7

C h a p t e r
GLOBAL MARKETS
IN ACTION

Answers to the Review Quizzes

Page 194
1. Describe the situation in the market for a good or service that the United States imports.
The goods and services the United States will import are those in which the United States has
a higher opportunity cost of production relative to other countries. In those markets the U.S.
no-trade price is higher than the world price. With trade the quantity produced in the United
States is less than the quantity consumed and the difference is imported.
2. Describe the situation in the market for a good or service that the United States exports.
The goods and services the United States will export are those in which the United States has
a lower opportunity cost of production relative to other countries. In those markets the U.S.
no-trade price is lower than the world price. With trade the quantity produced in the United
States exceeds the quantity consumed and the excess is exported.

Page 196
1. How is the gain from imports distributed between consumers and domestic producers?
Consumers gain consumer surplus from imports and domestic producers lose producer surplus
from imports.
2. How is the gain from exports distributed between consumers and domestic producers?
Consumers lose consumer surplus from exports and domestic producers gain producer surplus
from exports.
3. Why is the net gain from international trade positive?
The net gain from international trade is positive because the gain to the winners exceeds the
losses to the losers. For instance, in the case of an imported good, all the loss of producer
surplus is transferred to consumers as consumer surplus. In addition, however, consumers also
gain additional consumer surplus from the units imported. The total gain of consumer surplus
exceeds the loss of producer surplus so that the net surplus increases. The situation is similar
for exports: The total gain of producer surplus exceeds the loss of consumer surplus.

Page 203
1. What are the tools that a country can use to restrict international trade?
A country can use tariffs, import quotas, other import barriers such as health, safety, and
regulation barriers, and voluntary export restraints to restrict international trade. Export
subsidies given by a nation decrease other countries’ exports and thereby restrict their
international trade.

© 2019 Pearson Education Ltd.

112
2. Explain the effects of a tariff on domestic production, the quantity bought, and the price.
A tariff raises the domestic price of the product. The higher price increases domestic
production and decreases the domestic quantity purchased.
3. Explain who gains and who loses from a tariff and why the losses exceed the gains.
Domestic consumers lose consumer surplus from the tariff. Domestic producers gain producer
surplus from the tariff. The government also gains revenue from the tariff. But the gain in
producer surplus plus the gain in government revenue is less than the loss of consumer
surplus, so on net a tariff creates a deadweight loss.
4. Explain the effects of an import quota on domestic production, consumption, and price.
An import quota raises the domestic price of the product. The higher price increases domestic
production and decreases domestic purchases.
5. Explain who gains and who loses from an import quota and why the losses exceed the
gains.
Domestic consumers lose consumer surplus from the import quota. Domestic producers gain
producer surplus from the import quota. The importers also gain additional profit from the
import quota. But the gain in producer surplus plus the importers’ profits is less than the loss
of consumer surplus, so on net an import quota creates a deadweight loss.

Page 207
1. What are the infant industry and dumping arguments for protection? Are they correct?
The attempt to stimulate the growth of new industries is the infant-industry argument for
protection, which states that it is necessary to protect a new industry from import competition
to facilitate the growth of that industry, making it competitive in the world markets. This
argument is based on the idea that as firms mature they become more productive. However
this argument for protection only works if the benefits also spill over into other industries and
other parts of the economy. This is rarely the case, as the entrepreneurs of infant industries
and their financial supporters take this risk into account and all returns usually accrue only to
them, not to other industries. And it is more efficient to subsidize the infant industry needing
protection than it is to protect it by restricting trade.
The dumping argument for protection states that a foreign firm is selling its exports at a lower
price than its cost of production. Foreign firms trying to monopolize the international market
may use this practice. Once the competition is gone, the foreign firm will raise prices and reap
profits. This argument fails for several reasons. First, it is virtually impossible to detect the
occurrence of dumping since it is impossible to verify a firm’s production costs. The test most
commonly used is if the firm’s price when it exports is lower than its domestic price. This test
only examines the supply side of the two markets and ignores the demand side. If the
domestic market is inelastic and the export market is elastic (which is almost always the case)
then it is natural for a firm to price the domestic goods higher than the exports. Second, it is
difficult to see how a global firm could have a monopoly for the goods or services it exports.
There are too many foreign suppliers (and potential suppliers), making global competition too
extensive for a monopoly to exist in the global market. And, even if there is global monopoly
it is more efficient to regulate it than to impose trade restrictions on its products.
2. Can protection save jobs and the environment and prevent workers in developing countries
from being exploited?
There are many myths about trade restrictions. The problem mentions three of them, all false
reasons often offered as reasons to restrict international trade. These arguments are:
 Trade restrictions save domestic jobs: Free international trade does, indeed, cost jobs in
the import-competing markets. But this argument ignores the fact that, under free trade,

