Interna'onal Trade

Chapter 6
The document on "Increasing Returns to Scale and Monopolis'c Compe''on" in
Interna'onal Trade covers several key topics:

1. **Monopolis'c Compe''on**: It discusses the basics of monopolis'c compe''on,

including the assump'on of differen'ated products, many firms, increasing returns to scale,
and the long-run equilibrium where profits are zero.

2. **Trade Under Monopolis'c Compe''on**: It examines the impact of trade on

monopolis'c compe''on, highligh'ng how the opening of trade makes demand curves
more elas'c, leading to lower prices and firm exits from the market.

3. **Gains from Trade and Adjustment Costs**: The document explores the gains from trade,
such as lower prices and increased variety, and the adjustment costs, including short-term
unemployment due to firm exits.

4. **Free-Trade Agreements Within North America**: It provides insights into the gains and
adjustment costs of NAFTA for Canada, Mexico, and the United States, along with a
comparison of NAFTA and the USMCA.

5. **Intra-Industry Trade and the Gravity Equa'on**: This sec'on explains intra-industry
trade, the Gravity Equa'on, and its implica'ons for trade.

6. **Conclusions**: It concludes with the overall benefits of trade under monopolis'c

compe''on, the role of differen'ated goods, and the significance of the Gravity Equa'on.

For your exam prepara'on, focus on understanding these concepts, how they apply to real-
world scenarios, and their implica'ons for interna'onal trade policies and prac'ces. For
mock exams, consider including ques'ons that test these concepts, both in mul'ple-choice
and open-ended formats.

Here's a mock-up exam based on the chapter:

**Mul'ple Choice Ques'ons:**

1. In monopolis'c compe''on, firms produce:
a) Homogeneous products
b) Differen'ated products
c) Iden'cal services
d) None of the above

2. Trade under monopolis'c compe''on generally leads to:

a) Higher prices and more firms
b) Lower prices and firm exits
c) Increased profits for exis'ng firms
d) No impact on market structure
3. The primary benefit of free-trade agreements like NAFTA is:
a) Increasing governmental control
b) Reducing trade barriers
c) Limi'ng compe''on
d) Promo'ng monopolies

4. The Gravity Equa'on in trade explains:

a) The force of a_rac'on between two masses
b) The rela'onship between distance and trade volume
c) The impact of tariffs on trade flows
d) The economic growth due to trade

1.Explain the concept of 'increasing returns to scale' in the context of monopolis'c

compe''on and its impact on interna'onal trade.

Increasing Returns to Scale in Monopolis'c Compe''on**: This concept refers to a situa'on

where a firm's produc'on costs per unit decrease as it produces more. In interna'onal trade,
this leads to firms specializing in different products, increasing variety for consumers and
fostering trade between countries due to different product offerings.

2.Discuss the adjustment costs associated with free-trade agreements, using NAFTA as an
example.

Adjustment Costs of Free-Trade Agreements (NAFTA Example)**: Adjustment costs include

short-term challenges like job losses in industries that face s'ff foreign compe''on. In
NAFTA's case, while it increased overall trade and economic growth among member
countries, some sectors, par'cularly manufacturing in the U.S., experienced job losses due to
compe''on from Mexican industries.

3.Describe how the Gravity Equa'on can be used to predict trade flows between countries.

Gravity Equa'on in Trade**: The Gravity Equa'on suggests that trade volume between two
countries is propor'onal to their economic sizes (measured by GDP) and inversely
propor'onal to the geographic distance between them. This equa'on helps predict trade
pa_erns, indica'ng that countries with larger economies and closer proximity trade more
with each other.

Chapter 7) Offshoring of Goods and Services

1. **Defini'on and Concepts of Offshoring**: The chapter begins by defining offshoring and
its rela'on to foreign outsourcing. It differen'ates between these concepts and their
implica'ons in interna'onal trade.

2. **Model of Offshoring**: It provides a detailed model to understand offshoring,

explaining the value chain of ac'vi'es, the role of skilled and unskilled labor, and the impact
of offshoring on wages and employment in both home and foreign countries.

3. **Changes in Wages and Employment**: The chapter discusses the effects of offshoring
on rela've wages and employment pa_erns, especially in the context of the United States. It
addresses factors like skill-biased technological change and their role in these changes.

4. **Job Polariza'on**: This sec'on covers the phenomenon of job polariza'on, where there
is an increase in high- and low-wage jobs but a decrease in middle-wage jobs, explaining the
reasons behind this trend.

5. **Gains from Offshoring**: The chapter explores the economic gains from offshoring,
discussing how it affects produc'on costs and prices, and its overall impact on different
groups like skilled labor, unskilled labor, and consumers.

