Current Events:
The 50 Question Ch. 20 Multiple Choice Test will be next Wednesday, the 21st.
Tax News
This chapter presents the analysis of absolute and comparative advantage and employs supply and demand analysis to explain the determination of the terms of trade. Arguments regarding free trade and globalization are discussed. The chapter concludes with a section on the dynamics of trade as illustrated by trade in cashmere.
Chapter Outline
How Trade Is Restricted
Effects of Tariffs and Quotas
Tariffs and protectionism, 7:00
Cf. http://www.youtube.com/watch?v=dSQTbd2iJtY&feature=PlayList&p=36F5CC591354C474&playnext_from=PL&playnext=1&index=44
Checkpoint: The Terms of Trade
Arguments Against Free Trade
Traditional Economic Arguments
Infant Industry Argument
Antidumping
Low Foreign Wages
Made in Germany | Slovenia - booming economy, low wages, 5:04
National Defense Argument
Chinese and American Fragile Trade and Economic Ties, 5:53
Globalization Concerns
Globalization and Inequality (www.cgdev.org), 2:10
Nancy Birdsall, President of the Center for Global Development gives a brief overview of the issues and concerns surrounding the growing global Inequality resulting from Globalization.
Milton Friedman - Free to Choose 1990 - 1of 5 The Power of the Market PL 2/5
Trade and Domestic Employment
Trade and the Environment
Trade and Its Effect on Working Conditions in Developing Nations
Checkpoint: Arguments Against Free Trade
The Dynamics of Trade: Cashmere
Ideas for Capturing Your Classroom Audience
Chapter Checkpoints
The Terms of Trade
Question: When the government imposes a quota on a specific imported product,
who benefits and who loses?
The point is to check that students can: understand the costs and benefits of
restraints on trade and compare the effects of tariffs and quotas.
Arguments Against Free Trade
Question: “The biggest gains in export, imports, employment, and wages all
occurred during the 1990s, which was one of our greatest periods of economic
growth. Thus it is clear that trade benefits both consumers and the economy.”
Evaluate this statement.
The point is to check that students can: understand that trade benefits some and
imposes costs to others. This discussion also highlights the importance of context
in evaluating situations and policies (meaning, what gets attention in a recession
may not get attention when the economy is stronger).
Extended Examples in the Chapter
The Dynamics of Trade: Cashmere
Few people know that trade in cashmere has been changed dramatically by
removal of worldwide regulation of the textile industry. The winners appear to be
the Chinese, who have been developing their own cashmere industry to compete
with the previously predominant Scottish producers. As one might expect from the
analysis developed in the chapter, the effect has been competition, a loss of jobs in Scotland as the lower-cost Chinese goods have driven out the low end of what had been almost exclusively a Scottish market. Also, as one might expect, Scottish firms have been driven to increase quality and innovate. The example points out the dynamism of international trade in its effects on workers, producers, and consumers.
For another perspective on this topic, see the article by Evan Osnos titled “That
Low-Priced Cashmere Sweater Has a Hidden Cost” (The Seattle Times, December 8,
2006, available on the Web at: http://seattletimes.nwsource.com/html/nationworld/
2003498352_cashmere282.html).
Included in the article are important points about how the rise of China’s cashmere production has affected the environment, hence the “hidden cost” of the title.
Examples Used in the End-of-Chapter Questions
Question 4 references a study by Scott C. Bradford, Paul L. Grieco, and Gary Clyde
Hufbauer titled “The Payoff to America from Global Integration,” in C. Fred
Bergsten and the Institute for International Economics, The United States and the
World Economy (Washington: Institute for International Economics, 2005), Chapter
2. A follow-up article is available on the Institute’s site at http://www.petersoninstitute.
org/publications/papers/paper.cfm?ResearchID=738.
For Further Analysis
Comparing the Welfare Effects of Tariffs and Quotas
This example, as presented in the student handout at the end of this chapter, can be used as a small group exercise or as an individual exercise. It is designed to complement the text’s material on the effects of tariffs and quotas. It requires students to employ the welfare analysis used in previous chapters (you may want to assign the review from Chapter 13 in conjunction with this assignment. The handout focuses on calculating changes in consumer surplus but it is not difficult to extend it to calculations of producer surplus and deadweight losses if you wish.
Web-Based Exercise
The following assignment sends students to the Web site of the World Trade
Organization to learn more about it, particularly its functions. You can choose
whether or not to include the third part of the assignment depending on how extensive you would like the assignment to be.
Learn more about the World Trade Organization (WTO). Visit its Web site (at
http://www.wto.org) and answer the following:
1) What is the WTO?
2) Who belongs to the WTO and when was it started?
3) Choose a dispute in which the WTO was involved. Explain the issue, the
steps involved, and whether or not the issue was resolved.
Tips from a Colleague
Students tend to want simple statements like “free trade is a good thing,” and
sometimes are frustrated with having to weigh the costs and benefits. They also
may not appreciate that the degree of “protectionism” in the United States waxes
and wanes with changing circumstances, particularly having to do with jobs. You
may wish to have students investigate the positions on trade of different members
of Congress by way of making comparisons depending on the interests of the
states they represent.
References
Milton Friedman - Free to Choose 1990 - 1of 5 The Power of the Market PL 2/5
Tales Of The Wizard Of Oz: Free Trade [1961], 4:28
Email HW to gmsmith@shanahan.org
1. Be sure to review Chapters 20-24 (we will have Tests on this material as well, TBA). Some students have asked to be tested as close as possible after covering the material.
2. Ch. 25
The Terms of Trade
Question: When the government imposes a quota on a specific imported product,
who benefits and who loses?
The point is to check that students can: understand the costs and benefits of
restraints on trade and compare the effects of tariffs and quotas.
3. Arguments Against Free Trade
Question: “The biggest gains in export, imports, employment, and wages all
occurred during the 1990s, which was one of our greatest periods of economic
growth. Thus it is clear that trade benefits both consumers and the economy.”
Evaluate this statement.
The point is to check that students can: understand that trade benefits some and
imposes costs to others. This discussion also highlights the importance of context
in evaluating situations and policies (meaning, what gets attention in a recession
may not get attention when the economy is stronger).
4. As review for HW, typical questions that you may encounter on the actual AP Economics Macro Test are included daily:
Review Questions (Princeton):
a) the behavior of households
b) the pricing decisions of a firm
c) the purchasing decisions of a consumer
d) inflation
e) price discrimination
3. In a given period, the average price level in the country of Sherwood tripled, and Robin's income increased from $30,000 to $60,000. What happened to Robin's nominal and real income?
(There should be two straight columns here which is difficult to make straight in HTML):
Nominal Income Real Income
a) Increased Decreased
b) Increased Increased
c) Decreased Decreased
d) Increased Stayed the course
e) Decreased Increased
4. The upward sloping section of the aggregate supply curve can be explained by
a) excess capacity that allows output to increase without upward pressure on prices
b) the physical limit on output that prevents additional output from being produced
c) wages and other input prices that adjust more slowly than output prices
d) accurate information within firms about how their prices compare to the overall price level
e) a rational desire to produce more at higher price levels because the prices received for items sold will in turn allow the sellers to purchase more output from others
