Trade, Adjustment, and Protectionism

… a core topic in Economic Analysis and Atlas102

Topic description

This topic deals with trade, opportunity cost, comparative advantage, and arguments for and against international trade.

The treatment of this topic on the Atlas follows almost precisely that in Chapter 7, Trade, in the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics, accessed 30 April 2016).

Topic learning outcome

Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of trade and the following core concepts.

Core concepts associated with this topic (pages and links coming soon)

Comparative Advantage Trade and Differing Preferences Trade and Specialization Trade and Comparative Advantage Supply and Demand Effects of Tariffs

Net Welfare Costs of Protectionism Trade and Jobs Trade and Child Labour Trade and Strategic Industries Winners and Losers from Free Trade Trade Adjustment Assistance

Free Trade Imports Exports Absolute Advantage Division of Labour Division of Knowledge Pareto Efficiency Protectionism Tariff Quota

Readings

We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 71 minutes of MRU course videos listed below and doing the 22 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.

Atlas pages: Trade and associated Concepts

Tyler Cowen, The Big Ideas of Trade (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/trade-specialization-economics-globalization, accessed 5 May 2016.

Don Boudreaux, Comparative Advantage (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-tasmania, accessed 5 May 2016.

Alex Tabarrok, Another Look at Comparative Advantage (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-opportunity-cost, accessed 5 May 2016.

Alex Tabarrok, Comparative Advantage Homework (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-trade-homework, accessed 5 May 2016.

Alex Tabarrok, Tariffs and Protectionism (15-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tariffs-quotas-protectionism-definition, accessed 5 May 2016.

Alex Tabarrok, Arguments Against International Trade (14-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/arguments-against-trade, accessed 5 May 2016.

Textbook readings in MPP and MPA courses 

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 8 (pg. 218 onward)

Assessment questions

From http://www.mruniversity.com/node/201821, http://www.mruniversity.com/node/201827, http://www.mruniversity.com/node/201830, http://www.mruniversity.com/node/201837, http://www.mruniversity.com/node/201843, http://www.mruniversity.com/node/201843, http://www.mruniversity.com/node/201849, accessed , accessed 4 May 2016.

AQ102.06.01. How is international trade similar to domestic trade?

a. International trade makes people better off when preferences differ.

b. International trade increases productivity through specialization and the division of knowledge.

c. Trade increases productivity through comparative advantage.

d. a and b.

e. All of the above

AQ102.06.02. Many people will tell you that, whenever possible, you should always buy U.S.-made goods. If this argument were taken to its natural conclusion, where should you buy all of your goods from?

Your state

Your county

Your neighborhood 

Yourself

AQ102.06.03. True or False: Every country has at least one comparative advantage in something.

True

False

AQ102.06.04. The cost of the next most valuable opportunity is known as a

Sunk cost

Opportunity cost 

Comparative advantage 

Absolute advantage

AQ102.06.05. What is a source of comparative advantage?

a. climate

b. institutions

c. answer choices a & b

d. None of the above.

AQ102.06.06. In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. 

a. Kana has the absolute and comparative advantage at making miso soup.

b. Mitchell has the absolute and comparative advantage at making miso soup. 

c. Kana has the absolute and comparative advantage at cleaning the kitchen. 

d. Mitchell has the absolute and comparative advantage at cleaning the kitchen. 

e. a and d 

f. b and c

AQ102.06.07. In one hour, Ethan can bake 20 cookies or lay the drywall for two rooms. In one hour, Sienna can bake 100 cookies or lay the drywall for three rooms.

a. Ethan has the absolute and comparative advantage at baking cookies. 

b. Sienna has the absolute and comparative advantage at baking cookies. 

c. Ethan has the absolute and comparative advantage at laying drywall. 

d. Sienna has the absolute and comparative advantage at laying drywall. 

e. a and d 

f. b and c 

g. None of the above.

AQ102.06.08. Data can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day.

a. Data has the absolute and comparative advantage at writing poems. 

b. Riker has the absolute and comparative advantage at writing poems.

c. Data has the absolute and comparative advantage at solving physics problems. 

d. Riker has the absolute and comparative advantage at solving physics problems. 

e. a and d 

f. b and c

g. None of the above.

