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Essential Foundations of Economics 8th Edition Bade Solutions Manual Full Chapter PDF
Essential Foundations of Economics 8th Edition Bade Solutions Manual Full Chapter PDF
CHAPTER OUTLINE
Markets in
Action
1. Explain how markets work with international trade.
A. International Trade Today
8
B. What Drives International Trade?
C. Why the United States Imports T-shirts
D. Why the United States Exports Airplanes
2. Identify the gains from international trade and its winners and losers.
A. Gains and Losses from Imports
B. Gains and Losses from Exports
3. Explain the effects of international trade barriers.
A. Tariffs
1. The Effects of a Tariff
2. Winners, Losers, and the Social Loss from a Tariff
B. Import Quotas
1. The Effects of an Import Quota
2. Winners, Losers, and the Social Loss from an Import Quota
C. Other Import Barriers
1. Health, Safety, and Regulation Barriers
2. Voluntary Export Restraints
D. Export Subsidies
4. Explain and evaluate arguments used to justify restricting international
trade.
A. Three Traditional Arguments for Protection
1. The National Security Argument
2. The Infant-Industry Argument
3. The Dumping Argument
B. Four Newer Arguments for Protection
1. Saves Jobs
2. Allows Us to Compete with Cheap Foreign Labor
3. Brings Diversity and Stability
4. Penalizes Lax Environmental Standards
C. Why Is International Trade Restricted?
◼ Where We Are
Chapter 8 continues studying markets. We learn some
history behind the role government plays in international
trade, the factors that influence trade patterns, who gains
and who loses from international trade, and examine trade’s
political side.
IN THE CLASSROOM
◼ Class Time Needed
This material can take more time than expected because students frequently
resist the notion that protectionism is inefficient. Consequently at least two or
three class sessions should be planned, so as to leave plenty of time for
discussion.
An estimate of the time per checkpoint is:
• 8.1 How Global Markets Work—20 minutes to 25 minutes
• 8.2 Winners, Losers, and Net Gains from Trade—40 minutes to 60 minutes
• 8.3 International Trade Restrictions—20 minutes to 25 minutes
• 8.4 The Case Against Protection—45 minutes to 50 minutes
Classroom Activity: Ask your students to check the country of origin label on the items they
purchase in an average week, and calculate the percentage of their expenditure taken up by
non-American goods. If possible, ask them to compare the price of non-U.S. made articles to
their imported counterparts. Which is higher? What motivates their purchasing decisions?
Are they willing or able to change their buying habits to include more domestic goods?
In a related note, students often have the impression that because they see so many “Made
in…” labels that list other countries, that the U.S. doesn’t produce anything. Remind them
that the biggest areas of production in the U.S. do not typically have labels attached to them
(education, health care, housing, etc. – previously explored on textbook page 33). Given the
high levels of human capital and physical capital, the U.S. specializes in the production of
services and then imports consumer goods that require lower levels of human capital and
physical capital. But just because they don’t see “Made in the USA” all that often, that of
course does not mean that most of what they actually consume wasn’t produced in the U.S. –
it’s just that many of the consumption goods weren’t produced domestically.
Classroom Activity: Have students try to find a current news article that ignores or uses
incorrectly the ideas behind comparative advantage. Examples abound of misguided reports
regarding offshoring, outsourcing, and trying to convince people to “buy domestic.” One
possibility is to ask students to bring the articles to class for discussion or have them email
you the articles ahead of time – then pick a couple and talk about the issues underlying the
article. Alternatively, have students write a one to two sentence summary of how the article
ignores the potential gains from trade. This can help students solidify for themselves the idea
that trade provides benefits, although these benefits may accrue unevenly. Don’t be afraid to
spend more time on this issue as the benefits from trade is a key idea for students to grasp.
Alternatively, pick a current trade argument in the news as the focus of discussion. Put the
keys facts on the board or overhead and give students a chance to figure out who benefits
and who loses from the restriction in trade. You might want to divide students into groups
and ask some groups to come up with the benefits and others to come up with the costs.
