Chapter 9 — Exercises
Section A — Comparative advantage at the country level
A1. Country A can produce, in one labor-hour: 6 cars or 30 bushels of wheat. Country B can produce, in one labor-hour: 2 cars or 4 bushels of wheat. - (a) Who has absolute advantage in cars? In wheat? - (b) Compute opportunity costs. Who has comparative advantage in cars? In wheat? - (c) Suggest a trading ratio that would benefit both.
A2. "If China can produce textiles cheaper than the U.S., the U.S. should produce its own textiles to keep jobs at home." Use comparative advantage to evaluate this claim. Where does it make sense, and where does it fail?
A3. Explain why a country with absolute advantage in everything still gains from trade. (Refer back to Chapter 3 if needed.)
Section B — The tariff diagram
B1. Sketch a supply-and-demand diagram for the U.S. textile market. The world price is $5/unit. Show: - (a) The quantity demanded by U.S. consumers at the world price - (b) The quantity supplied by U.S. producers at the world price - (c) The amount imported (the difference)
B2. Now impose a $2/unit tariff. Show: - (a) The new effective price for U.S. buyers - (b) The new quantity demanded - (c) The new quantity supplied by domestic producers - (d) The new (smaller) amount imported - (e) The two deadweight loss triangles
B3. Compute the welfare effects of the tariff in B2: - (a) Change in consumer surplus (loss) - (b) Change in producer surplus (gain) - (c) Government tariff revenue - (d) Net welfare effect (negative — by how much?)
B4. Why does a tariff create two deadweight loss triangles, not one?
Section C — Quotas
C1. Compare the welfare effects of a tariff with a quota that produces the same import quantity. Which is worse for the importing country, and why?
C2. Why do most economists prefer tariffs to quotas?
C3. Why might a politician prefer to use a quota rather than a tariff, even though it's economically worse?
Section D — The China shock
D1. Summarize the four main findings of Autor, Dorn, and Hanson on the China shock. Use your own words.
D2. "The China shock disproves comparative advantage." Evaluate this claim. What is the China shock evidence actually showing? What does it leave intact?
D3. The "long-run adjustment" assumed by the simple comparative-advantage story is that workers displaced by trade find new jobs in growing industries. Why didn't this happen as much as expected after the China shock? List three reasons.
D4. Trade Adjustment Assistance (TAA) is the main federal program for helping workers displaced by trade. Look up its budget and the number of workers it serves. How does the scale compare to the millions of workers affected by the China shock?
D5. Imagine you are advising the U.S. government on a new trade agreement that's expected to benefit consumers but harm workers in a specific industry. Apply the lessons of the China shock. What conditions would you want to include in the agreement before supporting it?
Section E — Political economy
E1. Why are the losers from free trade more politically organized than the winners? Use the language of concentrated benefits and diffuse costs.
E2. "The 2016 election was decided by the China shock." Evaluate this claim. What evidence would you need to fully support or refute it?
E3. Explain why economists generally support free trade despite the political backlash. What's the case for not abandoning it?
Section F — Surplus calculations
F1. A country imports widgets at a world price of $10. Domestic demand and supply curves give equilibrium imports of 100 units. A $3 tariff is imposed. The new domestic price is $13. Imports fall to 60 units. - (a) Government revenue: $3 × 60 = $180 - (b) Compute the consumer surplus loss - (c) Compute the domestic producer surplus gain - (d) Compute the deadweight loss (the two triangles)
F2. Show that the deadweight loss in F1 plus the producer gain plus the government revenue equals the consumer surplus loss. (This is the welfare accounting identity.)
Section G — Policy debate
G1. "Free trade is good in theory but it has destroyed American manufacturing." Articulate the strongest case for and against this claim. Which parts are positive (factual) and which are normative (value-based)?
G2. "We should impose tariffs to protect strategically important industries (semiconductors, steel, rare earth metals)." Use the surplus framework and your knowledge of comparative advantage to evaluate. What counts as "strategically important"?
G3. "Trade with low-wage countries is exploitation. Workers there are paid poverty wages, and we shouldn't benefit from that." Use the framework of the chapter to address this objection. Does free trade help or hurt workers in low-wage countries?
Section H — Data lookup
H1. Find the U.S. balance of trade (FRED series BOPGSTB or similar). View the chart since 2000. When was the U.S. trade deficit largest? When was it smallest?
H2. Look up U.S. manufacturing employment (FRED series MANEMP). View the chart since 1939. When did manufacturing employment peak? When did it bottom out?
H3. Compare U.S. manufacturing employment with U.S. manufacturing output (real value-added) over the same period. Are they correlated? What explains any divergence?
Section I — Reflection
- After this chapter, do you find yourself more or less sympathetic to free trade than before?
- The China shock evidence is now widely accepted, but the policy response (more compensation for displaced workers) has been weak. Why?
- Imagine you are a worker in an industry being displaced by imports. How should you weight the consumer benefit (cheaper goods) against your own job loss?
Selected answers in appendices/answers-to-selected.md.