AQ102.06.09. Use the information below to answer questions AQ102.06.09 to AQ102.06.14. According to the Wall Street Journal (August 30, 2007, “In the Balance”), it takes about 30 hours to assemble a vehicle in the United States. Let’s use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, “North” is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while “South” is shorthand for the rest of the world. Let’s use that shorthand here. (In the North it takes 30 hours to make one high-quality care and 20 hours to make one low-quality car. In the South it takes 60 hours to make one high-quality care and 30 hours to make one low-quality car.) Which region has an absolute advantage at producing high-quality cars?

North 

South

AQ102.06.10. Which country has an absolute advantage at producing low-quality cars?

North

South

AQ102.06.11. Which country has a comparative advantage for producing low-quality cars?

North

South

AQ102.06.12. Which country has a comparative advantage for producing high-quality cars? 

North

South

AQ102.06.13. There are 1 million hours of labor available for making cars in the North, and another 1 million hours of labor available for making cars in the South. In a no-trade world, let’s assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. What will be the global output of low-quality cars?

17,253

22,222 

11,111 

27,778 

None of the above

AQ102.06.14. Now, allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will be the global output of low-quality cars? 

11,111 

22,222 

33,333 

44,444 

None of the above

AQ102.06.15. The Japanese people currently pay about four times the world price for rice because of trade barriers. Who is more likely to make a greater effort lobbying for or against a reduction in trade barriers?

Japanese consumers

Japanese rice farmers

AQ102.06.16. The supply curve for rice in Japan slopes upward, just like any normal supply curve. If Japan eliminated its trade barriers to rice, what would happen to the number of workers employed in the rice-producing industry in Japan: Would it rise or fall?

Rise

Fall

AQ102.06.17. Spend some time driving in Detroit, MI – the Motor City – and you’re sure to see bumper stickers with messages like “Buy American” or “Out of a job yet? Keep buying foreign!” or “Hungry? Eat your foreign car!” Explain these bumper stickers in light of what you’ve learned: Who is hurt most by imported automobiles?

American (domestic) consumers

American (domestic) car manufacturers

Foreign consumers

Foreign car manufacturers

AQ102.06.18. Trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. However, you are very unlikely to ever encounter bumper stickers that say things like “Out of money yet? Keep taxing foreign sugar!” or “Hungry? It’s probably because domestic sugar is so expensive!” Why?

Sugar is unhealthy and therefore it’s unpopular to lower its cost. 

The sugar tariff benefits more Americans than it hurts. 

The price increase of sugar per person is small. 

None of the above.

AQ102.06.19. Sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops do so because their land isn’t all that great for sugar production. If we translate this into the language of the supply curve, where would these sugar farmers be on the supply curve?

Lower-left

Upper-right

At equilibrium price 

Indeterminate with the given information

AQ102.06.20. There are three conditions that explain why a free market is efficient: 1. The supply of goods is sold by the sellers with the lowest cost. 2. There are no unexploited gains or wasteful trades. 3. The supply of goods is purchased by the buyers that place the highest value on the goods. Which condition or conditions cease to hold in the case of a tariff on imported goods?

1 only

2 only

3 only 

1 and 2 only

AQ102.06.21. If the United States were to eliminate a tariff on, say, Mexican shirts thereby lowering its cost, which product might be purchased more by Americans?

computer

toothpaste

pants

All of the above

AQ102.06.22. Some people argue for protectionism by pointing out that other countries with whom we trade engage in “unfair trade practices,” and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. India, for example, subsidizes its steel industry. Who is hurt by this subsidy?

U.S. steel producers

U.S. steel consumers 

Indian steel producers

U.S. & Indian steel producers

Page created by: Ian Clark, last modified on 16 May 2016.

Image: Minute 3:13 of MRU Video, Tariffs and Protectionism, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tariffs-quotas-protectionism-definition, accessed 5 May 2016.