International Trade

October 29, 2001

Questions for Chapter 1

1.Tell the difference between international trade and international finance.

2.Define balance of payments, a trade surplus, and a trade deficit.

Questions for Chapter 2

1.Krugman and Obstfeld say that there are two economic reasons for international trade. What are they?

2.Describe the economic theory of comparative advantage as it applies to international trade.

3.Assume a one-factor (labor), two-good model of international trade in which two countries use the same money. Assume homogeneous units of goods, constant returns to scale for each good, and no costs of transportation or transactions. Assume that there is no trade at first. Now suppose that trade begins. After trade goes on for a while the relative price of the goods in each country becomes identical. According to Krugman and Obstfeld, this price must fall between two values. Tell what these extreme values are and why the after-trade price must fall between them.

4.A leader in India once said: "It is obvious that our country has not gained from international trade because the wages of our workers are only 1/10 of the average international wage rate." Is this leader correct? Why? Why not?

5."Free trade is beneficial only if a country's labor resources are more productive and its non-labor resources are more competitive than those of other countries. Is this statement correct? Why? Why not?

6."International trade exploits the workers of a low-wage country, making them worse off. Is this statement correct? Why? Why not?

1.Assume a one-factor (labor), many-good model of international trade in which two countries use the same money. Each good has different labor requirements. Assume homogeneous units of goods, constant returns to scale for each good, and no costs of transportation or transactions. On the basis of the Ricardian theory of comparative advantage, which kinds of goods will the country export and which kinds will it import?

2.Assume a one-factor (labor), many-good model of international trade in which there are only two countries that use the same money. Each good has different labor requirements. Assume homogeneous units of goods, constant returns to scale for each good, and no costs of transportation or transactions. Finally, assume that the two countries, Germany and France, are already trading with each other and have reached an equilibrium. Both countries prohibit immigration and other trade in resources. Explain how the pattern of trade would change if, somehow, the wage rate in Germany fell while the wage rate in France stayed the same.

Questions for Chapter 3

1.On the basis of their analysis of trade in the specific factors model, Krugman and Obstfeld discuss the effects of trade on specific groups and they state a general principle regarding the outcome of trade. What is this principle?

2.Describe the optimal trade policy according to Krugman and Obstfeld.

3.Give at least two distinct reasons why a nation may not follow the optimal trade policy.

Question for Chapter 4

1.Define factor abundance, factor intensity, factor price equalization theorem, NIE, North-South trade.

Questions for Chapter 5

1.Assume two countries, France and Germany, each of which uses its own currency. The financiers in Germany lend money to French borrowers in the form of fixed interest loans that are denominated in deutschmarks. The financiers also invest heavily in French businesses by buying shares of stock in its corporations. The shares are denominated in francs. Now suppose that a sudden fear of business failure in France causes German financiers to sell all their shares and convert the francs into deutschmarks. How will this affect the ability of French borrowers to repay their loans? (Note: this is a question about the transfer problem and you may gain some insight by reading about the Asian financial crisis.)

Questions for Chapter 6

1.Define internal economies of scale, external economies of scale, monopolistic competition, interindustry trade, intraindustry trade.

2.Construct an argument that the presence of economies of scale, by itself, causes gains from international trade and specialization. In other words, assume that there is no initial comparative advantage.

3.What conditions cause intraindustry trade, according to the text?

4.What conditions cause interindustry trade, according to the text?

5.Explain how the people in a country can gain from intraindustry trade with another country?

6.According to the text, why did trade in the European Economic Community (EEC) grow at twice the rate of world trade during the 1960s.

7.Before 1965, Canada protected its small automobile industry against U.S. competition by huge tariffs. This was necessary, the government felt, because U.S. manufacturers were bigger and, because of internal economies of scale, more efficient. Without the tariffs the Canada industry could not survive. When tariffs were removed, however, the industry not only survived, it did better than before. The Americans also gained, according to text. How does the text explain this?

8.Describe the two conditions that must be met for dumping to occur.

9.Tell the difference between the economic definition of dumping and the legal definition.

10.Explain why a foreign firm might produce and sell its product in the Home market even though the per-unit costs are greater than its price.

11.What objections do economists have to an anti-dumping law?

12.Tell three reasons for external economies of scale.

13.How does the presence of specialized suppliers cause external economies of scale?

14.How does the presence of labor market pooling cause external economies of scale?

