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Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
Chapter 15 Comparative Advantage and the Gains from International Trade
Review Questions
2.A country has a comparative advantage in a good when it can produce it with a lower opportunity cost (in terms of other goods foregone) than some other country. A country has an absolute advantage when it can produce a good using fewer resources than some other country. A country can have an absolute advantage in a good without having a comparative advantage in that good, and vice versa.
4.Comparative advantage arises from differences in opportunity cost in production among countries. These differences, in turn, can arise from differences in endowments of natural resources, or from differences in available physical or human capital.
6.Multilateral trade agreements call for free trade to begin simultaneously in more than one country, thus creating a balance of influence that can enable governments to resist anti-trade lobbying. The World Trade Organization (WTO) sets standards for acceptable and unacceptable trade restrictions, and makes rulings in specific cases, thereby creating public-relations pressure.Finally, domestic industrial consumers, who hope to buy cheaper imports, may be able to successfully lobby against anti-trademeasures.
8.Naïve arguments in support of protectionism—based on a misunderstanding of the effects of trade—include: (a) the wages of a higher-wage country will drop toward those of its lower-wage trading partner; (b) the country with lower productivity will be flooded with goods from the higher-productivity country, destroying its industries. More sophisticated arguments include the potential gains of a strategic trade policy and the infant industry argument. The argument for strategic trade policy is most persuasive when a market is dominated by a few large firms; the infant industry argument makes the most sense in poor countries with poorly developed financial markets.
Problems and Exercises
2.a.In Paraguay, the pretrade price is $15; at that price 600 sides of beef are produced and sold. In Uruguay, the pretrade price is $30; 600 sides of beef are produced and sold at that price.
b.The equilibrium posttrade price is $22.50. In Paraguay, 300 sides of beef are purchased at that price; 900 are purchased in Uruguay.
c.In Paraguay, 900 sides of beef are produced; in Uruguay, 300 are produced. A total of 600 sides of beef are exported from Paraguay to Uruguay.
d.Beef consumers in Paraguay lose (the price of beef there rises), and beef producers in Uruguay lose (the price of beef there falls). Gainers include beef producers in Paraguay, and beef consumers in Uruguay.
4.a.The price of beef in Uruguay will rise from $22.50 to $27.50, since at that price, domestic quantity supplied falls short of quantity demanded by 200 sides. Domestic consumption will fall from 900 sides to 700 and domestic production will rise from 300 sides to 500.
- The price of beef in Paraguay will fall from $22.50 to $17.50, since at that price 200 sides will be available for export to Uruguay. Domestic consumption will rise from 300 sides to 500; domestic production will fall from 900 sides to 700.
6.
China / United StatesSuits / Computers / Suits / Computers
Change in production / +15 / -3 / -8 / +4
Exports or Imports / -12 / +3 / +12 / -3
Net Gain / +3 / +0 / +4 / +1
Both countries still gain from trade. But since the U.S. gains more suits than China and it gains 1 computer, the U.S. gains more from trade than China.
8.Yes, trade will still take place because suits are still cheaper in China and computers are still cheaper in the United States.
China / United StatesPer Suit / $2000 CNY
($333) / $500
(3000 CNY)
Per Computer / $10,000 CNY
($1666.67) / $1000
(6000 CNY)
Challenge Questions
2.a.
The domestic price is $4 in country A and $8 in country B. The equilibrium quantity in each country is 7 units.
b.The price will rise in country A, and will fall in country B. Consumption in country A will fall, while consumption will rise in country B. Production in country A will rise, while production in country B will fall. Country A has the competitive advantage in the production of Good X, and will export some units to country B.
Economic Applications Exercises
2.Answers may vary.