Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are shown in the following payoff matrix:   United States' Decision Low Tariffs High Tariffs Mexico's Decision Low Tariffs $28 billion, $28 billion $20 billion, $30 billion High Tariffs $30 billion, $20 billion $25 billion, $25 billion   The dominant strategy for the United States is always to choose    tariffs. The dominant strategy for Mexico is always to choose    tariffs.   True or False: The Nash equilibrium outcome for trade policy is for the United States to have low tariffs and Mexico to have high tariffs. True   False     In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously. True or False: Given the trade strategy decisions in the table, the United States is better off and Mexico is worse off with this new trade policy. True   False     Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), which of the following statements accurately characterize how well the payoffs indicated for the four possible outcomes actually reflect a nation's welfare? Check all that apply. The payoffs in the upper left and lower right corners of the matrix reflect a nation's welfare because they show that trade is beneficial and tariffs are a barrier to trade.   The payoffs in the upper right and lower left corners of the matrix do not reflect a nation's welfare because tariffs hurt overall total surplus, so both countries' welfare should decline regardless of who charges the high and low tariffs.   The payoffs in the upper right and lower left corners of the matrix reflect a nation's welfare because the nation with lower tariffs is better off, since that nation is more open to trade.

Match each trade theory below to its rationale for international trade  Theory of Comparative Advantage         Heckscher-Ohlin Theory Product Life Cycle Theory New Trade Theory   match to:   cost reductions due to large scale production differences in productivity demand and market conditions differences in endowments

Consider two countries, Home and Foreign. In the figure below, the import demand ("IDHome") curve depicts Home's demand for Foreign's flash drives, and the import supply curve ("ISForeign") depicts Foreign's supply of flash drives to Home. Assume Home is a "large" country that levies a tariff against Foreign imports of flash drives, thereby shifting the relevant supply curve from ISForeign to ISForeign +t. For the following questions, please refer to the figure below. P $30 28 26 24 22 20 18 16 15-- 14 12 10 8 6 4 2 0 2 4 ISForeign +t 6 8 10 12 14 16 18 20 22 22 24 26 28 ISForeign IDHome 30 Q With free trade, Home's consumer surplus equals $112.50 and Foreign's producer surplus equals $112.50. With a tariff of $ 12 per flash drive, Home's consumer surplus equals $72, Foreign's producer surplus equals $ 36, Home's tariff revenue equals $72, and Home's deadweight loss equals $45. Of the Home's tariff revenue, $36 comes from Foreign's producers, and the rest comes from Home's consumers.…

Finally, Canada and Australia are both English-speaking countries with not-too dissimilar population sizes. However, Canada’s trade is twice as large as that of Australia’s. to what extent, does comparative advantage help explain this?

The U.S. and Canada both produce aircraft engines and tons of chemicals, which are sold for the same price in both countries.  Suppose that with one unit of labor and one unit of capital, the U.S. can produce either 20 engines or 38 tons of chemicals and Canada can produce either 15 engines or 35 tons of chemicals. Which country has an absolute advantage producing chemicals?

When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Lamponia. Both countries produce lemons and sugar, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of sugar, as indicated by the grey stars marked with the letter A. (? (?) Maldonia Lamponia 64 64 56 56 48 PPF 48 40 40 32 32 24 24 PPF 16 16 16 24 32 40 48 56 64 16 24 32 40 48 56 64 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Maldonia has a comparative advantage in the production of production of while Lamponia has a comparative advantage in the . Suppose that Maldonia and Lamponia specialize in the production of the goods in which each has a comparative advantage.…