15.Why is such a large proportion of the world's movies and TV shows produced in Hollywood?

Questions for Chapter 7

1.When economists write about international factor movements, what do they mean?

2.Identify four forms of economic integration.

3.Use the marginal product of labor curves in a two-factor (land-labor) one-good model to demonstrate a situation where the workers in one country have an incentive to migrate. Make sure to explain how your graph demonstrates this in words.

4.Use the marginal product of labor curves in a two-factor (land-labor) one-good model to represent free migration of labor as among the two countries. Show the distributional effects (i.e., the effects on home and foreign wages and rents) in the two countries. Make sure to explain your graph in words.

5.Describe the theory of wage convergence due to labor migration.

6.Explain how labor migration could widen the wage gap between highly educated and less educated workers.

7.Tell three ways that firms located in country A may acquire money capital from abroad.

8.Distinguish the real interest rate from the nominal interest rate.

9.Show the production possibilities frontier of a country that is relatively rich in present consumption.

10.Show the production possibilities frontier of a country that is relatively poor in present consumption.

11.Could the people in country A gain from trading with the people in country B if the only difference between them was a difference in time preference? Explain by putting yourself in the shoes of people in both countries.

12.A multinational firm is a firm that has production operations in more than one country. Use location theory to explain why a firm can gain from being a multinational.

13.According to KO, can the multinational firm be explained by the fact that resources located in one country (including patents and human capital) may be an input for an operation in another country. Explain.

14.According to KO, can the multinational firm be explained by the fact that a corporation wishes to extend the use of a particular technology beyond a nation's boundaries. Explain.

15.Define vertical integration.

16.Explain how vertical integration by means of a multinational corporation can reduce costs over what they would be if the same operation were carried out by two independent firms.

17.By comparing coordination in a market with coordination in a multinational firm, explain how multinationals can avoid serious coordination problems.

18.Explain how multinational corporations can facilitate the transfer of technology. In other words, tell why the transfer of technology between different firms in different countries often entails extra costs that can be avoided by a multinational.

19.Are multinational firms villains? Explain my recognizing the points discussed in your text and/or in the lecture notes.

Questions for Chapter 8

1.Define: specific tariff, ad valorem tariff, effective rate of protection from a tariff, voluntary export restraint, export credit subsidy.

2.Assume that the country is too small to influence foreign export prices (the small country case). Beginning with equilibrium, use a graph show the effects on price and quantity demanded of a specific import tariff. Be sure to explain your graph. (Note: this is figure 8-5, which is the same as figure 9-4 in the lecture on Chapter 9 from Mankiw).

3.Assume that the country is large enough to influence foreign export prices (the large country case). Beginning with equilibrium, use a graph show the effects on price and quantity demanded of a specific import tariff. Be sure to explain your graph. (Note: this is figure 8-9 (see also figure 8-10), without the shaded areas.)

4.Assume that the country is too small to influence foreign export prices (the small country case). Beginning with equilibrium, use a graph show the benefits and costs to particular individuals and the nation that would result from a specific import tariff. Be sure to explain your graph. (Note: this is figure 9-5 in the lecture on Chapter 9 from Mankiw).

5.Assume that the country is large enough to influence the prices of the product it exports (the large country case). Beginning with equilibrium, use a graph show the benefits and costs to particular individuals and the nation that would result from a specific export subsidy. (Note: this is figure 8-11.)

6.Assume that the country is large enough to influence foreign export prices (the large country case). Beginning with equilibrium, use a graph show the benefits and costs to particular individuals and the nation that would result from a specific import tariff. (Note: this is figure 8-9.)

7.What are quota rents, who receives them, and what causes them?

8.Does an import quota on a traded good have the same effects as an import tariff? Explain. (Assume the small country case.)

9.Explain why the European Union decided to subsidize its exports of farm products. You may wish to use a graph to help you explain.

10.Did the citizens in European Union countries benefit from its combination of a price support of agricultural products, its import tariff, and its export subsidy program? Explain.

11.Have the citizens of the U.S. gained from the country's import quota on sugar? Explain. (It would probably be best to use a graph in order to help you identify all of those who are affected, but this is not necessary.)

12.Why is a voluntary export restraint on a traded good always more damaging to the importing country than a tariff that limits imports by the same amount?

13.Did the voluntary export restraint program adopted by Japan automobile manufacturers benefit U.S. citizens? Explain.

14.Were the Japanese harmed by the voluntary export restraint that they imposed after the U.S. request?

