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Chapter 20: Q10. (page 431)

Suppose that the current international price of wheat is \(6 per bushel and that the United States is currently exporting 30 million bushels per year. If the United States suddenly became a closed economy with respect to wheat, would the domestic price of wheat in the United States end up higher or lower than \)6?

  1. Higher.

  2. Lower.

  3. It will stay the same.

Short Answer

Expert verified

The correct option is: b) Lower

Step by step solution

01

Step 1. Reason why a country exports goods

When a country opens up its economy, importing or exporting depends on the world price. If the world price is higher than the domestic price of a good, the country will export that good, and if the world price is comparatively lower, the country will import that good.

Thus, if a country exports, the producers get higher prices by trading in the international market.

02

Step 2. Explanation for the answer

When the United States becomes a closed economy, the producers no longer will get higher prices from exporting. Thus, the United States ends up getting a lower price than $6.The surplus will be sold in the domestic market at a lower price.

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Most popular questions from this chapter

The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U.


China Production Alternatives

Product

A

B

C

D

E

F

Apparel (in thousands)

30

24

18

12

6

0

Chemicals (in tons)

0

6

12

18

24

30


U.S. Production Alternatives

Product

R

S

T

U

V

W

Apparel (in thousands)

10

8

6

4

2

0

Chemicals (in tons)

0

4

8

12

16

20

  1. Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce?

  2. What is the total gain in apparel and chemical output that would result from such specialization?

  3. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation?

What central point was Bastiat trying to make in his fictional petition of the candlemakers?

What form does trade adjustment assistance take in the United States? How does such assistance promote political support for free-trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other changes in the economy, say, changes in patterns of government spending?
  1. We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don’t we see full specialization—for instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among the following choices.

  1. High tariffs.

  2. Extensive import quotas.

  3. Increasing opportunity costs.

  4. Increasing returns.

How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? How might import competition lead to quality improvements and cost reductions by U.S. firms?
See all solutions

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