
Cheap Foreign Labor
a. What is the argument?
b. Does the argument make some economic sense?
c. What are the counterarguments?