Economics 230 J. F. O’Connor Exercises for Chapter XVI



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Economics 230 J. F. O’Connor

Exercises for Chapter XVI


1. Only two goods are produced in the world's two countries, Japan and Taiwan. In Japan, 1 worker can produce 50 pairs of shoes or 50 electronic calculators. In Taiwan, 1 worker can produce 40 pairs of shoes or 20 calculators.

a. In the absence of trade, what is the opportunity cost 1) of Japanese calculators, 2) of Taiwanese calculators?

b. Assuming each country has 10 workers, draw the production possibility curves for each country.

c. Which country has the absolute advantage in the production of each good? The comparative advantage?

d. Suppose trade is opened up between the two countries. What is a likely price of calculators (in terms of shoes) in the single international market?

e. How would the comparative advantage change if a Japanese worker could produce 1) 75 pairs of shoes, 2) 125 pairs of shoes, while the other production possibilities remained constant?


2. A car can be produced by 20 workers in the U.S., and by 10 workers in Germany. A thousand chickens can be produced by 25 workers in the U.S., and by 20 workers in Germany.
a. Which country has the absolute and comparative advantages in the production of each good?

b. In the absence of trade, what are the price ratios between the two goods in each country?

c. Show how a shift of workers towards one of the two industries in the U.S., coupled with a shift of workers towards the other in Germany, could result in increased total production of both goods in the two countries taken together.

d. Suppose that when trade opens, the international price ratio settles at the former German price ratio. Using diagrams, show what happens to production, consumption, exports and imports 1) in the U.S., 2) in Germany.



6. The United States restricts the importation of sugar by means of a quota. The current arrangement is portrayed graphically in the following figure.

a) What is the equilibrium price of sugar in the U.S.?

b) How much is imported?

c) What would the price be under autarky, that is, no imports allowed?

d) Predict and explain the impact of eliminating the restriction on imports of sugar on:

i) quantity produced in the U.S.

ii) price of sugar in the U.S.

iii) quantity consumed in the U.S.

iv) the price of corn syrup

v) the price of candy


7. In order to protect jobs in its cheese industry and to provide government revenue, Country X currently imposes a tariff on the importation of Bleu cheese from country Y. Some people think that the tariff should be removed because it is hurting Country X while others say that it helps country X and hurts Country Y.

You are asked to clarify the issues in this debate?

8. In a two-country world, Abuc and S.U. do not trade. The price of wheat in S.U. is $2 a bushel while the price of sugar is $.20 per pound. The price of wheat in Abuc is $5 a bushel while the price of sugar is $.10 per pound.
Suppose that free trade were allowed between the two countries. Explain what would happen to:

a) The price of wheat

b) The price of sugar

c) The quantities produced in each country

f) Patterns of international trade
Who gains and who loses?

Is free trade a sensible policy?


7. In order to protect jobs in its footwear industry and to provide government revenue, Country X currently imposes a tariff on the importation of footwear from country Y. Some people think that the tariff should be removed because it is hurting Country X while others say that it helps country X and hurts Country Y.

You are asked to clarify the issues in this debate?

8. In a two-country world, Abuc and S.U. do not trade. The price of wheat in S.U. is $8 a bushel while the price of sugar is $.12 per pound. The price of wheat in Abuc is $3 a bushel while the price of sugar is $.22 per pound.
If free trade were allowed between the two countries what would happen to:

a) The price of wheat

b) The price of sugar

c) The quantities produced in each country

f) Patterns of international trade
Who are gainers and who are the losers?

Is free trade a sensible policy?

2. At present, the price of sugar in the U.S. is approximately 22 cents per pound while the price in the world market is approximately 11 cents/lb. The source of the differential is a quota on sugar imports into the U.S.
Portray graphically the current situation.

Analyze the impact of removing the sugar quota, that is allowing free trade, on:
a) the output of sugar cane in the U.S. and the price received by growers

b) the price of soft drinks

c) the profits of soft drink companies

d) the price of sugar substitutes, such as corn sweeteners and aspartame ("equal" )

e) the price, output, and profits of corn farmers.

f) who would gain and who would lose


7. In order to protect jobs in its cheese industry and to provide government revenue, Country X currently imposes a tariff on the importation of Bleu cheese from country Y. Some people think that the tariff should be removed because it is hurting Country X while others say that it helps country X and hurts Country Y.

You are asked to clarify the issues in this debate?

8. In a two-country world, Abuc and S.U. do not trade. The price of wheat in S.U. is $2 a bushel while the price of sugar is $.20 per pound. The price of wheat in Abuc is $5 a bushel while the price of sugar is $.10 per pound.
If free trade were allowed between the two countries what would happen to:

a) The price of wheat

b) The price of sugar

c) The quantities produced in each country

f) Patterns of international trade
Who gains and who loses?

Is free trade a sensible policy?


7. In order to protect jobs in its footwear industry and to provide government revenue, Country X currently imposes a tariff on the importation of footwear from country Y. Some people think that the tariff should be removed because it is hurting Country X while others say that it helps country X and hurts Country Y.

You are asked to clarify the issues in this debate?



7. Supply and demand for wool in the U.S. and Britain are shown in this table, with the price quoted in dollars per pound of wool, and the quantities in millions of pounds.

a. Beside each other, draw supply and demand diagrams for wool in each of the two countries.

b. If there were no trade, what would be equilibrium price and quantity of wool be in each country?

c. When trade is opened between two countries, what is international price of wool, and what are the exports and imports of each country? Show on the diagrams.

d. The U.S. now imposes a tariff on wool imports of $2 a pound.

1) How much trade is prevented by this tariff?

2) What is the new price of wool to British exporters, to U.S. producers and to U.S. consumers of wool?

3) How much revenue does the government take in from the tariff?

4) How are production and consumption of wool changed in the two countries by the tariff?

5) Who is helped and who is hurt by this tariff?



e. Rather than impose a tariff on wool imports, the U.S. government sets a quota of 15 million pounds of wool imports. Compare the effect of the quota to the tariff in d, in terms of price, production, consumption, exports and imports in the two countries.
3. The General Agreement on Trade and Tariffs (GATT) negotiations are in difficulty because of the reluctance of the French Government to reduce its barrier against the importation of U.S. movies into France. Discuss the consequences of the elimination of the limit on the number of U.S. movies that are imported into France on the French movie industry and on French consumers of movies.




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