Then allow the students to present their arguments. Depending on where your school is, you
may get strong arguments regarding protecting family farms or protecting manufacturing
jobs. Be sensitive and take your students arguments seriously as some will have been affected
directly by offshoring/outsourcing. But also point out that the loss of jobs may be due to a
downturn in the U.S. economy and not to jobs moving out of the country. Try to get the
students to convince each other that although there may be people in an economy who are
adversely affected by trade, there are net gains as the benefits from trade outweigh the costs.
CHAPTER LECTURE
◼ 8.1 How Global Markets Work
International Trade Today
• Imports are the goods and services that we buy from people in other countries. Exports
are the goods and services that we sell to people in other countries.
• The U.S. is the world’s largest international trader, comprising 10 percent of the world’s
exports and 12 percent of the imports in 2015. Total exports were about 13 percent of total
U.S. production and total imports were about 16 percent of total U.S. expenditure.
What Drives International Trade?
The fundamental force that generates
international trade is comparative
advantage. A country has a comparative
advantage in producing a good if it can
produce that good at a lower opportunity
cost than any other country.
• The figure shows the market for
airplanes in the United States. The
world price of a plane, $80 million,
exceeds the U.S. price, $60 million,
which means that the United States
has a comparative advantage in
producing airplanes.
• With no trade, the equilibrium
price is $60 million per plane
and 300 planes are produced.
• When the United States trades
with the world, the supply curve shows that it will produce 400 planes. Of these 400
planes, the demand curve shows that 200 will be purchased in the United States. The
remaining planes will be exported to foreigners.
• The number of planes produced in the United States increases but the number of
planes consumed in the United States decreases.
• If the world price of a good or service is less than the U.S. price, the United States does not
have a comparative advantage in producing the good or service and so it will import the
good or service from abroad. The amount of the good or service produced in the United
States decreases but the number consumed in the United States increases.
• Winners see their surplus increase, while losers see their surplus decrease.
• The figure shows the market for pairs
of pants in the United States. The world
price of a pair of pants is less than the
U.S. price, so the United States imports
pants 200 million pairs of pants.
• Consumer surplus increases and
equals the sum of areas C + B + D.
Of this amount, area B is lost by
producers and gained by
consumers. Area D is newly gained
surplus resulting from the trade.
• Producer surplus decreases and
equals area A. Without trade,
producer surplus would be the sum
of areas A + B.
• Because the total surplus increases
by the amount of area D, the United
States is better off with trade.
Gains and Losses from Exports
The gains and losses from exports are likewise calculated by examining their effect on consumer
surplus, producer surplus, and total surplus.
• The figure shows the market for
airplanes in the United States. The
world price of an airplane exceeds the
U.S. price, so the United States exports
pants 200 airplanes.
• Producer surplus increases and
equals the sum of areas C + B + D.
Of this amount, area B is lost by
consumers and gained by
producers. Area D is newly gained
surplus resulting from the trade.
• Consumer surplus decreases and
equals area A. Without trade,
consumer surplus would be the
sum of areas A + B.
• Because the total surplus increases
by the amount of area D, the United
States is better off with trade.
• An import quota benefits domestic producers and the importers, harms consumers, and
creates a deadweight loss.
• Consumers lose because the domestic price rises.
• Producers gain producer surplus from selling a greater quantity at a higher price.
• The importers earn profit from buying at the lower world price and reselling in the
U.S. at the higher domestic price (importer profit would be the same amount as the
government collects in tariff revenue with a comparable tariff).
• There is a deadweight loss created from the lost consumer surplus. The deadweight
loss indicates that the society is made worse off with the import quota.
• Provided that an import quota is set at the same level of imports that would result from a
tariff, the impact on market outcomes is nearly identical, with one notable difference—a
tariff creates government revenue while an import quota creates profit for the importer.
Other Import Barriers
• Health, safety, and regulation barriers: Imports of certain goods, such as food,
pharmaceuticals, and toys may be regulated to ensure that they are safe from
contaminants or produced under sanitary conditions.
• Voluntary export restraints resemble import quotas in that imports decrease, as with an
import quota, but with voluntary export restraints the foreign exporter gets the profit
from the gap between the good’s domestic price and its world price.
