Economics 11th Edition Michael Parkin

Solutions Manual
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 C h a p t e r
7 GLOBAL MARKETS
IN ACTION

Answers to the Review Quizzes

Page 154
1. Describe the situation in the market for a good or service that the United States imports.
The goods and services the United States will import are those in which the United States has a higher
opportunity cost of production relative to other countries. In those markets the U.S. no-trade price is
higher than the world price. With trade the quantity produced in the United States is less than the
quantity consumed and the difference is imported.
2. Describe the situation in the market for a good or service that the United States exports.
The goods and services the United States will export are those in which the United States has a lower
opportunity cost of production relative to other countries. In those markets the U.S. no-trade price is
lower than the world price. With trade the quantity produced in the United States exceeds the quantity
consumed and the excess is exported.

Page 156
1. How is the gain from imports distributed between consumers and domestic producers?
Consumers gain consumer surplus from imports and domestic producers lose producer surplus from
imports.
2. How is the gain from exports distributed between consumers and domestic producers?
Consumers lose consumer surplus from exports and domestic producers gain producer surplus from
exports.
3. Why is the net gain from international trade positive?
The net gain from international trade is positive because the gain to the winners exceeds the losses to the
losers. For instance, in the case of an imported good, all the loss of producer surplus is transferred to
consumers as consumer surplus. In addition, however, consumers also gain additional consumer surplus
from the units imported. The total gain of consumer surplus exceeds the loss of producer surplus so that
the net surplus increases. The situation is similar for exports: The total gain of producer surplus exceeds
the loss of consumer surplus.

Page 163
1. What are the tools that a country can use to restrict international trade?
A country can use tariffs, import quotas, other import barriers such as health, safety, and regulation
barriers, and voluntary export restraints to restrict international trade. Export subsidies given by a nation
decrease other countries’ exports and thereby restrict their international trade.
2. Explain the effects of a tariff on domestic production, the quantity bought, and the price.
A tariff raises the domestic price of the product. The higher price increases domestic production and
decreases the domestic quantity purchased.

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3. Explain who gains and who loses from a tariff and why the losses exceed the gains.
Domestic consumers lose consumer surplus from the tariff. Domestic producers gain producer surplus
from the tariff. The government also gains revenue from the tariff. But the gain in producer surplus plus
the gain in government revenue is less than the loss of consumer surplus, so on net a tariff creates a
deadweight loss.
4. Explain the effects of an import quota on domestic production, consumption, and price.
An import quota raises the domestic price of the product. The higher price increases domestic production
and decreases domestic purchases.
5. Explain who gains and who loses from an import quota and why the losses exceed the gains.
Domestic consumers lose consumer surplus from the import quota. Domestic producers gain producer
surplus from the import quota. The importers also gain additional profit from the import quota. But the
gain in producer surplus plus the importers’ profits is less than the loss of consumer surplus, so on net an
import quota creates a deadweight loss.

Page 167
1. What are the infant industry and dumping arguments for protection? Are they correct?
The attempt to stimulate the growth of new industries is the infant-industry argument for protection,
which states that it is necessary to protect a new industry from import competition to facilitate the growth
of that industry, making it competitive in the world markets. This argument is based on the idea that as
firms mature they become more productive. However this argument for protection only works if the
benefits also spill over into other industries and other parts of the economy. This is rarely the case, as the
entrepreneurs of infant industries and their financial supporters take this risk into account and all returns
usually accrue only to them, not to other industries. And it is more efficient to subsidize the infant
industry needing protection than it is to protect it by restricting trade.
The dumping argument for protection states that a foreign firm is selling its exports at a lower price than its
cost of production. Foreign firms trying to monopolize the international market may use this practice.
Once the competition is gone, the foreign firm will raise prices and reap profits. This argument fails for
several reasons. First, it is virtually impossible to detect the occurrence of dumping since it is impossible to
verify a firm’s production costs. The test most commonly used is if the firm’s price when it exports is lower
than its domestic price. This test only examines the supply side of the two markets and ignores the
demand side. If the domestic market is inelastic and the export market is elastic (which is almost always the
case) then it is natural for a firm to price the domestic goods higher than the exports. Second, it is difficult
to see how a global firm could have a monopoly for the goods or services it exports. There are too many
foreign suppliers (and potential suppliers), making global competition too extensive for a monopoly to
exist in the global market. And, even if there is global monopoly it is more efficient to regulate it than to
impose trade restrictions on its products.
2. Can protection save jobs and the environment and prevent workers in developing countries
from being exploited?
There are many myths about trade restrictions. The problem mentions three of them, all false reasons
often offered as reasons to restrict international trade. These arguments are:
 Trade restrictions save domestic jobs: Free international trade does, indeed, cost jobs in the import-
competing markets. But this argument ignores the fact that, under free trade, consumers in the
exporting country will have greater disposable income. These consumers will use part of their higher
income to buy goods and services from other countries, thereby increasing employment in the
exporting sector of the nation. So, although international trade rearranges jobs—decreasing them in
import-competing markets and increasing them in exporting markets—it does not, on net, cost jobs.

