Study questions for International Economics, 14th Edition

International Economics

The world's trading nations have become increasingly interdependent because advances in communication and transportation have reduced or removed barriers to these activities thereby increasing the demand for trade. Further, major trading nations have for the past several decades actively sought to remove trade barriers between themselves, in order to further encourage trade.

The major arguments for an open trading system is that it will result in more economically efficient trade, thereby raising overall economic activity, and by extension the wealth of nations. Arguments against can be broad -- such as open trading delivers unequal outcomes because those with high amounts of power make the rules, and those rules invariably reflect their own interests above the interests of others. More niche arguments include infant industry arguments and the need for restrictions on trade based on national security concerns.

Chapter 2, 1.. Modern trade theory is concerned with the questions of economic efficiency and optimizing outcomes. Modern trade theory has moved beyond basic H-O assumptions to study a more realistic world where there are differences between nations, and incorporating these differences into trade theory.

2. Smith's views on trade were more aligned with the concept of free trade. Mercantilists sought to protect their own interests, viewing government as charge with the task of doing so, even by military means. Smith saw this is inefficient compared with open trade.

Chapter 3, 1. Transportation costs affect comparative advantage between nations. Higher transportation costs can offset lower factor costs. It is one source among many of comparative advantage. For example, it is cheaper for the U.S. To buy cars from Canada, which has high wages, than from South Africa, which has low wages, for a number of reasons, but transportation costs are among them.

2. When transportation costs are low, nations have more competitive markets for factor inputs. The U.S., for example, can buy steel from Asia at lower cost than to produce steel itself, because of lower transportation costs. When transportation costs were higher, it was economically inefficient to do so. A more competitive global marketplace for goods will reduce factor input costs via competition.

Chapter 4, 13. A tariff imposed on oil imports could theoretically increase U.S. development of oil resources, if cost was the major reason that those resources are presently undeveloped.

14.

A bonded warehouse is where the goods are stored under government inspection. A foreign trade zone is a designated city or area where foreign goods are not subject to duties. These can reduce import duties, because such duties are waived in many cases. Such programs exist specifically to reduce duties in order to stimulate trade.

Chapter 5, 10. The cost of that policy would be higher car prices, the benefit would be to protect U.S. jobs in the auto industry, that might otherwise go to foreign companies. In 1980, the issue was specifically the Japanese auto industry, which through its superior efficiency and quality -- not to mention smaller cars - was winning significant market share away from U.S. automakers. Such a policy would not provide sufficient incentive for the U.S. automakers to innovate, and likely they would continue to produce uncompetitive cars if given such protections.