CHAPTER OVERVIEW AND TEACHING TIPS In this chapter, Samuelson and Nordhaus present the basic economic model of trade. The fundamental point is that foreign trade can improve the welfare (i.e., the standard of living) of most nations, even if they already are the most productive in producing everything. Part of David Ricardo’s great contribution to the study of international trade was to show that inefficiency in all lines of production would make a country poor, but it would not cause its trading opportuni-ties to totally evaporate. Relatively efficient and inefficient countries can still trade to mutual advantage, provided there are some differences in their relative costs of production. The first part of the chapter explains Ricardo’s innovative view of trade.Once the case for free trade is made, Samuelson and Nordhaus turn the coin over to look at its opposite side, protec-tionism. The topic of protectionism always invokes lively discussion—among students, politicians, economists, and the usual group at the local coffee shop. Chapter 15 plays into that interest by reviewing not only how tariffs work, for example, but also how protectionism affects the U.S. citizenry. If free trade is so beneficial, why do we see so many bar-riers to free trade in the real world? To answer this question, it is essential to see how trade barriers work. Only then can their effects be delineated and their merits evaluated. Once students understand the effects of protectionism, the various arguments for and against protection can be critically reviewed.The text tries to bring the theory up to date by calling attention to current practice, but you should certainly have no trouble finding a discussion of one sort of trade restraint or another in today’s newspaper. The role of interest-group politics in a democratic society is a fascinating topic. Lobbyists come into congressional offices with computer printouts of firms within districts that might be helped by protection measures; they never represent the cases of those who might be harmed. Is that harm spread around so much that it is negligible, or is it concentrated among people with less effec-tive representation?LEARNING OBJECTIVES1.Distinguish between absolute advantage and comparative advantage .2.Explain, using a simple two-commodity model, how a country can increase its real income by specializing (for the purpose of export) in the commodity in which it has a comparative advantage and importing the commodity in which it has a comparative disadvantage.3.Understand why the Ricardo model can easily be extended to include multinational trading arrangements.4.Use supply-and-demand analysis to outline the economic effects of protection. Show that opening trade in a good drives its domestic price toward equality with its world price. Show that a tariff can be expected to generate welfare losses.5.Outline the economic as well as the noneconomic arguments for trade restriction and evaluate their validity.6.Discuss a few nontariff barriers to trade that have been employed by the United States in the past few years and explain how they work.73C H A P T E RC o m p a r a t i v eA d v a n t a g ea n d P r o t e c t i o n i s m1574C HAPTER15: C OMPARATIVE A DV ANTAGE AND P ROTECTIONISMSUGGESTED ANSWERS TO QUESTIONS IN THE TEXT1. a.Incorrect; it is a statement that the north has an absolute advantage in everything, but Mexico would help bothitself and the north if it could export things in which it nonetheless has a comparative advantage (at least after factor markets adjust).b.Incorrect; trade can increase aggregate income, though it may redistribute it. Workers in the U.S. may get paidmore due to higher productivity.c.Sure! Do what you do well.d.Incorrect; Ross is forgetting about comparative advantage and differences in worker productivity.2.Graph Table 15-1:Table 15-1Food050100150200Clothing150112.57537.503.With (1, 2; 2, 4), relative prices are 1 to 2 in both countries; neither has a comparative advantage, and neither canexpand its consumption frontier through trade. The larger the difference in pre-trade prices, the greater the gains from trade.4.The gains come from specialization. Should Korea end up with the same technology as the United States, trade willdisappear. The Korean standard of living will improve, but the American standard of living will decline with the decline in relative comparative advantage. Yes, there is a lesson here.5.The first statement is the Ricardo result. Growth of competitors need not cause the standard of living in a tradingcountry to go dawn. Growth that diminishes diversity, however, can.6. a.This is an optimal-tariff argument, with the country having power over the terms of trade.b.This one is awful, ignoring the notion of comparative advantage.c.This is a non-economic reason that illustrates the multiplicity of objectives in trade policy.d.This is a short-run argument, and the recession might better be solved by domestic monetary or industrial poli-cy. Other countries might retaliate against the tariff.7.Everything is exactly the same, except that the revenue goes to the importers who buy or produce at the world priceand sell at the higher domestic import price. When auctioned, these surpluses will be bid away and will flow to the government.DISCUSSION QUESTIONS1.“Comparative advantage is a static theory.” What does this mean? How might comparative advantage change overtime? Does this modify the theory at all?2.Assume for the sake of argument that research shows that American agriculture is the most efficient in the world.Might it still pay the United States to import food? Why?3.“Both countries may gain from trade, but this doesn’t mean that everyone in both countries gains by the sameamount.” Discuss. Assuming different factor endowments in different countries, which groups should benefit the most from trade? Can anyone lose? (Does this give us any clue about vested-interest positions with respect to protectionism?)4.“If full employment prevails in both countries before trade, then it is impossible for both countries to be better offafter trade.” Identify the important flaw in this statement.5.“The gains from trade arising from comparative advantage among countries have equal relevance for trade amongregions within a country, and even for interpersonal trade.” Do you agree? If so, can you think of any reason why international trade theory is usually regarded as a separate field of study in economics?6.“Trade does take place among industrial countries with roughly the same factor proportions, but comparative costswon’t explain it.” Provide some other reasons why trade between such countries might be mutually beneficial.7.