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 Trade restrictions penalize lax environmental standards: Not all developing countries have lax
environmental standards. Also, a clean environment is a normal good. Countries that are relatively
poor and have lax pollution standards do not care as much about the environment because imposing
clean air, water, and land standards have a high opportunity cost because they will slow economic
development. The best way to encourage environmental quality is not to restrict economic
development but to encourage rapid economic growth, which will more quickly increase citizen
demand for a cleaner environment in those developing countries.
 Trade restrictions prevent rich countries from exploiting poorer countries: Importing goods made in
countries with low wage levels increases the demand for labor in those countries, increasing the
number of jobs available and raising wages over time. The more free trade that occurs with these
countries, the more quickly the wages will rise and the working conditions will increase in quality and
safety.
3. What is offshore outsourcing? Who benefits from it and who loses?
Offshore outsourcing occurs when a firm in the United States buys finished goods, components, or
services from firms in other countries. Workers who have skills for jobs that have been sent abroad lose
from offshore outsourcing. Consumers who consume the goods and services produced abroad and
imported into the United States benefit.
4. What are the main reasons for imposing a tariff?
There are two main reasons for imposing tariffs on imports. First the government receives tariff revenues
from imports, which can be useful when revenues from income taxes and sales taxes are less effective ways
of gaining government revenue. Second rent seeking by individuals in industries that would be hurt by
foreign competition can influence the government to impose tariffs.
5. Why don’t the winners from free trade win the political argument?
Trade restrictions are enacted despite the inherent inefficiency because of the political actions of rent
seeking groups, which fear that foreign competition might have a negative impact on their industry, firm,
or jobs. The anti-trade groups are easily organized and have much to gain from trade restrictions, whereas
the vast millions of consumers, who would win from free trade, are difficult to organize because each
individual has only a small amount of loss when trade restrictions are imposed. Hence the winners from
trade restrictions frequently out-lobby the winners from free trade.

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Answers to the Study Plan Problems and Applications

Use the following information to work
Price Quantity Quantity
Problems 1 to 3.
(dollars per demanded supplied
Wholesalers of roses (the firms that supply
container) (millions of containers per year)
your local flower shop with roses for
100 15 0
Valentine’s Day) buy and sell roses in
125 12 2
containers that hold 120 stems. The table
150 9 4
provides information about the wholesale
175 6 6
market for roses in the United States. The
200 3 8
demand schedule is the wholesalers’ demand
225 0 10
and the supply schedule is the U.S. rose
growers’ supply. Wholesalers can buy roses at auction in Aalsmeer, Holland, for $125 per container.
1. a. Without international trade, what would be the price of a container of roses and how many
containers of roses a year would be bought and sold in the United States?
Without international trade, in the United States the price of a container of roses is $175 and 6 million
containers of roses are bought and sold.
b. At the price in your answer to part (a), does the United States or the rest of the world have a
comparative advantage in producing roses?
The price of roses in the United States exceeds the price in the rest of the world, so the rest of the world
has a comparative advantage in producing roses.
2. If U.S. wholesalers buy roses at the lowest possible price, how many do they buy from U.S.
growers and how many do they import?
The price of roses in the United States is $125 per container. At this price, U.S. rose growers supply 2
million containers per year and U.S. wholesalers demand 12 million containers of roses. U.S. wholesalers
buy the 2 million containers from U.S. growers and purchase 10 million containers from foreign sources,
which are imported into the United States.
3. Draw a graph to illustrate the U.S. wholesale market for roses. Show the equilibrium in that
market with no international trade and the equilibrium with free trade. Mark the quantity of
roses produced in the United States, the
quantity imported, and the total quantity
bought.
In Figure 7.1, the equilibrium without international
trade is determined at the intersection of the
demand curve and the supply curve. Without
international trade the equilibrium price is $175 per
container and 6 million containers per year are
bought and produced. With international trade the
world price is $125 per container, as shown in
Figure 7.1. The quantity produced in the United
States is 2 million containers and the quantity
bought in the United States is 12 million
containers. Imports into the United States account
for the difference between the quantity bought and
the quantity produced, 10 million containers.