112
 GOVERNMENT ACTIONS IN MARKETS 113
consumers in the exporting country will have greater disposable income. These
consumers will use part of their higher income to buy goods and services from other
countries, thereby increasing employment in the exporting sector of the nation. So,
although international trade rearranges jobs—decreasing them in import-competing
markets and increasing them in exporting markets—it does not, on net, cost jobs.
 Trade restrictions penalize lax environmental standards: Not all developing countries
have lax environmental standards. Also, a clean environment is a normal good. Countries
that are relatively poor and have lax pollution standards do not care as much about the
environment because imposing clean air, water, and land standards have a high
opportunity cost because they will slow economic development. The best way to
encourage environmental quality is not to restrict economic development but to
encourage rapid economic growth, which will more quickly increase citizen demand for a
cleaner environment in those developing countries.
 Trade restrictions prevent rich countries from exploiting poorer countries: Importing
goods made in countries with low wage levels increases the demand for labor in those
countries, increasing the number of jobs available and raising wages over time. The more
free trade that occurs with these countries, the more quickly the wages will rise and the
working conditions will increase in quality and safety.
3. What is offshore outsourcing? Who benefits from it and who loses?
Offshore outsourcing occurs when a firm in the United States buys finished goods,
components, or services from firms in other countries. Workers who have skills for jobs that
have been sent abroad lose from offshore outsourcing. Consumers who consume the goods
and services produced abroad and imported into the United States benefit.
4. What are the main reasons for imposing a tariff?
There are two main reasons for imposing tariffs on imports. First the government receives
tariff revenues from imports, which can be useful when revenues from income taxes and sales
taxes are less effective ways of gaining government revenue. Second rent seeking by
individuals in industries that would be hurt by foreign competition can influence the
government to impose tariffs.
5. Why don’t the winners from free trade win the political argument?
Trade restrictions are enacted despite the inherent inefficiency because of the political actions
of rent seeking groups, which fear that foreign competition might have a negative impact on
their industry, firm, or jobs. The anti-trade groups are easily organized and have much to gain
from trade restrictions, whereas the vast millions of consumers, who would win from free
trade, are difficult to organize because each individual has only a small amount of loss when
trade restrictions are imposed. Hence the winners from trade restrictions frequently out-lobby
the winners from free trade.

© 2019 Pearson Education Ltd.

Answers to the Study Plan Problems and Applications
Use the following data to work Problems 1 to 3.
Price Quantity Quantity
Wholesalers buy and sell roses in containers that
(dollars per demanded supplied
hold 120 stems. The table provides information
container) (millions of containers per year)
about the wholesale market for roses in the
United States. The demand schedule is the 100 15 0
wholesalers’ demand and the supply schedule is 125 12 2
the U.S. rose growers’ supply. Wholesalers can 150 9 4
buy roses at auction in Aalsmeer, Holland, for 175 6 6
$125 per container. 200 3 8
1. a. Without international trade, what would 225 0 10
be the price of a container of roses and how many containers of roses a year would be bought
and sold in the United States?
Without international trade, in the United States the price of a container of roses is $175 and 6
million containers of roses are bought and sold.
b. At the price in your answer to part (a), does the United States or the rest of the world have a
comparative advantage in producing roses?
The price of roses in the United States exceeds the price in the rest of the world, so the rest of the
world has a comparative advantage in producing roses.
2. If U.S. wholesalers buy roses at the lowest possible price, how many do they buy from U.S.
growers and how many do they import?
The price of roses in the United States is $125 per container. At this price, U.S. rose growers
supply 2 million containers per year and U.S. wholesalers demand 12 million containers of roses.
U.S. wholesalers buy the 2 million containers from U.S. growers and purchase 10 million
containers from foreign sources, which are imported into the United States.
3. Draw a graph to illustrate the U.S. wholesale market for roses. Show the equilibrium in that
market with no international trade and the
equilibrium with free trade. Mark the quantity of
roses produced in the United States, the quantity
imported, and the total quantity bought.
In Figure 7.1, the equilibrium without
international trade is determined at the
intersection of the demand curve and the supply
curve. Without international trade the equilibrium
price is $175 per container and 6 million
containers per year are bought and produced.
With international trade the world price is $125
per container, as shown in Figure 7.1. The
quantity produced in the United States is 2
million containers and the quantity bought in the
United States is 12 million containers. Imports
into the United States account for the difference
between the quantity bought and the quantity
produced, 10 million containers.
114 CHAPTER 7

