Economics 9th Edition Colander Solutions Manual 1

Chapter 10 - International Trade Policy
Economics 9th Edition Colander

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Chapter 10: International Trade Policy
Questions and Exercises
1. Because U.S. trade accounts for a relatively small percentage of total output, trade
is less important to the United States than it is to other countries. Because,
considering all goods and services produced, U.S. producers face less
competition, this suggests that trade policies are less important.
2. The two greatest U.S. trading partners are Canada and Mexico. Trade with China
and India is rising rapidly. (The Pacific Rim and the European Union are
collections of countries, not single countries.)
3. Tariffs and quotas have similar effects on limiting trade. The tax shown in the
graph shifts the supply curve for imports up, whereas a quota Q* limits quantity
supplied. The equilibrium price and quantity are the same in both cases. Domestic
producers face less competition in both. The difference is who gets the revenue
from the resulting increase in the price of imports. With a tariff, the domestic
government gets the revenue, as shown by the shaded region. With a quota, the
revenues accrue to the foreign producers.
4. Both voluntary restraint agreements and tariffs increase the price of an imported
good, which helps the domestic producers. In the case of the voluntary restraint,
increases in price result in increased revenue to foreign firms; the increased
10-1
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demand is met entirely by the domestic market. In the case of the tariff, the
revenue raised goes to the domestic government.
5. See the accompanying graph for all parts.
a. The gains to domestic producers are shown in the accompanying graph. Domestic
producers now produce B at Pt instead of A at Pw. Domestic producers gain the
additional revenue shown by areas FHKG and ABKE.
b. The revenue to the government is the quantity supplied by foreign producers, BC,
multiplied by the tariff. This is shown in the accompanying graph as HIJK.
c. The cost to domestic producers to produce additional units is shown by area
ABKHE.
d. The gain to domestic producers is greater than the cost to domestic producers by
area FHEG because the cost of producing the additional output is less than the
revenue gained from the additional output, specifically, area GEHF.
6. a. It might be good or bad for the U.S. government. To the extent that it produced
tariff revenue, it was good. To the extent that it strained U.S–German relations,
the trade war was bad.
b. A tariff by Germany on the U.S.- produced chickens would lead to higher chicken
prices in Germany since the supply of imported chicken would shift up by the
amount of the tariff, increasing the price. German producers would also sell their
chickens at the higher price because they would face less competition. German
consumers would be hurt by the tariff.
c. U.S. chicken producers would be hurt because the quantity of chickens demanded
would fall and they would have to pay a tariff on those chickens which they did
sell to Germans. The net price they would receive is lower.
d. U.S. light truck producers would gain because light trucks imported from
Germany would rise in price and be less competitive. U.S. producers of light
trucks could raise their prices.
e. Economists in general do not support any trade restrictions because they reduce
world output and raise prices.
7. a. With the quota, the quantity of clothes sold was fixed. Suppliers charged the price
(P0) consumers were willing to pay for that quantity. With the removal of the
10-2
whole or part.
quota, as the accompanying graph demonstrates, equilibrium quantity rose (to Q1)
and equilibrium price fell (to P1).
b. Consumers benefited because they were able to buy a greater quantity at a lower
price. This is represented by an increase in consumer surplus shown by the shaded
region in the accompanying graph.
c. The short-run effect of the removal of the quota was that profits declined because
the equilibrium price declined. If economies of scale lower average total costs by
more than the decline in equilibrium price, in the long run profits may increase
with the removal of the quotas.
8. Countries restrict trade for many reasons. Any three of the following are correct
answers: 1) There is an unequal internal distribution of the gains from trade; 2)
Companies that feel they are not getting a good deal from trade will lobby
government to restrict trade; 3) Countries want to make credible threats of trade
restrictions for the purpose of negotiating; 4) Learning by doing and economies of
scale may reduce the cost of producing domestic goods, making those goods more
competitive in the future—this may be particularly true for infant industries; 5)
When a country is in a recession, it is not fully utilizing its resources—exports
can stimulate aggregate demand and reduce unemployment, moving the economy
out of the recession; 6) Sales of goods to foreign goods may threaten national
security; 7) Countries may want to use trade restrictions as an international
political tool; and 8) Governments earn revenue from the tariffs that can be used
to support government spending.
10-3
whole or part.
9. A country would have trade adjustment assistance programs in an effort to

facilitate free trade by compensating domestic producers who lose as a result of
reductions in trade restrictions. They are difficult to implement because losses
from free trade become exaggerated and magnified, often causing the costs of the
assistance programs to outweigh the gains.
10. A credible threat of trade restrictions would lead to lower trade restrictions
because the other bargainer's belief that a country would implement trade
restrictions would give the first country the upper hand in strategic bargaining and
enable that country to extract larger gains from trade. These gains could consist of
lower trade restrictions.
11. Economies of scale refer to the situation in which costs per unit of output fall as
output increases. If per-unit costs fall sufficiently, the country that increases the
production of that good may gain a comparative advantage in that good. Trade
restrictions would reduce competition, allowing domestic firms to sell and
produce more of that good and realize the economies of scale.
12. Three of any of the following four mentioned in the chapter would be a correct
answer: 1. From a global perspective, free trade increases total output. 2.
International trade provides competition for domestic companies. 3. Restrictions
based on national security are often abused or evaded. 4. Trade restrictions are
addictive and may lead to more trade restrictions.
13. Most-favored nations receive the lowest tariffs compared with all other countries.
This will increase trade between the two countries, potentially raising output for
producers and reducing prices for consumers in both countries. It might not want
to be a most-favored nation if an increasing number of jobs are being outsourced.
That status would limit the country’s ability, at least in the short run, to reduce the
outflow of jobs.
14. The WTO is the successor to GATT. Both work toward agreements to reduce
trade barriers. The WTO includes enforcement mechanisms that GATT did not
have.
10-4
whole or part.
Questions from Alternative Perspectives
1. Austrian
It depends. In some ways it is true; a tariff protects the income of people who
produce goods protected by the tariff. As such, the tariff transfers income from
others to that group. In other ways it is more complicated. Government is also a
way that people deal with collective problems that have to be solved
collectively. This can involve implicit social contracts among people in a society
to compete, and a tariff can be seen as a way to maintain a social contract to take
into account new issues.
2. Radical
The view that liberty is the only solution to problems of human relationship does
not deal with the fact that one person’s liberty often infringes on the liberty of
another person and that where that infringement occurs, this solution does not
provide an answer even if one believes in liberty.
3. Religious
When there is trade, there is a blending of economies that creates better