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Use the following news clip to work Problems 4 and 5.

Underwater Oil Discovery to Transform Brazil into a Major Exporter
A huge underwater oil field discovered late last year has the potential to transform Brazil into a
sizable exporter. Fifty years ago, Petrobras was formed as a trading company to import oil to support
Brazil’s growing economy. Two years ago, Brazil reached its long-sought goal of energy self-
sufficiency.
Source: International Herald Tribune, January 11, 2008
4. Describe Brazil’s comparative advantage in producing oil and explain why its comparative
advantage has changed.
Until recently Brazil did not have a comparative advantage in producing oil. Its cost of producing oil was
higher than the world market price and Brazil imported oil. But with the discovery of the new oil field, the
cost of producing oil in Brazil fell so that Brazil now has a comparative advantage in the production of oil.
With this new comparative advantage, Brazil now exports oil.
5. a. Draw a graph to illustrate the Brazilian market for oil and explain why Brazil was an
importer of oil until a few years ago.
Figure 7.2 illustrates the market for oil in Brazil.
The supply curve labeled Sold shows the supply
curve before the discovery of the new oil field.
When the supply curve is Sold, the price in Brazil is
higher than the world price, and Brazil imports oil.
In the figure, Brazil imports 2 million barrels a
week.
b. Draw a graph to illustrate the Brazilian market
for oil and explain why Brazil may become an
exporter of oil in the near future.
Figure 7.2 illustrates the market for oil in Brazil.
The supply curve labeled Snew shows the supply
curve after the discovery of the new oil field. When
the supply curve is Snew, the price in Brazil is lower
than the world price, and Brazil exports oil. In the
figure, Brazil exports 2 million barrels a week.

6. The End of Cheap Chinese Goods

Beginning in the 1990s, as China emerged as a major exporter, the prices of many goods fell.
For example, clothing prices fell through 2007 when they bottomed out. But as China’s labor
costs started to rise, clothing production moved from China to other countries.
Source: The New York Times, October 21, 2011
a. Explain why China emerged as a major exporter of clothing through 2007.
Production of clothing requires a lot of labor. Through 2007, wages in China were low and, with the low
wages, China had a comparative advantage in producing clothes, which made China a major exporter of
clothing.

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b. Explain why cheap Chinese goods are disappearing. Explain why China no longer exports
cheap clothing.
China’s wage rate has risen as the nation has developed. The higher wages mean that China’s opportunity
cost of producing cheap clothing is higher than that in other countries. China no longer has a comparative
advantage in producing cheap clothing, so China no longer exports cheap clothing.
7. In the news clip in Problem 6, who will gain and who will lose from the trade in goods that the
news clip predicts?
The firms and workers that gain are those that will now produce and export cheap clothing. The
consumers of cheap clothing will also gain because the clothing will remain cheap. The losers from this
international trade are workers and producers in China who used to produce and export cheap clothing.
8. Use the information on the U.S. wholesale market for roses in Problem 1 to
a. Explain who gains and who loses from free international trade in roses compared to a
situation in which Americans buy only roses grown in the United States.
U.S. rose wholesalers, who are the consumers in the problem, gain from free international trade. U.S. rose
growers lose from free international trade.
b. Draw a graph to illustrate the gains and losses from free trade.
Figure 7.3 illustrates the market with free trade.
Consumer surplus before international trade is equal
to area A; after international trade consumer surplus
is equal to area A + area B + area C. Producer
surplus before international trade is equal to area B
+ area D; after international trade producer surplus
is equal to area D.
c. Calculate the gain from international trade.
The gain from international trade is area C in Figure
7.3. It is equal to ½  ($175  $125)  (10 million
containers) which is $250 million.

Use the following news clip to work Problems 9 and 10.