6. **Future of Offshoring**: The chapter concludes with insights into the future trends in
offshoring, including the impact on service sectors and the concept of onshoring.

1. Offshoring is best defined as:

a) Impor'ng goods from foreign countries
b) Moving domes'c produc'on to foreign countries
c) Selling goods to foreign markets
d) Foreign direct investment

2. The main impact of offshoring on the labor market is:

a) Increase in all types of jobs
b) Decrease in unskilled labor jobs
c) Polariza'on of jobs
d) Uniform wage increase

3. What is a primary driver of job polariza'on due to offshoring?

a) Increased automa'on
b) Decreased global trade
c) Rise in skilled labor
d) Decrease in service sector jobs

4. The primary benefit of offshoring is:

a) Increased domes'c employment
b) Reduced produc'on costs
c) Greater control over foreign markets
d) Enhanced product quality
1.Discuss the effects of offshoring on wages and employment in the context of skilled and
unskilled labor.

Effects of Offshoring on Wages and Employment**: Offshoring generally leads to lower

wages and reduced employment for unskilled labor in developed countries, as these jobs are
more likely to be offshored. Conversely, skilled workers may experience wage increases due
to higher demand and reduced compe''on domes'cally.

2.Explain the phenomenon of job polariza'on and its connec'on to offshoring.

Job Polariza'on and Offshoring**: Job polariza'on refers to the growth in high-skill and low-
skill jobs but a decline in middle-skill jobs. Offshoring contributes to this by reloca'ng
middle-skill jobs (like manufacturing) to countries with lower labor costs, while increasing
high-skill jobs domes'cally.

3.Describe the future trends in offshoring and their poten'al impact on the service sector.

Future Trends in Offshoring and Impact on Service Sector**: The trend is moving towards
offshoring more service sector jobs, especially those that can be digi'zed. This could lead to
global shifs in job markets, with a poten'al increase in remote and digital work, impac'ng
both developed and developing economies.

Chapter 8) Import Tariffs and Quotas Under Perfect Compe''on

1. **The Use and Impact of Import Tariffs**: The chapter details the reasons governments
implement tariffs and their effects on domes'c markets, including producer and consumer
impacts.

2. **Small vs. Large Country Dynamics**: It differen'ates between the effects of tariffs in
small and large countries, explaining how these vary based on the country's influence in the
global market.

3. **Poli'cal Economy of Tariffs**: The chapter discusses why tariffs are poli'cally favorable
despite poten'al economic drawbacks, such as the crea'on of deadweight losses.

4. **Comparison of Tariffs and Quotas**: It compares the economic effects of tariffs and
import quotas, highligh'ng how they similarly impact domes'c markets by raising domes'c
prices and affec'ng consumer and producer surplus.

5. **Op'mal Tariff Formula'on**: For large countries, the chapter discusses the concept of
op'mal tariffs and how they are determined based on foreign export supply elas'city.
1. Import tariffs primarily affect a domes'c market by:
a) Lowering the price of imported goods
b) Raising the price of imported goods
c) Decreasing government revenue
d) Reducing the domes'c produc'on

2. In terms of tariffs, a small country is characterized by:

a) Ability to influence world prices
b) Inability to influence world prices
c) Implemen'ng higher tariffs
d) No need for tariffs

3. The poli'cal economy of tariffs suggests that tariffs are favored because they:
a) Always benefit the economy
b) Benefit specific interest groups
c) Reduce deadweight loss
d) Increase consumer surplus

4. Comparing tariffs and quotas, both:

a) Decrease domes'c prices
b) Increase domes'c prices
c) Have no impact on domes'c produc'on
d) Lead to increased government revenue

1.Explain the economic impact of an import tariff on a small country's market.

Economic Impact of an Import Tariff on a Small Country**: In a small country, an import tariff
raises the price of imported goods. This leads to increased prices for consumers and may
benefit domes'c producers by reducing foreign compe''on. However, it does not affect
world market prices due to the country's limited influence.

2. Discuss the concept of an op'mal tariff for a large country and how it is determined.

Op'mal Tariff for a Large Country**: A large country can influence world market prices. An
op'mal tariff is set to maximize the country's welfare by considering the foreign export
supply elas'city. The goal is to find a balance where the tariff increases domes'c welfare
without excessively harming foreign exporters

Chapter 9) Dumping and An'dumping Du'es

1. **Defini'on and Examples of Dumping**: The chapter begins by defining dumping and
providing examples. It emphasizes how firms may charge different prices in their domes'c
market compared to their export markets.

