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Chapter 9

Application: International Trade



Problem 1

The world price of wine is below the price that would prevail in Canada in the absence of trade.
a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.
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 Canada. Who are the winners and losers? Is Canada as a whole better or worse off?

Erwin A.
Numerade Educator

Problem 2

Suppose that Congress imposes a tariff on imported automobiles to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following 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 gain to domestic producers, revenue for the government, and a deadweight loss. Use your diagram to identify these three pieces.

Heather D.
Numerade Educator

Problem 3

When China's clothing industry expands, the increase in world supply lowers the world price of clothing.
a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States.
b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic.
c. Compare your answers to parts (a) and (b). What are the similarities and what are the differences?
Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain.

Erwin A.
Numerade Educator

Problem 4

Consider the arguments for restricting trade.
a. Imagine that you are a lobbyist for timber, an established industry suffering from low-priced foreign competition, and you are trying to get Congress to pass trade restrictions. Which two or three of the five arguments discussed in the chapter do you think would be most persuasive to the average member of Congress? Explain your reasoning.
b. Now assume you are an astute student of economics (not a hard assumption, we hope). Although all the arguments for restricting trade have their shortcomings, name the two or three arguments that seem to make the most economic sense to you. For each, describe the economic rationale for and against these arguments for trade restrictions.

Erwin A.
Numerade Educator

Problem 5

The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs \$20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith's $The$ $Wealth$ $of$ $Nations$ while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of \$16. The number of T shirts consumed in Textilia rises to 4 million, while the number of T-shirts produced declines to 1 million.
a. Illustrate the situation just described in a graph. Your graph should show all the numbers.
b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from
opening up trade. ($Hint$: Recall that the area of a triangle is ${1\over2} \times$ base $\times$ height.)

Yi Chun L.
Washington University in St Louis

Problem 6

China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.
a. Draw the graph that describes the market for grain in an exporting country. Use this graph as the starting point to answer the following questions.
b. How does an export tax affect domestic grain prices?
c. How does it affect the welfare of domestic consumers, the welfare of domestic producers, and
government revenue?
d. What happens to total welfare in China, as measured by the sum of consumer surplus, producer
surplus, and tax revenue?

Erwin A.
Numerade Educator

Problem 7

Consider a country that imports a good from abroad. For each of following statements, state whether it is true or false. Explain your answer.
a. "The greater the elasticity of demand, the greater
the gains from trade."
b. "If demand is perfectly inelastic, there are no
gains from trade."
c. "If demand is perfectly inelastic, consumers do
not benefit from trade."

Heather D.
Numerade Educator

Problem 8

Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the samesized tax on textile consumption (including both imported and domestically produced textiles).
a. Using Figure 4, identify the quantity consumed and the quantity produced in Isoland under a textile consumption tax.
b. Construct a table similar to that in Figure 4 for the textile consumption tax.
c. Which raises more revenue for the government- the consumption tax or the tariff? Which has a
smaller deadweight loss? Explain.

Erwin A.
Numerade Educator

Problem 9

Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported.
a. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by \$100. Draw a graph to show how this change affects the welfare of U.S. consumers and U.S. producers and how it affects total surplus in the United States.
b. After the fall in price, consumers buy 1.2 million televisions, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction.
c. If the government responded by putting a \$100 tariff on imported televisions, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of U.S. welfare? Who might support the policy? d. Suppose that the fall in price is attributable not to technological advance but to a \$100 per television subsidy from the Japanese government to Japanese industry. How would this affect your analysis?

Heather D.
Numerade Educator

Problem 10

Consider a small country that exports steel. Suppose that a "pro-trade" government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy affect the domestic price of steel, the quantity of steel produced, the quantity of steel consumed, and the quantity of steel exported? How does it affect consumer surplus, producer surplus, government revenue, and total surplus? Is it a good policy from the standpoint of economic efficiency? ($Hint$: The analysis of an export subsidy is similar to the analysis of a tariff.)

Heather D.
Numerade Educator