4. Use the data on the U.S. wholesale market for roses in Problem 1 to
a. Explain who gains and who loses from free international trade in roses compared to a
situation in which Americans buy only roses grown in the United States.
U.S. rose wholesalers, who are the consumers in the problem, gain from free international trade.
U.S. rose growers lose from free international trade.
b. Draw a graph to illustrate the gains and losses from free trade.
Figure 7.2 illustrates the market with free
trade. Consumer surplus before international
trade is equal to area A; after international
trade consumer surplus is equal to area A +
area B + area C. Producer surplus before
international trade is equal to area B + area D;
after international trade producer surplus is
equal to area D.
c. Calculate the gain from international trade.
The gain from international trade is area C in
Figure 7.2. It is equal to ½  ($175  $125) 
(10 million containers) which is $250 million.

Use the information on the U.S. wholesale market for

roses in Problem 1 to work this problem 5 to 10.
5. If the United States puts a tariff of $25 per
container on imports of roses, explain how the
U.S. price of roses, the quantity of roses bought, the quantity produced in the United States,
and the quantity imported changed.
The U.S. price of roses rises from $125 per container (the price with free trade) to $150 per
container. The quantity of roses produced in the United States increases from 2 million containers
(the quantity produced with free trade) to 4 million containers. The quantity of roses consumed in
the United States decreases from 12 million containers (the quantity consumed with free trade) to
9 million containers. The quantity imported decreases from 10 million containers to 5 million
containers.
6. Who gains and who loses from this tariff?
U.S. rose consumers lose from the tariff. U.S. rose producers gain from the tariff. The U.S.
government gains revenue from the tariff.

© 2019 Pearson Education Ltd.

7. Draw a graph of the U.S. market for roses to illustrate the gains and losses from the tariff and
on the graph identify the gains and losses, the tariff revenue, and the deadweight loss created.
Figure 7.3 shows the effect of the tariff. The
amount of the tariff per container is equal to the
height of the light gray arrow. Before the tariff
U.S. consumer surplus was equal to area A + area
B + area C + area E + area F. After the tariff U.S.
consumer surplus is equal to area A. U.S.
consumers lose consumer surplus equal to area B
+ area C + area E + area F. Before the tariff U.S.
producer surplus was equal to area G. After the
tariff U.S. producer surplus is equal to area G +
area B. U.S. producers gain producer surplus
equal to area B. After the tariff the U.S.
government gains tariff revenue equal to area E.
The deadweight loss from the tariff is equal to
area C + area F.
8. If the United States puts an import quota on roses
of 5 million containers, what happens to the U.S.
price of roses, the quantity of roses bought, the
quantity produced in the United States, and the
quantity imported?
The U.S. price of roses rises to $150 per container. 9 million containers of roses are purchased in
the United States and 4 million containers of roses are produced in the United States. The
difference, 5 million containers, is imported into the United States.
9. Who gains and who loses from this quota?
U.S. rose growers and importers of roses gain from the quota. U.S. rose wholesalers lose from the
quota.
116 CHAPTER 7

10. Draw a graph to illustrate the gains and losses from the import quota and on the graph identify
the gains and losses, the importers’ profit, and the deadweight loss.
Figure 7.4 shows the effect of the import quota.
The amount of the quota is equal to the length of
the gray arrow. Before the quota U.S. consumer
surplus was equal to area A + area B + area C +
area E + area F. After the quota U.S. consumer
surplus is equal to area A. U.S. consumers lose
consumer surplus equal to area B + area C + area
E + area F. Before the quota U.S. producer
surplus was equal to area G. After the quota U.S.
producer surplus is equal to area G + area B. U.S.
producers gain producer surplus equal to area B.
After the quota the importers of the rose
containers earn profit equal to area E. The
deadweight loss from the import quota is equal to
area C + area F.
11. Economic isolation of Qatar
As a result of a diplomatic dispute, Saudi Arabia
and its allies decided to isolate Qatar by cutting
off all trade ties with it. Among other goods,
food imports, which Qatar largely depends on, were affected with the closing of the Saudi
Arabian land border. Following this boycott, Qatar filed a formal complaint with the World
Trade Organization (WTO), citing national security for this boycott would be an acceptable,
yet an almost unprecedented and taboo justification.
Source: Reuters, June 6, 2017, and Aljazeera, August 1, 2017
a. What does the news clip imply about the comparative advantage of Qatar in producing food?
Because Qatar imports various kinds of food from different countries, transported through Saudi
Arabia’s land border, the news clip suggests that Qatar doesn’t have a comparative advantage in
producing food.
b. Do you think the WTO will rule in favor of Qatar? If so, explain why.
The objective of this embargo is political pressuring which is not a valid argument for boycotting
relations and can be considered as an unfair trade practice by the WTO. If trade causes threats to
the environment or to human rights, there would be valid grounds against free trade. Even if citing
national security threat is an accepted exemption under WTO rules, there would be an
investigation about its validity. But otherwise, this justification would be used by many countries
as an argument against free trade.

