Midterm Exam Study Questions on Trade Economics
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Powered by AIIndia and Thailand should evaluate opportunity costs to determine specialization. In India, producing 5 meters of cloth foregoes 10 kg of rice, resulting in an opportunity cost of 2 kg of rice per meter of cloth. In Thailand, producing 2 meters of cloth foregoes 5 kg of rice, with an opportunity cost of 2.5 kg of rice per meter. Thus, India has a comparative advantage in cloth exports due to a lower opportunity cost, while Thailand should specialize in rice, as its opportunity cost for producing rice is less than it is in India .
An import quota, like Cologne's limit to 50 boxes of chocolate, artificially inflates domestic prices due to constrained supply, creating quota rents benefitting those holding import licenses. The unfulfilled demand may increase warehousing costs as sellers adjust logistic capacities. This distortion in natural market forces leads to a consumption distortion loss, resulting in potential inefficiencies within domestic production and appeal for alternative goods or suppliers .
Implementing tariffs aligned with the wage gap between U.S. and China aims to equalize production costs, potentially incentivizing domestic manufacturing by making U.S. production comparably competitive. While this could foster some job repatriation, it risks igniting trade tensions and ignoring broader cost factors like capital investments and technological capabilities. It may offer protectionism more than genuinely boosting jobs if not complemented by comprehensive policy and economic adjustments .
China's worsening farm pollution likely increases global demand for clean agricultural exports like those from the Netherlands, positively affecting Dutch terms of trade as export prices rise. Conversely, Egypt's plans to import liquefied natural gas don't directly impact the Netherlands' agricultural exports but may affect raw material markets, altering Holland's import prices and overall terms of trade. Other factors, such as OPEC's oil production cuts, indirectly influence the cost structures in related markets, further tweaking these dynamics .
International immobility of resources can be offset by the flow of goods that optimize global resource use through comparative advantage and specialization. Trade allows countries to focus production on goods where they hold an advantage, thus indirectly reallocating resources. For example, countries lacking certain resources import goods embodying these resources from nations efficiently producing them. Such trade balances local immobility with global resource access, enhancing overall efficiency .
Comparative advantage is determined by lower opportunity costs. Mike, who produces either 10 hamburgers or 3 T-shirts per day, has an opportunity cost of 3.33 hamburgers per T-shirt. Johnson, producing either 7 hamburgers or 4 T-shirts, faces an opportunity cost of 1.75 hamburgers per T-shirt. Therefore, Johnson has a comparative advantage in T-shirts because of his lower opportunity cost. Conversely, Mike holds a comparative advantage in hamburger production since he sacrifices fewer T-shirts per hamburger than Johnson, who sacrifices more .
An increase in Country A's capital stock enhances its ability to produce more capital-intensive goods like X. The strengthened supply can lead to lower prices for X, deteriorating Country A's terms of trade if the external demand does not rise equivalently. Conversely, higher production capability may also encourage efficiency and output levels, improving welfare through increased income and consumption opportunities despite potential terms of trade declines .
When the price of cloth rises, the factor prices r (machine-hours) and w (work-hours) adjust. In a competitive market, higher cloth prices increase wages for workers in the cloth sector and machine rates, resulting in gains for these factor owners. However, if there's no substitution, total output doesn't increase, amplifying inequality, as those in the food sector see no benefit and potentially face higher costs. The absence of factor substitution constrains resource reallocation, failing to optimize response to price changes, eliciting a marked disparity between sectors .
Imposing a 1.5 specific tariff on book imports raises domestic book prices, benefiting Home's import-competing producers through increased market share and higher prices. Home consumers face welfare losses due to higher prices and reduced consumption, while the Home government gains revenue from the tariff. Overall, the tariff can create deadweight loss from inefficient production allocation and reduced consumption, offsetting any potential welfare gains for specific groups .
When relative supply is unresponsive to price changes, such as with immobile factors and a right-angled PPF, welfare benefits from improved terms of trade are constrained compared to flexible supply scenarios. Increased terms of trade raise export good prices, boosting national income, yet these gains are tempered by fixed output capacities. While welfare rises through greater purchasing power for imports, limited output flexibility hinders maximizing such advantages, unlike in adaptive economies .