Chap021 - Chapter 21: International Trade Policy Chapter...

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Chapter 21: International Trade Policy Chapter 21: International Trade Policy Questions for Thought and Review 1. A country does better producing and exporting that good for which it has a comparative advantage and importing goods for which other countries have a comparative advantage. 2. If Widgetland produces only widgets, it can make 240 of them and the opportunity cost is 1/1. If Wadgetland makes only wadgets could produce 720 of them at an opportunity cost of .25/1 (widgets to wadgets). Since the opportunity costs differ, there is a basis for trade in production. Widgetland should produce 240 widgets, and trade 60 of the widgets for 120 wadgets. Wadgetland should produce only 720 wadgets and trade 120 wadgets for 60 widgets. Both countries will be better off. 3. Outsourcing to China and India today differs from outsourcing in the past in two ways: (1) the potential size of that outsourcing is much larger today (those countries have combined population of about 2.5 billion) and (2) China and India are able to compete on a larger number of production levels (China and India have adopted more technological advances). 4. Traders get big gains from trade in newly opened markets. The more competition that exists in international trade, the more the traders’ gains will be reduced and the more gains are passed to the citizens. 4. Smaller countries tend to get more of the gains from trade because more opportunities are opened up for them. This is true only under the condition that competition among traders prevails. International traders in small countries often have little competition and so keep large shares of the gains from trade for themselves; hence the people of the small country may not get the gains from trade. 5. Countries producing goods with economies of scale get a larger gain from trade. Trade allows an increase in production and if there are economies of scale, the increase can lower the average cost of production, and lower the price of the good in the producing country. 6. Three reasons are: (1) Economists can identify both the costs and benefits of trade. Laypeople often do not recognize that the decline in product prices is the result of trade, while they can readily identify that lost jobs are the costs. (2) Economists know that comparative advantage implies that each country is better at producing at least one good. Laypeople worry that since wages are lower in China, it has a comparative advantage in all goods and the U.S. will lose all its jobs. Economists admit that because the U.S. has a trade deficit, the U.S. will face difficult economic forces to restore a more nearly equal division of comparative advantage. (3) Economists recognize that trade occurs in more sectors than manufacturing. They see the comparative advantage that the U.S. has in trading services. Laypeople tend to see trade as trade in manufactured goods only. 7.
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This note was uploaded on 04/19/2008 for the course ECON 2030 taught by Professor Bong during the Spring '07 term at LSU.

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Chap021 - Chapter 21: International Trade Policy Chapter...

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