Steel Tariffs Appear to Have Backfired on Bush
President Bush set aside his free-trade principles last year and imposed heavy tariffs on imported steel
to help out struggling mills in Pennsylvania and West Virginia. Some economists say the tariffs may
have cost more jobs than they saved, by driving up costs for automakers and other steel users.
Source: The Washington Post, September 19, 2003
9. a. Explain how a high tariff on steel imports can help domestic steel producers.
The high tariff raises the price of steel in the United States. This higher price results in domestic steel
producers increasing the quantity of steel they produce and increases their profits.
b. Explain how a high tariff on steel imports can harm steel users.
The tariff raises the U.S. price of steel and boosts steel users’ costs. The rise in costs leads steel users to
decrease the supply of the good they produce and also leads to lower profits for steel users.

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10. Draw a graph of the U.S. market for steel to show how a high tariff on steel imports
i. Helps U.S. steel producers.
ii. Harms U.S. steel users.
iii. Creates a deadweight loss.
Figure 7.4 shows the steel market. This figure shows
how the tariff helps producers, harms users, and
creates a deadweight loss. The amount of the tariff is
equal to the height of the light gray arrow. Before
the tariff U.S. consumer surplus was equal to area A
+ area B + area C + area E + area F. After the tariff
U.S. consumer surplus is equal to area A. U.S.
consumers lose consumer surplus equal to area B +
area C + area E + area F. Before the tariff U.S.
producer surplus was equal to area G. After the tariff
U.S. producer surplus is equal to area G + area B.
U.S. producers gain producer surplus equal to area
B. After the tariff the U.S. government gains tariff
revenue equal to area E. The deadweight loss is
equal to area C + area F.

Use the information on the U.S. wholesale market for roses in Problem 1 to work Problems 11 to 16.
11. If the United States puts a tariff of $25 per container on imports of roses, explain how the U.S.
price of roses, the quantity of roses bought, the quantity produced in the United States, and
the quantity imported changed.
The U.S. price of roses rises from $125 per container (the price with free trade) to $150 per container.
The quantity of roses produced in the United States increases from 2 million containers (the quantity
produced with free trade) to 4 million containers. The quantity of roses consumed in the United States
decreases from 12 million containers (the quantity consumed with free trade) to 9 million containers. The
quantity imported decreases from 10 million containers to 5 million containers.
12. Who gains and who loses from this tariff?
U.S. rose consumers lose from the tariff. U.S. rose producers gain from the tariff. The U.S. government
gains revenue from the tariff.

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13. Draw a graph of the U.S. market for roses to illustrate the gains and losses from the tariff and
on the graph identify the gains and losses, the tariff revenue, and the deadweight loss created.
Figure 7.5 shows the effect of the tariff. The amount
of the tariff is equal to the height of the light gray
arrow. Before the tariff U.S. consumer surplus was
equal to area A + area B + area C + area E + area F.
After the tariff U.S. consumer surplus is equal to
area A. U.S. consumers lose consumer surplus equal
to area B + area C + area E + area F. Before the tariff
U.S. producer surplus was equal to area G. After the
tariff U.S. producer surplus is equal to area G + area
B. U.S. producers gain producer surplus equal to
area B. After the tariff the U.S. government gains
tariff revenue equal to area E. The deadweight loss
from the tariff is equal to area C + area F.

14. If the United States puts an import quota on roses of 5 million containers, what happens to the
U.S. price of roses, the quantity of roses bought, the quantity produced in the United States,
and the quantity imported?
The U.S. price of roses rises to $150 per container. 9 million containers of roses are purchased in the
United States and 4 million containers of roses are produced in the United States. The difference, 5
million containers, is imported into the United States.
15. Who gains and who loses from this quota?
U.S. rose growers and importers of roses gain from the quota. U.S. rose wholesalers lose from the quota.
16. Draw a graph to illustrate the gains and losses from the import quota and on the graph
identify the gains and losses, the importers’
profit, and the deadweight loss.
Figure 7.6 shows the effect of the import quota. The
amount of the quota is equal to the length of the
gray arrow. Before the quota U.S. consumer surplus
was equal to area A + area B + area C + area E + area
F. After the quota U.S. consumer surplus is equal to
area A. U.S. consumers lose consumer surplus equal
to area B + area C + area E + area F. Before the
quota U.S. producer surplus was equal to area G.
After the quota U.S. producer surplus is equal to
area G + area B. U.S. producers gain producer
surplus equal to area B. After the quota the
importers of the rose containers earn profit equal to
area E. The deadweight loss from the import quota
is equal to area C + area F.

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Use the following news clip to work Problems 17 and 18.

