Answers to Text Questions and Problems in Chapter 15
Answers to Review Questions
Prior to and during World War Two, Canada’s leading trade partners were the United Kingdom and
the United States. Today, Canada’s major trade partners are the United States, Japan, China, and the
False. Even though a country may have an absolute advantage in every sector, there are likely to be
sectors in which the neighbouring advantage has a comparative advantage, that is, in which the
neighbouring country is relatively more efficient (i.e., relatively less inefficient) than the first country. If
the home country exports goods in which it has a comparative advantage, and imports goods in which its
neighbour has a comparative advantage, its consumption possibilities will be improved.
See Figure 15.8 (with automobiles replacing wine). The tariff raises the domestic price of
automobiles to the world price plus the tariff. Facing a higher domestic price for cars, domestic producers
supply more cars and domestic consumers demand fewer cars. Imports, the difference between the
domestic quantities demanded and supplied, decline. Consumers are hurt by the tariff, as they must pay
more for cars, while domestic producers (who receive a higher price for their output) are helped. The
government benefits by collecting tariff revenue. Overall, though, the tariff is inefficient; the costs to
consumers exceed the benefits to producers and the government.
See Figure 15.9 (with automobiles replacing wine). If the quota allows fewer imports than would
occur under free trade, then the domestic price will be higher than the world price. Consumers face a
higher price and are thus worse off; domestic producers, who receive a higher price for their output, are
better off. Unlike the case of a tariff, with a quota the government collects no revenue; those revenues
flow instead to holders of import licences, who can buy cars at the world price and re-sell them at the
higher domestic price.
A free trade area requires rules of origin to prevent goods from entering the free trade area through
the member country with the lowest external tariff and, from there, moving without hindrance to the
member countries with higher external tariffs.
The application of countervailing duties on Canadian exports of softwood lumber to the United
States helped the U.S. lumber industry and harmed the Canadian lumber industry. As well, Americans
constructing new homes were losers due to the higher cost of lumber they were forced to pay.
In the figure below, a fall in net exports lowers autonomous expenditures and equilibrium output,
thereby eliminating the expansionary gap.
= 970 + 0.8
= 960 + 0.8