2. **Policy Response to Dumping**: It explains how governments, par'cularly under WTO

rules, respond to dumping by imposing an'dumping du'es when a foreign firm's export
price is below its domes'c market price or produc'on cost.

3. **Case Study - Solar Panels from China**: The chapter includes a detailed case study on
the United States and European du'es on Chinese solar panels, illustra'ng prac'cal
applica'ons of an'dumping policies.

4. **Effec'veness and Consequences of An'dumping Du'es**: The chapter cri'cally

assesses the effec'veness of these du'es and their broader economic impact, including
poten'al welfare losses and effects on consumer prices.

5. **Measuring Dumping Margin**: The process of determining the dumping margin, which
is the difference between the product's price in the exporter's domes'c market and the price
in the impor'ng country.

6. **WTO and An'dumping Measures**: A detailed look at the World Trade Organiza'on's
guidelines and rules regarding an'dumping measures, ensuring they are applied fairly and
consistently.

7. **Debate Over An'dumping Policies**: The chapter discusses the debate over the use of
an'dumping du'es, with some arguing they protect domes'c industries from unfair
compe''on, while others see them as protec'onist tools that harm consumers and trade
rela'ons.

1. Dumping occurs when:

a) A firm sells its product at a lower price in the domes'c market than in foreign markets.
b) A firm sells its product at a higher price in the domes'c market than in foreign markets.
c) A firm sells its product at a lower price in foreign markets than in the domes'c market.
d) A firm's produc'on costs are lower than its selling price.

2. An'dumping du'es are imposed when:

a) A country wants to increase its exports.
b) A foreign firm's export price is below its cost of produc'on or domes'c market price.
c) A domes'c industry is performing poorly.
d) There is a global surplus of a par'cular product.

3. According to WTO rules, an'dumping du'es must:

a) Protect all domes'c industries equally.
b) Be applied only in severe cases of dumping.
c) Be consistent with WTO guidelines and fair prac'ces.
d) Match the dumping margin exactly.
1.Discuss the case study of solar panels from China in the context of dumping and
an'dumping du'es.
Solar Panels Case Study**: This case study illustrates the implementa'on of an'dumping
du'es by the U.S. and Europe on Chinese solar panels. It highlights the complexi'es involved
in determining whether dumping has occurred, considering the impact on interna'onal trade
and domes'c industries.

2. Explain the debate surrounding the use of an'dumping policies in interna'onal trade.

Debate on An'dumping Policies**: The debate centers around the balance between
protec'ng domes'c industries from unfair foreign pricing prac'ces and avoiding
protec'onism that can harm consumers and interna'onal trade rela'ons. Cri'cs argue that
an'dumping measures can be used as a form of hidden protec'onism, leading to higher
prices and limited choices for consumers.

Chapter 11) Interna'onal Agreements on Trade and the Environment

1. **The Need for Interna'onal Agreements**: It explores why interna'onal agreements are
crucial in trade and environmental contexts, highligh'ng the challenges of reaching
consensus among diverse na'ons.

2. **Mul'lateral Trade Agreements**: The chapter discusses the logic and benefits of
mul'lateral trade agreements, explaining how they help reduce trade barriers and apply the
most favored na'on principle.

3. **Regional Trade Agreements**: It contrasts regional trade agreements with mul'lateral

ones, discussing their characteris'cs, types (like free-trade areas and customs unions), and
their impact on trade crea'on and diversion.

4. **The WTO's Role and Challenges**: The chapter also delves into the World Trade
Organiza'on's role in facilita'ng trade agreements and resolving disputes, while also facing
challenges and cri'cisms.

5. **Trade and Environment Conflict**: It discusses the poten'al conflicts between trade
liberaliza'on and environmental protec'on, exploring cases where trade agreements might
conflict with environmental goals.

6. **Sustainable Development**: The chapter delves into the concept of sustainable

development and how interna'onal trade agreements can be designed to support
environmental sustainability.

7. **Case Studies**: It includes specific case studies demonstra'ng the intersec'on of trade
and environmental policies, offering real-world examples of how these issues are addressed
in interna'onal agreements.
Here's a mock-up exam for Chapter 11, "Interna'onal Agreements on Trade and the
Environment":

1. Interna'onal trade agreements are essen'al because they:

a) Focus solely on environmental issues
b) Help in reducing trade barriers
c) Apply only to developed countries
d) Guarantee economic growth

2. One of the main challenges for the WTO in facilita'ng trade agreements is:
a) Limi'ng the number of par'cipa'ng countries
b) Balancing trade liberaliza'on with environmental protec'on
c) Focusing solely on regional trade agreements
d) Increasing trade barriers

3. Sustainable development in the context of interna'onal trade aims to:

a) Priori'ze economic growth over environmental concerns
b) Integrate environmental considera'ons into trade prac'ces
c) Eliminate all trade barriers
d) Focus on short-term economic gains

1. Discuss the conflict between trade liberaliza'on and environmental protec'on.

Trade Liberaliza'on vs Environmental Protec'on**: This conflict arises when efforts to

reduce trade barriers poten'ally clash with the need to protect the environment. For
example, increased trade can lead to environmental degrada'on if not managed properly.
Balancing economic growth with environmental sustainability is a key challenge.