Car Sales Go Up as Prices Tumble
Car affordability in Australia is now at its best in 20 years, fueling a surge in sales as prices tumble.
In 2000, Australia cut the tariff to 15 percent and on January 1, 2005, it cut the tariff 10 percent.
Source: Courier Mail, February 26, 2005
17. Explain who gains and who loses from the lower tariff on imported cars.
The lower tariff lowers the price of cars in Australia. As a result, Australian consumers increase the
quantity of cars they purchase and so they gain from the tariff reduction. However, also as a result of the
lower price, Australian producers decrease the quantity of cars they produce and so they lose from the tariff
reduction.
18. Draw a graph to show how the price of a car, the quantity of cars bought, the quantity of cars
produced in Australia, and the quantity of cars imported into Australia changed.
Figure 7.7 shows the effect of the tariff reduction.
The tariff is reduced by the amount of the gray
arrow. The price of an automobile in Australia falls
from $30,000 to $27,000. In the figure the quantity
of cars demanded in Australia increases from 5
million to 6 million and the quantity of automobiles
produced in Australia decreases from 3 million to 2
million. With the higher tariff, 2 million cars per
year were imported; with the lower tariff 4 million
cars per year are imported.

Use the following news clip to work Problems 19 and 20.

A New Food Crisis Is on Our Plates
Over the past year the price of corn has risen 52 percent, wheat 49 percent, and soybeans 28 percent.
Alarmed at spiking food prices, a score of countries, including Russia and Ukraine, have banned food
exports to make sure they can feed their own people first.
Source: Sydney Morning Herald, February 22, 2011
19. a. What are the benefits to a country from importing food?
The benefits to a country that imports food are the same as the benefits to a country that imports any
good or service: The country gets the food at a lower opportunity cost than what it would face if it
produced the food itself.
b. What costs might arise from relying on imported food?
The demand for food is highly inelastic because there are not many substitutes for food. If food exports are
restricted or decrease, the price of the imported food will rise sharply. If food exports are bountiful, the
price of food will fall sharply. So relying on food imports makes the country vulnerable to large swings in
the price of food.

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20. If a country restricts food exports, what effect does this restriction have in that country on the
price of food, the quantity of food it produces, the quantity of food it consumes, and the
quantity of food it exports?
If a country restricts its food exports, the price of food within that country falls. The lower price decreases
the quantity of food produced and increases the quantity of food consumed. The quantity of food
exported decreases.
21. Chinese Tire Maker Rejects U.S. Charge of Defects
U.S. regulators ordered the recall of more than 450,000 faulty tires. The Chinese producer of
the tires disputed the allegations and hinted that the recall might be an effort by foreign
competitors to hamper Chinese exports to the United States. Mounting scrutiny of Chinese-
made goods has become a source of new trade frictions between the United States and China
and fueled worries among regulators, corporations, and consumers about the risks associated
with many products imported from China.
Source: International Herald Tribune, June 26, 2007
a. What does the information in the news clip imply about the comparative advantage of
producing tires in the United States and China?
Because the tires were produced in China, the news clip suggests that China has the comparative advantage
in producing tires.
b. Could product quality be a valid argument against free trade?
Product quality is not a valid argument against free trade. Quality is a valid concern for consumers. If
consumers cannot judge quality themselves, then government inspection might be necessary. But in that
case government inspection of both imported and domestically produced goods is required. To single out
imported goods or services makes little sense.
c. How would the product-quality argument against free trade be open to abuse by domestic
producers of the imported good?
Domestic producers could easily assert that the imported good lacks some essential quality characteristic
and should be prohibited in the U.S. market. Product quality concerns raised by domestic producers can
also be used to raise worry amongst U.S. consumers about imported goods. Domestic producers would
have a never-ending incentive to complain about quality defects of imported goods.

