[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

9. How is it possible that while there are gains to free
trade, some groups are harmed? Which are the
groups in the United States that are most adversely
affected?
10. What are beggar-thy-neighbor policies? What are their
consequences?
11. What is meant by trade diversion versus trade
creation?
PROBLEMS
1. David Ricardo illustrated the principle of comparative
advantage in terms of the trade between England and
Portugal in wine (port) and wool. Suppose in England
it takes 120 laborers to produce a certainty quantity
of wine, while in Portugal it takes only 80 laborers to
produce the same quantity. Similarly, in England it
takes 100 laborers to produce a certain quantity of
wool, while in Portugal it takes only 90. Draw the
opportunity set for each country, assuming each has
72,000 laborers. Assume each country commits half
its labor to each product in the absence of trade, and
designate that point in your graph. Now describe a
new production plan, with trade, that can benefit
both countries.
2. If you continue with the example of Problem 1, which
country has an absolute advantage in wine? in wool?
Which country has a comparative advantage in wine?
in wool?
3. For many years, an international agreement called the
Multifiber Agreement limited the amount of textiles that
the developed economies of North America and Europe
could buy from poor countries in Latin America and
Asia. Textiles can be produced by relatively unskilled
labor with a reasonably small amount of capital. Who
benefited from the protectionism of the Multifiber
Agreement? Who suffered? The Multifiber Agreement
expired on January 1, 2005. Who should benefit from its
end? Who will suffer?
4. Both the European Union and the United States produce
cars and television shows. Assume the labor costs
(in worker hours) required for the production of cars
and programs is as follows:
LABOR COSTS OF PRODUCING CARS
AND TV SHOWS (WORKER HOURS):
European Union
United
States
Labor required
to make a car 100 80
Labor required to
to produce a TV show 600 400
Assume each region has 240,000 worker hours to divide
between producing cars and television shows. Initially,
assume workers are divided equally between producing
cars and television shows.
(a) What are the initial levels of production of cars and
TV shows in each region? What is total production
in the two regions?
(b) Draw the production possibilities curves for the two
regions.
(c) Which region has an absolute advantage in producing
cars? Which region has an absolute advantage in
producing television shows?
(d) Which region has a comparative advantage in producing
cars? Which region has a comparative
advantage in producing television shows?
(e) Starting with the initial levels of production, demonstrate
how comparative advantage can be exploited
to raise joint production of cars by 10 while leaving
television show output unchanged.
5. In 2002, President George W. Bush imposed tariffs on
foreign-produced steel. Who gained from this policy? Who
lost? (In 2003, the WTO ruled that the tariffs were illegal.)
6. Many Americans have objected to the importation of textiles
and garments from poor countries because the conditions
of production in those countries is much worse
than it is for most American workers. If these imports
from poor countries are reduced, who benefits? Who loses?
7. If Mexican workers receive a third of the wages that
U.S. workers do, why don't all American firms move
down to Mexico?
8. If Mexico becomes a more attractive place to invest, is
the United States helped or hurt?
REVIEW AND PRACTICE ∂ 451