© 2019 Pearson Education Ltd.

Answers to Additional Problems and Applications
12. Suppose that the world price of rice is 40 cents a kilogram, China does not trade
internationally, and the equilibrium price of rice in China is 60 cents a kilogram. China then
begins to trade internationally.
a. How does the price of rice in China change?
The price of rice in China falls.
b. Do Chinese consumers buy more or less rice?
As a result of the lower price, Chinese consumers buy more rice.
c. Do Chinese rice growers produce more or less rice?
As a result of the lower price, Chinese growers produce less rice.
d. Does China export or import rice and why?
China imports rice. The quantity of rice demanded increases while quantity supplied decreases.
The difference is made up by imports.
13. Suppose that the world price of steel is $100 a ton, India does not trade internationally, and the
equilibrium price of steel in India is $60 a ton. India then begins to trade internationally.
a. How does the price of steel in India change?
The price of steel in India rises to equal the world price.
b. How does the quantity of steel produced in India change?
Producers respond to the higher price by increasing the quantity of steel produced.
c. How does the quantity of steel bought by India change?
Steel users in India respond to the higher price by decreasing the quantity of steel bought.
d. Does India export or import steel and why?
Because the price of steel in India is lower than the world, India has a comparative advantage in
the production of steel. India will export steel.
14. Most of the world supply of
buttons currently comes from Price Quantity Quantity
China. Assume that producers (centavos per demanded supplied
of buttons can get 10 centavos unit) (millions of units per year)
per button on the world market. 7 20 0
Brazil wants to enter this world 9 16 6
market. The table provides 11 12 12
information about the market 13 8 18
for buttons in Brazil. 14 4 24
a. With no international trade, 15 0 30
what would be the price of a button and how many buttons a year would be bought and sold
in Brazil?
With no international trade the price of a button in Brazil is 11 centavos per unit. 12 million units
are bought and sold in Brazil.
b. Does Brazil have a comparative advantage in producing buttons?
Brazil doesn’t have a comparative advantage in producing buttons because the price of buttons in
Brazil is higher than the price in the world market.
118 CHAPTER 7

15. Biofuel Goals Could Require All the World’s Crops

Biofuels to combat global warming and cut carbon emissions are diverting corn from food to
fuel, and a World Resources Institute report says meeting a 20 percent bioenergy target in
2050 would need the world’s annual harvest of plant material to double.
Source: CBS News, January 29, 2015
a. What is the effect on the world price of corn of the increased use of corn to produce biofuel?
The use of corn to produce biofuels increased the demand for corn, thereby raising the price of
corn.
b. How does the change in the world price of corn affect the quantity of corn produced in a poor
developing country with a comparative advantage in producing corn, the quantity it
consumes, and the quantity that it either exports or imports?
The higher world price of corn decreases the consumption of corn and increases the production of
corn in poor developing countries. Because the country has a comparative advantage it will export
corn. The higher price leads the country to increase its exports.
16. Draw a graph of the market for corn in the poor developing country in Problem 15(b) to show
the changes in consumer surplus, producer surplus, and deadweight loss.
Figure 7.5 shows the situation in the poor
country that exports corn. With the initial lower
price, the country produces 60 million bushels,
exports 20 million bushels, and consumes 40
million bushels. The consumer surplus is equal
to area A + area B and the producer surplus is
equal to area E. After the world price of corn
rises to $8 per bushel, the country produces 80
million bushels of corn, exports 60 million
bushels, and consumes 20 million bushels.
Consumer surplus decreases to area A and
producer surplus increases to area B + area C +
area E. There is no deadweight loss; in fact, the
country gains additional surplus equal to area
C.
Use the following news clip to work Problems 17 and
18.
Poultry trade ban between Kenya, Uganda
partially lifted
In January 2017, Kenya banned imports of poultry from Uganda following the avian flu outbreak. In
August, the ban was partially lifted in the hopes to be completely lifted after health risks disappear.
The Kenyan Cabinet Secretary for Agriculture, Livestock, and Fisheries, Willy Bett, stated that
“When there is a ban on trade of poultry you can imagine the impact it creates in business that’s why
this matter is taken seriously so as to see there is continuity in trade.”
Source: Capital Business, August 23, 2017

© 2019 Pearson Education Ltd.