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Answers to Additional Problems and Applications

22. Suppose that the world price of sugar is 10 cents a pound, the United States does not trade
internationally, and the equilibrium price of sugar in the United States is 20 cents a pound.
The United States then begins to trade internationally.
a. How does the price of sugar in the United States change?
The price of sugar in the United States falls.
b. Do U.S. consumers buy more or less sugar?
As a result of the lower price, U.S. consumers buy more sugar.
c. Do U.S. sugar growers produce more or less sugar?
As a result of the lower price, U.S. growers produce less sugar.
d. Does the United States export or import sugar and why?
The United States imports sugar. The quantity of sugar demanded increases while quantity supplied
decreases. The difference is made up by imports.
23. Suppose that the world price of steel is $100 a ton, India does not trade internationally, and
the equilibrium price of steel in India is $60 a ton. India then begins to trade internationally.
a. How does the price of steel in India change?
The price of steel in India rises to equal the world price.
b. How does the quantity of steel produced in India change?
Producers respond to the higher price by increasing the quantity of steel produced.
c. How does the quantity of steel bought by India change?
Steel users in India respond to the higher price by decreasing the quantity of steel bought.
d. Does India export or import steel and why?
Because the price of steel in India is lower than the world, India has a comparative advantage in the
production of steel. India will export steel.
24. A semiconductor is a key component in
your laptop, cell phone, and iPod. The Price Quantity Quantity
table provides information about the (dollars per demanded supplied
market for semiconductors in the United unit) (billions of units per year)
States. Producers of semiconductors can 10 25 0
get $18 a unit on the world market. 12 20 20
14 15 40
a. With no international trade, what would
16 10 60
be the price of a semiconductor and how
18 5 80
many semiconductors a year would be
20 0 100
bought and sold in the United States?
With no international trade the price of a semiconductor in the United States is $12 per unit. 20 billion
units are bought and sold in the United States.
b. Does the United States have a comparative advantage in producing semiconductors?
The United States has a comparative advantage in producing semiconductors because the U.S. price is
lower than the price in the world market.

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25. Act Now, Eat Later

The hunger crisis in poor countries has its roots in U.S. and European policies of subsidizing
the diversion of food crops to produce biofuels like corn-based ethanol. That is, doling out
subsidies to put the world’s dinner into the gas tank.
Source: Time, May 5, 2008
a. What is the effect on the world price of corn of the increased use of corn to produce ethanol
in the United States and Europe?
The use of corn to produce ethanol increased the demand for corn, thereby raising the price of corn.
b. How does the change in the world price of corn affect the quantity of corn produced in a
poor developing country with a comparative advantage in producing corn, the quantity it
consumes, and the quantity that it either exports or imports?
The higher world price of corn decreases the consumption of corn and increases the production of corn in
poor developing countries. Because the country has a comparative advantage it will export corn. The
higher price leads the country to increase its exports.
26. Draw a graph of the market for corn in the poor developing country in Problem 25(b) to show
the changes in consumer surplus, producer surplus, and deadweight loss that arise.
Figure 7.8 shows the situation in the poor country
that exports corn. With the initial lower price, the
country produces 60 million bushels, exports 20
million bushels, and consumes 40 million bushels.
The consumer surplus is equal to area A + area B
and the producer surplus is equal to area E. After
the world price of corn rises to $8 per bushel, the
country produces 80 million bushels of corn,
exports 60 million bushels, and consumes 20
million bushels. Consumer surplus decreases to
area A and producer surplus increases to area B +
area C + area E. There is no deadweight loss; in
fact, the country gains additional surplus equal to
area C.

Use the following news clip to work Problems 27 and 28.

South Korea to Resume U.S. Beef Imports
South Korea will reopen its market to most U.S. beef. South Korea banned imports of U.S. beef in
2003 amid concerns over a case of mad cow disease in the United States. The ban closed what was
then the third-largest market for U.S. beef exporters.
Source: CNN, May 29, 2008
27. a. Explain how South Korea’s import ban on U.S. beef affected beef producers and consumers
in South Korea.
The South Korean ban raised the price of beef in South Korea. The higher price led to increased
production in South Korea, which made South Korean producers better off. The higher price also led to
decreased consumption in South Korea, which made South Korean consumers worse off.

