Chapter 14 Problems

Chapter 14 Problems - Chapter 14 Problems 2, 3, 4 and 6...

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Chapter 14 Problems 2, 3, 4 and 6
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Problem 2 • A form of economic integration used to occasionally is the elimination of trade barriers among countries in the goods produced by a particular sector; an example is a free-trade arrangement in automobiles and parts between the United States and Canada. If the parties keep their tariffs on all other goods, why might freeing trade in one sector cause the wrong country to specialize and export?
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Problem 2 Answer • If tariffs are eliminated only on some goods but not on others, then tariffs are distorting the relative prices between goods across countries. This leads to the situation where production may occur in the inefficient location. To eliminate this possibility, tariffs must be eliminated on all goods. This is simply a restatement of the fact that it is comparative, not absolute, advantage that is important in determining trade patterns.
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Problem 3 • Suppose that customs union causes a substantial expansion in its members’ real incomes and output through the
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Chapter 14 Problems - Chapter 14 Problems 2, 3, 4 and 6...

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