15.Define a local content requirement and explain why a government might want to impose it?

16.Who benefits and who is harmed by a local content requirement?

Questions for Chapter 9

1.Suppose that a country has a specific tariff on the import of a particular good, say rice. Assuming that the country is not large enough to influence the world price of rice, use a graph of the rice market to show that removal of the tariff would raise economic efficiency. Be sure to explain your graph.

2.Describe how countries could gain from free trade if there are economies of scale in many industries.

3.Describe the dynamic gains from free trade as opposed to managed trade (i.e., trade managed by the government).

4.Describe the political effects of free trade as opposed to managed trade. In your answer show that you understand the concept of rent seeking.

5.In 1992, policy makers were considering the Single European Act. Tell in some detail what they perceived as the potential gains from the act. What potential losses did they perceive?

6.Tell the meaning of the terms of trade argument for a tariff?

7.One argument in favor of a tariff is that a large country can influence the terms of trade. Does the phrase "large country" refer to the geographical size of the country? Explain.

8.Describe the idea of an optimum import tariff. What does it mean and how is it important? (A graph is not necessary, although you may use one.)

9.Describe the idea of an optimum export tax. What does it mean and how is it important? (A graph is not necessary, although you may use one.)

10.One argument in favor of a tariff is that a large country can influence the terms of trade. According to the text, is it practical for a large country to use its national monopoly power to try to extract gains at the expense of other countries? Explain.

11.Even though the losses from a tariff and other types of protectionism are typically greater than the gains, a country still has a propensity to adopt them. By showing that you understand how to model the political process, explain why this occurs.

1.Consider the trade managers of a country. These are the people who decide whether a country will have free-trade or trade restrictions. Explain why international negotiation can provide an incentive for the trade managers to move a nation toward free trade. (Note: you must consider the incentives of gainers and losers from free trade to influence domestic trade policy.)ncentives when trade negotiations become possible.)

2.Consider the trade managers of two large countries. These are the people who decide whether a country will have free-trade or trade restrictions. It is sometimes said that the these trade managers face a prisoner's dilemma game. Explain what this means.

1.The general agreement on tariffs and trade (GATT) was set up after a World War II. What constraints did this agreement place on its members?

2.The Uruguay round of the general agreement on tariffs and trade began in 1986 and ended in 1994. Described the trade liberalization measures contained in the final Uruguay round agreement.

3.The Uruguay round of the general agreement on tariffs and trade, which was finalized in 1994, contained a set of administrative reforms. Identify these.

4.According to the text, who is likely to feel the benefits of the Uruguay round of the general agreement on tariffs and trade, which was finalized in 1994. Also, who is likely to feel the costs?

5.Does the general agreement on tariffs and trade (GATT) allow a member country to follow different tariff policies toward different other member countries? In other words, does it allow preferential trading agreements? For example, could Germany follow different trade policies toward the U.S. than toward England? Explain.

6.Define and give an example of a free-trade area.

7.Define and give an example of a custom union.

8.Can a country be worse off if it joins a custom union than it otherwise would be?

9.Distinguish between trade creation and trade diversion. You may wish to give examples.

10.Did the South American countries that joined Mercosur gain from that free trade association? Explain.

11.Do you like bananas?

Questions for Chapter 10

1.Describe the infant industry argument for protecting certain firms and industries from international competition.

2.One may criticize the infant industry argument because it disregards the timing of assistance to a firm or industry. Discuss this criticism.

3.There are a number of cases where firms in infant industries were protected from foreign competition. Does this prove that protection is necessary for their development? Explain.

4.Infant firms and industries may not develop due to imperfect capital markets. Define an imperfect capital market and tell how it can interfere with the growth of infant firms and industries.

5.Suppose that imperfect capital markets are preventing infant firms and industries from starting. According to your textbook, what is the first best way to solve this problem?

6.Infant firms and industries may not develop due to an appropriability problem. Define an appropriability problem and tell how it can interfere with the growth of infant firms and industries.

7.Suppose that an appropriability problem is preventing infant firms and industries from starting. According to your textbook, what is the first best way to solve this problem?

8.Describe the wage differentials argument for encouraging growth in the industrial sector at the expense of growth in the farm sector.

9.If farmers are paid less than industrial workers of the same quality, what should the government do, according to the text.

10.Explain how a policy encouraging workers to leave farming for industrial jobs could cause greater unemployment.