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Chapter 20: Q9. (page 431)

True or False. If a country is open to international trade, the domestic price of a product can differ from the international price of that product.

Short Answer

Expert verified

The given statement is false.

Step by step solution

01

Step 1. Explanation

When a country opens to international trade, it can import and export the product. In such a situation, if the domestic price is more than the international price, the domestic consumer will prefer more goods from the international market. It can boost imports and reduce the demand for domestic production. When the international price is greater than the domestic price, the country exports to earn more revenue. Thus, in the end, the trade leads to price equalization as prices cannot be disparate during international trade and perfect information.

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Most popular questions from this chapter

Suppose that the opportunity-cost ratio for sugar and almonds is 4S ≡ 1A in Hawaii but 1S ≡ 2A in California. Which state has the comparative advantage in producing almonds?

  1. Hawaii

  2. California

  3. Neither

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?

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.

Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata:

Canswicki: 1 can baby formula ≡ 2 cans tuna fish

Tunata: 1 can baby formula ≡ 4 cans tuna fish

In what product should each nation specialize? Which of the following terms of trade would be acceptable to both nations: (a) 1 can baby formula ≡ 2 1/2 cans tuna fish; (b) 1 can baby formula ≡ 1 can tuna fish; (c) 1 can baby formula ≡ 5 cans tuna fish?
  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.
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