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b. Draw a graph of the market for beef in South Korea to illustrate your answer to part (a).
Identify the changes in consumer surplus, producer surplus, and deadweight loss.
Figure 7.9 shows the effect of South Korea’s import
ban. Prior to the ban the price of beef in South
Korea was $4 per pound. At this price the quantity
consumed in South Korea was 12 million tons of
beef per year and the quantity produced in South
Korea was 2 million tons of beef per year. The
difference, 10 million tons of beef per year, was
imported from the United States. Consumer surplus
in South Korea was equal to area A + area B + area
C and producer surplus in South Korea was equal to
area E. With the import ban, the price of beef in
South Korea rises to $6 per pound. At this price 6
million tons of beef per year are consumed in South
Korea and 6 million tons of beef per year are
produced in South Korea. There are no imports.
Consumer surplus is South Korea shrinks to only
area A and producer surplus grows to equal area B +
area E. There is now a deadweight loss which is
equal to area C.
28. a. Assuming that South Korea is the only importer of U.S. beef, explain how South Korea’s
import ban on U.S. beef affected beef producers and consumers in the United States.
South Korea’s ban meant that the United States no longer exported beef. (Recall the assumption that
South Korea is the only importer of U.S. beef.) In the United States the price of beef falls to the no-trade
price. U.S. consumption increases and U.S. production decreases so U.S. consumers are better off and
U.S. producers are worse off.
b. Draw a graph of the market for beef in the United States to illustrate your answer to part (a).
Identify the changes in consumer surplus, producer surplus, and deadweight loss.
Figure 7.10 shows the situation in the U.S. market
for beef. With trade the price of beef is $4 per
pound. The United States produces 30 million
pounds of beef, consumes 20 million pounds of
beef, and exports the difference. At this price
consumer surplus in the United States is equal to
area A and producer surplus is equal to area B + area
C + area E. When South Korea eliminates U.S.
exports, the price falls to $3.50 per pound, the no-
trade price. U.S. consumer surplus increases from
area A to area A + area B. U.S. producer surplus falls
from area B + area C + area E to only area E. The
deadweight loss equals area C.
Use the following information to work Problems 29 to
31.
Before 1995, trade between the United States and
Mexico was subject to tariffs. In 1995, Mexico joined
NAFTA and all U.S. and Mexican tariffs have
gradually been removed.

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29. Explain how the price that U.S. consumers pay for goods from Mexico and the quantity of U.S.
imports from Mexico have changed. Who are the winners and who are the losers from this free
trade?
With NAFTA, the prices that U.S. consumers pay for goods from Mexico have fallen and, as a result, the
quantity of imports from Mexico have increased. Winners from this free trade are Mexican producers of
goods exported to the United States and U.S. consumers of these goods. Losers are Mexican consumers of
the goods and U.S. producers of the goods.
30. Explain how the quantity of U.S. exports to Mexico and the U.S. government’s tariff revenue
from trade with Mexico have changed.
The prices of U.S. goods in Mexico have fallen and, as a result, the quantity of U.S. goods exported to
Mexico has increased. The U.S. government’s tariff revenue from tariffs imposed on trade with Mexico
decreased.
31. Suppose that in 2013, tomato growers in Florida lobby the U.S. government to impose an
import quota on Mexican tomatoes. Explain who in the United States would gain and who
would lose from such a quota.
U.S. tomato growers gain from such a quota. The importers who hold the quota rights also gain. U.S.
consumers of tomatoes lose from such a quota.
Use the following information to work Problems 32 and 33.
Suppose that in response to huge job losses in the U.S. textile industry, Congress imposes a 100
percent tariff on imports of textiles from China.
32. Explain how the tariff on textiles will change the price that U.S. buyers pay for textiles, the
quantity of textiles imported, and the quantity of textiles produced in the United States.
The tariff raises the U.S. price of textiles. As a result, the quantity of textiles consumed in the United
States decreases and the quantity produced increases. Imports of textiles into the United States decrease.
33. Explain how the U.S. and Chinese gains from trade will change. Who in the United States will
lose and who will gain?
The decrease in trade means that the U.S. and Chinese gains from trade decrease. In the United States,
U.S. producers gain from the tariff. The U.S. government also gains revenue from the tariff. U.S. textile
consumers lose.
Use the following information to work Problems 34 and 35.
With free trade between Australia and the United States, Australia would export beef to the United
States. But the United States imposes an import quota on Australian beef.
34. Explain how this quota influences the price that U.S. consumers pay for beef, the quantity of
beef produced in the United States, and the U.S. and the Australian gains from trade.
The quota raises the price of beef in the United States. By raising the U.S. price, the quota increases the
quantity of beef produced in the United States and decreases the quantity of beef consumed in the United
States. The U.S. and Australian gains from trade decrease.
35. Explain who in the United States gains from the quota on beef imports and who loses.
U.S. beef producers gain from the quota. The people who hold the import quota rights also gain. U.S.
beef consumers lose from the quota.

