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Exam 55: Debate on Free Trade

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Question 21

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Explain the comparative advantage model of trade (including the assumptions for the model) and how it is used to argue for free trade. -Explain how comparative advantage differs from absolute advantage.

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Question 22

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Whats defention of terms: -absolute advantage

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Question 23

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$\text { Table } 55 \text { a }$ $\begin{array}{l}\text { Units of output produced by } 1 \text { hour of labor input }\\\begin{array}{|l|l|l|}\hline \text { Commodity } & \text { Canada } & \text { Mexico } \\\hline \text { Bread } & 6 \text { loaves } & 2 \text { loaves } \\\hline \text { Cheese } & 8 \text { punds } & 4 \text { pounds } \\\hline\end{array}\end{array}$ -In Table 55a, if the trading price of goods is based on labor input, what is the relative price of 1 loaf of bread in Mexico?

The neoclassical theory of comparative advantage (the Heckscher-Ohlin model) differs from the classical theory (Ricardian model) in that

In the 19^th century, wool imported to the United States was subject to a 25% tax. This is an example of

Explain the comparative advantage model of trade (including the assumptions for the model) and how it is used to argue for free trade. -Following are the production possibilities curves for the fictional nations of Bergsakeria and Solbergia showing their respective capacities for producing gizmos (G) and widgets (W). Use this information to answer the questions that follow. a. Which nation has an absolute advantage in producing gizmos (and widgets for that matter)? Explain. b. Which nation has a comparative advantage in producing gizmos? How do you know? c. Which nation has a comparative advantage in producing widgets? Explain.

$\text { Table } 55 \text { a }$ $\begin{array}{l}\text { Units of output produced by } 1 \text { hour of labor input }\\\begin{array}{|l|l|l|}\hline \text { Commodity } & \text { Canada } & \text { Mexico } \\\hline \text { Bread } & 6 \text { loaves } & 2 \text { loaves } \\\hline \text { Cheese } & 8 \text { punds } & 4 \text { pounds } \\\hline\end{array}\end{array}$ -In Table 55a, if the trading price of goods is based on labor input, what is the relative price of 1 pound of cheese in Canada?

$\text { Table 55b }$ $\begin{array}{l}\text { Units of output produced by } 1 \text { hour of labor input }\\\begin{array}{|l|l|l|}\hline \text { Commodity } & \text { Canada } & \text { Mexico } \\\hline \text { Bread } & 3 \text { loaves } & 1 \text { loaves } \\\hline \text { Cheese } & 4 \text { pounds } & 2 \text { pounds } \\\hline\end{array}\end{array}$ -Using Table 55b, Mexico will have the most gain from trade if

Explain the comparative advantage model of trade (including the assumptions for the model) and how it is used to argue for free trade. -What are the assumptions behind the simple static theory of comparative advantage?

Whats defention of terms: -comparative advantage

Use the comparative advantage model to explain the terms of trade -Describe how two countries might arrive at mutually agreeable terms of trade.

Explain the predicted and actual outcomes of free trade based on the comparative advantage model. -In the real world, what might interfere with the results predicted by the model?

Cite historical and current examples of protectionism and the free trade debate. -Why do Europe and the U.S. both want to maintain agricultural subsidies? Why do ?developing countries argue the U.S. and Europe should drop the subsidies?

Cite historical and current examples of protectionism and the free trade debate. -What is the WTO? Is it effective in enforcing trade policies? Why or why not?

Discuss how alternative models seek to address weaknesses in the comparative advantage model. -Why have South Korea, Taiwan, and Singapore been so successful at technologically advanced processes and products when static comparative advantage indicated that they should have concentrated on low-value-added goods forty years ago? Why, on the other hand, have such apparently promising nations such as Chile and Brazil not advanced that much in development compared with these previously low-development East Asian nations?

Whats defention of terms: -free trade

Use the comparative advantage model to explain the terms of trade -Demonstrate using a PPF graph why both countries can be made better off by specialization and trade.

$\text { Table } 55 \text { a }$ $\begin{array}{l}\text { Units of output produced by } 1 \text { hour of labor input }\\\begin{array}{|l|l|l|}\hline \text { Commodity } & \text { Canada } & \text { Mexico } \\\hline \text { Bread } & 6 \text { loaves } & 2 \text { loaves } \\\hline \text { Cheese } & 8 \text { punds } & 4 \text { pounds } \\\hline\end{array}\end{array}$ -In Table 55a, which country has the comparative advantage in the production of cheese?

Explain the predicted and actual outcomes of free trade based on the comparative advantage model. -Explain why would both countries be better off specializing and trading even if one country produces more of all goods.

Discuss how alternative models seek to address weaknesses in the comparative advantage model. -Explain the need to go beyond the analysis of static comparative advantage according to modifications of the assumptions, paying particular attention to a. Transportation costs b. Factor proportions c. Human capital and knowledge d. Distribution of benefits and costs of trade e. Economies of scale and monopolistic competition f. The product cycle and industrial metamorphoses g. Anomalous terms of trade between primary and manufactured goods