“The basic rationale for specialization and hence for trade is diversity.” Diversity in what? Give concrete examplesfor different countries.8.Why are many tariffs imposed despite persuasive economic arguments that they do more harm than good? Why hasprotectionism declined so much since World War II?C HAPTER15: C OMPARATIVE A DV ANTAGE AND P ROTECTIONISM759.“Non-economic goals may constitute valid arguments for tariffs, but they also constitute valid arguments for freertrade.” Do you think, on balance, that American national-security interests today call for higher or lower tariffs? 10.How would you reply to an Asian student who argued: “Asia needs tariffs as protection against cheap foreignmachinery and capital?” What issues would you raise in discussing Asian nations’ large trading surpluses?11.“The escape clause tariff argument, which is much used today, is simply another version of the older protectionismargument, and hence equally fallacious.” Discuss. What industries do you think use this argument today? What policies other than tariff protection might be adopted?12.One writer has argued that a tariff should be viewed in terms of its effect at four levels—world, country, factory, andindustry—and goes on to say: “Only one argument for a tariff is valid for the world as a whole: the infant-industry argument.” Do you agree? At what level does the terms-of-trade argument for a tariff hold? The cheap-foreign-labor tariff argument?pare and contrast the effects of a tariff increase with those of an increase in domestic expenditure.14.A writer once compared infant industries that seek tariff protection to matinee idols—they both remain youthful.Do you think there is anything to this comparison?15.Explain the high cost of preserving U.S. jobs through tariff protection. Use graphs to illustrate your answer.16.Why is there a preference for tariff protection when auctioned quotas can accomplish the same goals?ESSAY QUESTIONS1.Evaluate: “It pays a country to specialize for the same reason that it pays an individual to specialize.” Whatconditions must be met for this statement to hold for nations? For people?2.International trade results in a more efficient employment of the world’s productive forces.” In exactly what sense isthis true? How would you demonstrate that “more efficient employment” actually did occur as a result of trade?Explain.3.Evaluate: American wages must fall if American producers are to compete with manufacturers using cheap foreignlabor.”4.To produce 1 bushel of wheat, America uses 3 labor days. England uses 5 labor days. To produce 1 bolt of cloth,America needs 5 labor days. England needs 6.a.Which country has (1) absolute advantage in wheat production, (2) absolute advantage in cloth production, (3)comparative advantage in wheat production, (4) comparative advantage in cloth production?b.What will be the limits within which the post-trade price ratios must lie? What additional information wouldyou need to know the exact price ratios?5.Do the largest gains from trade accrue to small countries whose pretrade prices are dramatically different fromprevailing world prices? Illustrate your answer graphically.6.What are the static assumptions that underlie the theory of comparative advantage? Explain their significance ascarefully as you can.7.Do real wages tend to equalize under free international trade? What about prices? Do national boundaries thatinhibit migration and immigration play any role in your answers to these questions? If so, explain that role; if not, explain why not. (This is a difficult question for intro students.)8.The 1974 Trade Act allows for tariff protection for industries injured by import competition. Construct the bestpossible defense for this provision, then attack it with all you have. In the process, define “injured.”9.Since the 1930s, industrial countries have negotiated a series of agreements that have generally lowered tariffbarriers to international trade. Have they responded by erecting a new set of non-tariff barriers? Give examples. 10.Two of the most frequently heard tariff arguments today are the escape clause argument in developed countriesfacing “unfair” foreign competition and the argument for diversification to reduce terms-of-trade risk in under-developed countries. Carefully appraise the respective validity of these arguments. In each case, indicate policies other than tariff protection that might be used.11.“It is true that cheap labor abroad threatens the livelihood of labor in this country, which is located in those indus-tries where labor is inefficient; but this is not so much an argument for the tariff as an argument for shifting resources, including capital and land as well as labor, out of these inefficient industries.” Discuss in detail.12.“Arguments for protection under dynamic conditions, if valid, are not contradictory to the principle of comparativeadvantage.” Appraise, with respect to the infant-industry argument for tariffs.13.“If all other countries were unlikely to retaliate, then it would be desirable to impose small tariffs.” Why? Does itmatter whether the country imposing tariffs is small or large? Discuss.76C HAPTER15: C OMPARATIVE A DV ANTAGE AND P ROTECTIONISM 14.Nation X may be able to increase its domestic employment by erecting protective tariff barriers. If other nationsretaliate, Nation X will at worst return to its initial state of employment and income.” Discuss these two statements.15.Tariffs generally lower the real incomes of most voters. Still, most democracies have erected a bewildering array oftariffs. Why?16.Under what conditions might a tariff for retaliation be desirable? Undesirable? Explain.17.In the 1970s, the U.S. steel industry was protected by government efforts to force other countries into “voluntary”export quotas. Show that this exacerbates oligopoly in the United States and undercuts fruitful trade.18.“Anything a tariff can do, a subsidy can do better.” Explain why this can be true and under what conditions a sub-sidy may be desirable. Evaluate the politics of subsidy.19.It has been claimed that more complete tariff protection will increase U.S. national security (economic or military).Evaluate this claim with reference to energy sources for the United States and for Japan, which imports all of its energy; to Asian dominance in electronic goods; to automobile production.20.President Bush led a delegation of American business executives to Japan in January 1992. The purpose of the tripwas to espouse free trade and to open Japanese markets to American goods. Was the trip successful? Why or why not?。