Export Subsidies
Subsidies are payments by a government to a producer. An export subsidy is a subsidy paid
to the producer of goods for export. Such subsidies stimulate production of goods and
services and consequently make it difficult for other producers to compete. Export subsidies
lead to global overproduction and deadweight loss.
enjoy the benefits. Free trade is no different. If one of our trading partners is
able to sell products and services in our country free of trade restrictions
then our consumers will be the beneficiaries. If that same country does not
want to allow its own consumers to enjoy the same benefit, this refusal
should have no bearing on our decision to keep the barriers down. In other
words, this is an argument for unilateral free trade. The moral of the story:
“beware of the wolf in sheep’s clothing.” The “not free trade but fair trade”
argument is simply a pretext for restricted trade.
It is important to point out to students the magnitude of the costs associated with protecting
domestic employment through trade restrictions in relation to how much those workers would
actually earn (as textile workers didn’t get paid anywhere near the $221,000 a year it cost to save
their jobs). Identifying how the cost of saving these jobs is greater than what these jobs actually
pay may help reinforce how large the net gains from trade actually are. Moreover, Trade
Adjustment Assistance could potentially be used to pay extended unemployment benefits and
for the retraining and relocation of displaced workers and those subsidies would be far less than
the net gains from importing in that market. Basically, the losers can be compensated and there
would still be gains leftover for our economy.
An issue that might confront you in class is the idea that the effectiveness of free trade
agreements is based on whether or not our country will be able to increase its exports. If it can’t
or won’t then the agreement is judged a failure. But let’s hold on a moment. Americans can’t eat
wheat we export to France, we can’t enjoy personal computers we send to Singapore, and we
don’t get the benefits of a pharmaceutical that is sent half way around the world to South Africa!
Imports on the other hand are the goods and services that our trading partner sells to us. We
directly consume French wine and wear bathing suits made in Singapore and give our loved ones
diamond jewelry that came from the mines of South Africa. The bottom line is that we export so
we can import, not the other way around.
• Allows us to compete with cheap foreign labor: The argument that trade protection allows
us to compete with cheap foreign labor is flawed. Differences in real wage rates
generally reflect differences in productivity and to think about competitiveness, we
must consider both differences in wages and differences in productivity.
• Brings diversity and stability: The argument that trade protection brings diversity and
stability is flawed. Big rich countries are already diversified. And smaller countries
can use the proceeds to trade to invest in a variety of other nations and thereby
increase diversity.
• Penalizes lax environmental standards: The argument that trade liberalization leads to a
“race-to-the-bottom” in environmental standards is weak. Many poorer countries
have comparable environmental standards and should not be targeted. And
environmental standards are positively related to income (they are a normal good).
The best way to encourage improved environmental standards is to allow trade and
the economic benefits it brings to poorer countries. But using free trade agreements
such as CAFTA to help negotiate policies that avoid irreversible harm to resources
such as rain forests might be useful.
quickly shot down as the consensus amongst economists and many elected
officials was that protectionism, while politically popular at the time, would
likely deepen the recession and slow the recovery. However, protectionist
measures gained new life during the 2016 election cycle, with top presidential
candidates from both major political parties (Donald Trump, Bernie Sanders, and
Hillary Clinton) tapping into voter frustrations and speaking out against major
free trade agreements such as the Trans-Pacific Partnership. Looking at the
average tariff rate over the past century will also provide some historical
perspective for students for President Trump’s proposal of a 45 percent tariff rate
on imports from some countries. What would be the effect on markets for
imports from drastically raising tariffs like that? How would export markets be
affected if other countries retaliate in a similar fashion?
◼ Answers
◼ Checkpoint 8.4 The Case Against Protection
1. Economists realize that those who argue for free trade but only if it is fair
are, in a sense, engaged in a stall tactic. The advantages of free trade are
strong enough that we have no need to wait for our trading partners to
embrace it. We can lead by example and enjoy the benefits ourselves.
2. The statement ignores the fact that even if a country were to gain all of
another nation’s technology, the gaining country still would not have a
comparative advantage in everything. The United States would still benefit
from trade with China because the United States would still command a
comparative advantage in some areas.
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