potential gains depend on the terms of trade. Suppose Country A exports 67 computers and Country B exports 7,035 bushels of wheat. The output exported by each country is imported by the other. Based on this information, the gains from trade are
3 computers and 35 bushels of wheat in Country A; 2 computers and 115 bushels of wheat in Country B. Correct. In Country A, consumption rose from 30 computers to 33, since Country A produced 100 computers and exported 67. Country A imported 7,035 bushels of wheat, which represents a gain of 35 bushels. Country B imported 67 computers, allowing it to consumer an additional 2 computers over the 65 it produced before trade. Country B produced 13,750 bushels of wheat and exported 7,035, leaving is 6,715 to consume, a gain of 115 over the 6,600 that were consumed before trade. *The Sources of Comparative Advantage *Benefits and Costs of Free Trade Workers can be divided into three groups, and trade affects each group differently. 1. Non-tradable jobs: These are usually service jobs, like plumbing. It is not possible to outsource a plumber. The majority of government jobs are also in this category. For this group, there are no costs to trade; only the benefits of lower prices and more selection. 2. Tradable jobs in areas of competitive advantage: There will be an increase of jobs in this area. The increase in demand often leads to higher wages and salaries. Not only will this group benefit by more demand for their services, but the people in this group will also benefit from lower prices and a greater selection of goods. 3. Tradable jobs in non-competitive advantage areas: This group bears the costs, as they will lose their jobs. However, they will gain from lower prices and a greater selection of goods. 9. In response to a free trade treaty, a country increases its exports of computer software and begins to import kitchen appliances. As a result of free trade, domestic jobs are lost in the kitchen appliance manufacturing industry, but jobs are created in the computer software industry. Correct. Because domestic consumers are importing kitchen appliances from abroad, the number of domestic jobs manufacturing appliances will fall. Jobs in the export sector will increase. 10. One of the biggest benefits of free trade is
increased consumption. Correct. Numerical examples in the previous section illustrate the potential gains from trade in terms of additional output. 11. True or false . Trading allows people, businesses, and countries to consume inside their production possibility curve. False Correct. Consumption is inside the production possibilities curve if there is inefficiency or high unemployment. 12. Which of the following is not one of the benefits of free trade? Job gains in both export- and import-competing industries Correct. As a country transitions to a free trade equilibrium, export industries are likely to expand, resulting in job creation, but import-competing industries will shrink as consumers are offered cheaper, imported goods.
- Fall '16
- International Trade