36. Trading Up
The cost of protecting jobs in uncompetitive sectors through tariffs is high: Saving a job in the
sugar industry costs American consumers $826,000 in higher prices a year; saving a dairy

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industry job costs $685,000 per year; and saving a job in the manufacturing of women’s
handbags costs $263,000.
Source: The New York Times, June 26, 2006
a. What are the arguments for saving the jobs mentioned in this news clip?
The arguments for saving these jobs are (explicitly) the argument that protection saves jobs and (implicitly)
that protection allows us to compete with cheap foreign labor.
b. Explain why these arguments are faulty.
The fact these arguments are wrong can be demonstrated by comparing the cost of saving a job to the
wage paid on the job. The cost to U.S. consumers of saving a job massively outweighs the benefit of a job
to the worker, that is, the wage rate paid on the job. This empirical result demonstrates the conclusion that
the cost of protection to the losers, U.S. consumers, exceeds the gain to the winners, U.S. producers.
c. Is there any merit to saving these jobs?
There is merit to the workers whose jobs are saved and who might not receive any government assistance if
their jobs are not protected. There also is merit to the politicians who can obtain a reward from lobbyists
for the protection. There is no merit, however, to society as a whole.

Economics in the News

37. After you have studied Reading Between the Lines on pp. 168–169, answer the following
questions.
a. What events put U.S. solar panel producers under pressure?
The price of solar panels fell, which pressured U.S. producers of solar panels.
b. Explain how a tariff on solar panel imports changes domestic production, consumption, and
imports of solar panels.
The tariff raises the U.S. price of solar panels. The higher price increases domestic U.S. production,
decreases domestic U.S. consumption, and decreases U.S. imports.
c. Illustrate your answer to part (b) with an appropriate graphical analysis assuming that
imports are not completely eliminated.
Figure 7.11 shows the effect of the tariff in the
market for solar panels. In the figure the tariff,
which equals the length of the grey arrow, raises
the price in the United States from $150 per panel
to $175 per panel. U.S. production of solar panels
increases from 1,000 panels per week to 2,000
panels per week. U.S. consumption of solar panels
decreases from 6,000 panels per week to 4,500
panels per week. U.S. imports decrease from
5,000 panels per week to 2,500 panels per week.
d. Explain how a tariff on solar panel imports
changes consumer surplus and producer
surplus.
The tariff on solar panels raises the price of solar
panels in the United States. The higher price and
decrease in quantity demanded decreases U.S.
consumer surplus. The higher price increase in
quantity supplied increases U.S. producer surplus.

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e. Explain the four sources of loss of consumer surplus that result from a tariff on solar panel
imports.
The higher price means that consumer surplus decreases on both U.S.-produced solar panels and imported
solar panels. The loss of consumer surplus on U.S.-produced solar panels from the higher price is gained
by U.S. producers. Some of the loss of consumer surplus on imported solar panels from the higher price is
gained by the U.S. government in the form of tariff revenue. But two parts of this loss are lost to society,
that is, are deadweight losses.
f. Illustrate your answer to part (e) with an appropriate graphical analysis.
In Figure 7.12 the loss of consumer surplus is the
sum of area A + area B + area C + area E. Of these
areas, area A is gained by U.S. producers as
additional producer surplus from the tariff. Area C
is the tariff revenue the U.S. government collects
from the tariff. Area B and area E are both
deadweight losses; that is, they are a loss of
consumer surplus that no one else gains.

38. Aid May Grow for Laid-Off Workers

Expansion of the Trade Adjustment Assistance (TAA) program would improve the social safety
net for the 21st century, as advances permit more industries to take advantage of cheap foreign
labor—even for skilled, white-collar work. By providing special compensation to more of
globalization’s losers and retraining them for stable jobs at home, an expanded program could
begin to ease the resentment and insecurity arising from the new economy.
Source: The Washington Post, July 23, 2007
a. Why does the United States engage in international trade if it causes U.S. workers to lose
their jobs?
While some U.S workers lose from international trade, other U.S. workers and U.S. consumers gain from
the trade. On an economy-wide level, the gains from international trade exceed the losses.
b. Explain how an expansion of the TAA program will make it easier for the United States to
move toward freer international trade.
The Trade Adjustment Assistance program encourages workers to retrain for jobs in industries in which
the United States has a comparative advantage. Workers who stand to lose from free international trade
lobby to keep or establish protection for their industry. If Trade Adjustment Assistance was expanded,
then these workers’ losses would be decreased, which makes them less likely to lobby for protection.

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