Chapter 19: Quiz Answers -- International Trade

1. A possible non-economic reason for the government to intervene in free-trade is
   all of the above. Trade barriers typically result in less efficient outcomes, however, noneconomic factors such as national security or political considerations may prompt governments to impose barriers.

2. Which country has an absolute advantage in producing watches?
   Germany. Germany's absolute advantage arises from its ability to produce more watches than Poland given the same resource inputs.

3. Based on the chart to the right, which country has a comparative advantage in producing watches?
   Germany. If Germany produces one boat it must sacrifice two watches. In contrast, if Poland produces one boat it must sacrifice just 1.5 watches. Germany, therefore, has a higher opportunity cost of producing boats so it should produce watches.

4. Based on the chart above, if the international price of watches in terms of boats is set at 1.75, how many watches can Poland consume if it trades all of its boats to Germany?
   175. Because Poland can produce 100 boats, it can trade them for 175 watches. Notice that Poland can consume more watches than it could consume in the absence of trade.

5. If an important goal of trade policy is to raise revenue for the government then
   tariffs would be preferred to quotas. Tariffs are government taxes on imports that generate government revenue. Quotas on the other hand, limit the quantity of imports but the higher import prices that result primarily benefit the importers who are able to sell their imports in the foreign country.

6. The pattern of international trade is determined by
   comparative advantage. Absolute advantage is not the relevant factor.

7. The term comparative advantage implies that
   one country can produce a product relatively more efficiently than other products, and should therefore specialize in that product.

8. A tariff imposed on an import will
   all of the above. Because the tariff shifts the supply curve of the import to the left, the price of the import rises. Given the higher import price, demand for the domestically produced substitute will increase, shifting the demand curve of the domestic good to the right, increasing its price.

9. NAFTA has disrupted trade patterns much more significantly than we predicted, leading to significant unemployment for U.S. workers.
   False. In fact, most studies of NAFTA have concluded what many economists predicted all along: the costs imposed by NAFTA on the U.S. economy have been small. In fact, the U.S. unemployment rate declined substantially after the passage of NAFTA. By year-end 2000 the unemployment rate was near 4.0 percent, down from more than 7.0 percent in the early 1990s.

10. NAFTA has made everyone in both Mexico and the US better off.
    False. Perhaps on average people in both countries are better off, but the business that failed and the people who were laid off due to the implementation of NAFTA were not better off (at least initially). The costs that they bore were real.