understanding among cultures and mutual dependence. A greater understanding
and mutual dependence can reduce the chances of war. But trade also introduces
new areas of contention among countries which can lead to fights.
4. Post-Keynesian
The group that has been helped most by free trade consists of international traders
and those associated with them. They have been made wealthy by such trade. The
group that has been hurt most by trade consists of low-skill laborers. That
definitely matches the support among the two groups of free trade. Economists
side with the traders.
5. Radical
a. Some radical economists would argue that they did not follow that strategy
because they were protecting their infant industries.
b. Some radical economists would argue that it suggests that economists’ calls for
free trade might be self-serving for developed economies because free trade
allows them greater access to the markets of developing economies.
10-5
whole or part.
Issues to Ponder
1. Although trade may increase output and income, trade will change the culture of
the country. The impact is considerably larger for developing countries with
unique and rich cultural practices and production. It often takes the form of
exporting the dominant country's culture and goods.
2. a. Three assumptions are that the good is tradable, transportation costs are minimal,
and taxes do not differ significantly between the two countries.
b. To the degree that production facilities and labor can move easily, the law of one
price should hold for labor, too. In light of the wage differentials that exist among
countries with seemingly equivalent productivities, it seems that these conditions
do not hold for labor. Barriers such as language and family ties probably explain
this observation.
c. Since capital is more mobile than labor, the law of one price should have a greater
tendency to hold for capital. Financial capital is a great example. Interest rates
among countries tend to equalize much faster than do wages.
3. An equitable method might be to tax those who gain from the trade liberalization
and give the proceeds to those who are hurt by it.
a. Assuming the original distribution is equitable and the government is not trying to
change income distribution, this method is equitable because the combined
policies make everyone better off.
b. The political problems with implementation include the following: (1) Everyone
will try to exaggerate the amount he or she is hurt and minimize the amount he or
she is helped. Thus, actually finding a tax that accomplishes the goal will be
difficult. (2) Once the taxes and subsidies are in place, they may not be removed
after the adjustment of displaced workers is complete. Losers will be
overcompensated, and gainers will be taxed too much. (3) Those who have big
gains (big business) may have more political power and be able to prevent the
implementation of this policy.
4. With a price floor, there is a loss of consumer surplus, higher prices, and lower
quantities.
5. There is no right answer to this question. To the extent that the chemicals present
a health problem, the government may want to restrict tomatoes imported from
Mexico. Doing so, however, will raise the price of tomatoes for American
consumers. Domestic producers will lobby for such restrictions because they will
be able to sell more tomatoes at higher prices.
6. a. Yes, if the deductions in lost taxes exceed the amount collected. This is indeed the
case. Congressional tax experts have estimated that the deductions exceed the
amount that corporations pay in taxes by $6 billion a year.
10-6
whole or part.
b. The natural suggestion would be to eliminate the tax, including the accompanying
deductions from corporate taxable income. This would have the added benefit of
eliminating the administrative costs associated with the tax.
c. It is likely that the companies want the tax because they benefit from it. In other
words, because the tax results in lower taxable corporate income, it is an implicit
subsidy, and they will lobby strongly to keep it. The government may keep the tax
because it wants to encourage exports. (Source: “U.S. Overseas Tax Is Blasted,”
Wall Street Journal, May 5, 2004.)
7. a. Economists opposed the tariff because it creates deadweight loss, as shown by the
shaded region in the accompanying graph, and hurts the welfare of the whole
society.
b. The tariff shifts the supply curve of imports up, which increases equilibrium price
to P1 and lowers equilibrium quantity to Q1, as shown in the accompanying graph.
c. The tariff would help the economy by increasing the price of imported goods,
making domestic goods relatively more competitive and allowing domestic
producers to raise their prices if they chose to do so. It would also provide
revenue for government that the government could spend on consumption or
investment, further stimulating the domestic economy.
10-7
whole or part.
d. The macro economy would be worsened because a retaliatory tariff reduces the
trade between countries, which hurts both of them. The countries do not benefit
from the full extent of their comparative advantages.
8. The answer in part will depend on what advice is being given. Most economists
would argue that some trade restrictions might benefit a country, but almost no
country can limit its restrictions to the beneficial ones. Trade restrictions are
addictive; most economists would not recommend them even in a recession.
10-8
whole or part.

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Chapter 10 - International Trade Policy

Economics 9th Edition Colander

Chapter 10: International Trade Policy

Questions and Exercises

5. See the accompanying graph for all parts.

9. A country would have trade adjustment assistance programs in an effort to

Questions from Alternative Perspectives

When there is trade, there is a blending of economies that creates better

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