2. Explain how sustainable development can be supported through interna'onal trade

agreements.

Sustainable Development in Trade Agreements**: Sustainable development involves

integra'ng environmental considera'ons into trade agreements. This can be achieved by
including provisions that promote environmentally friendly prac'ces and technologies,
encouraging sustainable use of resources while facilita'ng economic growth.

Based on the documents provided, here are some key graphs that are essen'al for
understanding the content:

1. **Trade Diversion in a Graph (Chapter 11)**: Figure 11-3 illustrates trade diversion with
Mexico and Asia facing the same tariff for sales into the United States. Understanding this
graph is crucial as it explains the concept of trade diversion in the context of tariffs and their
impact on different countries' exports【55†source】.

2. **Gravity Equa'on for the United States and Canada (Chapter 6)**: Figure 6-9 displays the
rela'onship between the dollar value of exports and the gravity term in a log scale for trade
between Canadian provinces and U.S. states. This graph is significant for understanding the
gravity equa'on's applica'on in predic'ng trade volumes based on country size (GDP) and
distance【56†source】【58†source】.

3. **No-Trade Equilibrium for the Home Firm (Chapter 7)**: Figure 7-11 shows the
produc'on possibility fron'er (PPF) for a firm, depic'ng the combina'ons of components
and R&D that can be undertaken with a given amount of labor and capital. This graph is
essen'al for understanding how offshoring affects a firm's produc'on decisions and trade
equilibrium【57†source】.

These graphs are fundamental to grasping key concepts in interna'onal trade and
economics, and it's essen'al to understand them for your exam prepara'on.

Based on the content of your documents, here are addi'onal key graphs that are essen'al
for your understanding:

1. **Tariffs for a Large Country (Chapter 11)**: Figure 11-1 shows the deadweight loss and
terms-of-trade gain for a large country implemen'ng tariffs, a fundamental concept in
understanding the impact of tariffs on large economies【64†source】.

2. **Consumer and Producer Surplus (Chapter 8)**: Figure 8-1 illustrates the basic economic
concept of consumer and producer surplus, essen'al for understanding market impacts of
various trade policies【65†source】.

3. **Foreign Export Supply (Chapter 8)**: Figure 8-6 depicts the supply and demand in a
foreign market in the context of no-trade and trade scenarios, crucial for understanding
interna'onal trade dynamics【66†source】.

4. **Value Chain of a Product (Chapter 7)**: Figure 7-1 explains the value chain in offshoring,
showing the distribu'on of skilled and unskilled labor, an important aspect of interna'onal
trade and labor economics【67†source】.

5. **Fall in the Price of R&D (Chapter 7)**: Figure 7-14 highlights the effects of a fall in the
price of R&D on offshoring and trade, offering insights into trade and technology interac'ons
【68†source】.

6. **Terms of Trade for the United States (Chapter 7)**: Figure 7-15 shows the U.S. terms of
trade over 'me, essen'al for understanding trade benefits and economic trends【69†source
】.

7. **Trade Surplus in Business Services (Chapter 7)**: Figure 7-16 illustrates the trade
surplus in various service sectors, providing a perspec've on the role of services in trade
balances【70†source】.

8. **Monopolis'c Compe''on Equilibrium with Trade (Chapter 6)**: Figures 6-6 and 6-7
show short-run and long-run equilibriums under monopolis'c compe''on with trade, crucial
for understanding market structures in interna'onal economics【71†source】【72†source
】.
9. **Rela've Demand for Skilled Labor Across the Value Chain (Chapter 7)**: Figure 7-2 and
Figure 7-3 present the rela've demand and supply for skilled and unskilled labor, vital for
analyzing labor market dynamics in the context of interna'onal trade【73†source】.

10. **Rela've Employment of Nonproduc'on/Produc'on Workers (Chapter 7)**: Figure 7-6

shows the trends in the employment of nonproduc'on versus produc'on workers in U.S.
manufacturing, illustra'ng changes in labor market composi'on due to trade and offshoring
【74†source】.

Understanding these graphs will provide a comprehensive insight into various concepts
covered in your interna'onal trade course.