a. Which parts of this quote are positive statements? Which parts are normative statements? (Be sure to identify all three statements in the quote.)
b. Is the policy that is being advocated consistent with the preceding statements about the wages and productivities of American and Asian workers? Why?
c. Would such a policy make some Americans better off without making any other Americans worse off? That is, would this policy be efficient from the viewpoint of all Americans? Why?
d. Would low - wage Asian workers benefit from or be hurt by such a policy? Why?
Instead of legislation banning the imports (considered a quota), assume that the government enacts a special tax on imported clothing that is so high that the selling price of the imports would be equal to the selling price of the same clothing made in America. This kind of tax is called a tariff and is enacted to protect domestic producers of the same items that can be imported at much lower costs. Answer the following:
e. What would shoppers see when they shopped in Wal-Mart and the other “big box” stores that sell so many imported items?
f. Would this tax policy have a better effect, worse effect, or no different effect on American workers than the legislation banning the imports discussed in question 1? What kind of effect would the tax have on the Asian workers? (This question is often missed by students. Please compare a tariff to a quota for the answer.)
2. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any combination in between. The Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between.
Examine the first diagram showing the monthly production possibility frontier for the Tivoli and the monthly production possibility frontier for the Frivoli.
a. Which tribe has the comparative advantage in spaghetti production? Why?
b. Which tribe has the comparative advantage in meatball production? Why?
In A.D. 100 the Frivoli discover a new technique for making meatballs that doubles the quantity of meatballs they can produce each month. Examine the new monthly production possibility frontier for the Frivoli.
c. After the innovation, which tribe now has an absolute advantage in producing meatballs? Why?
d. Which tribe now has an absolute advantage in producing spaghetti? Why?
e. Which has the comparative advantage in meatball production? Why?
f. Which has the comparative advantage in spaghetti production? Why?
3. According to the U.S. Census Bureau, in July 2006 the United States exported aircraft worth $1 billion to China and imported aircraft worth only $19,000 from China. During the same month, however, the United States imported $83 million worth of men’s trousers, slacks, and jeans from China but exported only $8,000 worth of trousers, slacks, and jeans to China. Using what you have learned about how trade is determined by comparative advantage, answer the following questions.
a. Which country has the comparative advantage in aircraft production? Which country has the comparative advantage in production of trousers, slacks, and jeans? Why?
b. Can you determine which country has the absolute advantage in aircraft production and which country has the absolute advantage in production of trousers, slacks, and jeans? Why?