17. a. Explain how the Kenyan import ban on
poultry affected the producers and consumers
in Uganda and Kenya.
The Kenyan import ban raised the price of
poultry in Kenya and lowered the price in
Uganda to the no-trade price. The higher price
led to increased production in Kenya, which
made Kenyan producers better off. On the
other hand, the lower price led to decreased
production in Uganda, which made Ugandan
producers worse off.
The higher price also led to decreased
consumption in Kenya, which made Kenyan
consumers worse off.
b. Draw a graph of the market for poultry in
Kenya to illustrate your answer to part (a).
Identify the changes in consumer surplus and
producer surplus in Kenya.
Figure 7.6 shows the effect of
Kenyan import ban. Prior to the
ban, the price of poultry in Kenya
was 2 Kenyan shilling (KSh) per
ton, for which the quantity
consumed was 18 million tons of
poultry per year, and the quantity
produced was 3 million tons of
poultry per year. The difference,
15 million tons of poultry per
year, was imported from Uganda.
Consumer surplus in Kenya was
equal to area A+ area B+ area C and producer surplus in Kenya was
equal to area E. With the import ban, the price of poultry in Kenya
rises to KSh4 per ton. At this price, 9 million tons of poultry per
year are consumed and produced in Kenya. There are no imports.
Consumer surplus in Kenya shrinks to only area A and producer
surplus grows to equal area B+ area E.
18. a. Explain how lifting of the Kenyan import ban on poultry will affect consumers in both the
countries and producers in Uganda. Why do you think Bett wants continuity in trade?
The partial and the complete lifting of the ban will result in a lower price of poultry in Kenya and
the consumption in Kenya increases so Kenyan consumers are better off. In Uganda, the price of
poultry increases. As a result of the rise in price, Ugandan production increases and consumption
decreases so producers are better off and consumers are worse off. The total net gains of free trade
overcompensate total net gains of the ban in both countries. Bett was in favor for continuity in
trade because trade has a positive net effect in both trading countries.
b. Draw a graph and identify the changes in Ugandan consumer surplus and producer surplus, if
there’s a total ban lift of imports of poultry from Uganda.
Figure 7.7 shows the situation in the Ugandan market for poultry. With the Kenyan ban on poultry
imports from Uganda, the price in Uganda is $1.25 per ton of poultry, which is the no-trade price.
120 CHAPTER 7

At this price, consumer surplus in Uganda is equal to area A+ area B and producer surplus is equal
to area E.
With trade, the price of poultry rises to $2 per ton. Uganda produces 20 million tons of poultry,
consumes 5 million tons of poultry, and exports the difference which is 15 million tons of poultry
per year.
Ugandan consumer surplus decreases from area A+ area B to area A. Ugandan producer surplus
rises from area E to area B+ area C+ area E.
Use the following information to work Problems 19 to 21.
Before 2015, trade between China and South Korea was subject to tariffs. In 2015, China and South
Korea signed a free trade agreement that aims to remove most barriers to trade between the countries.
19. Explain how the price that Chinese consumers pay for goods from South Korea and the
quantity of China imports from South Korea have changed. Who are the winners and who are
the losers from this free trade?
With the free trade agreement, the prices that Chinese consumers pay for goods from South Korea
will decrease and, as a result, the quantity of imports from South Korea will increase. Winners
from this free trade agreement are South Korean producers of goods exported to China and
Chinese consumers of these goods. Losers are South Korean consumers of the goods and Chinese
producers of the goods.
20. Explain how the quantity of Chinese exports to South Korea and the Chinese government’s
tariff revenue from trade with South Korea have changed.
The prices of Chinese goods in South Korea will fall and, as a result, the quantity of Chinese
goods exported to South Korea will increase. The Chinese government’s tariff revenue from tariffs
imposed on trade with South Korea will decrease.
21. Suppose that in 2016 automobile producers in China lobby the Chinese government to impose
an import quota on South Korean cars. Explain who in China would gain and who would lose
from such a quota.
Chinese automobile producers will gain from such a quota. The importers who hold the quota
rights will also gain. Chinese consumers of cars will lose from such a quota.
Use the following information to work Problems 22 and 23.
Suppose that Jordan decides to remove the 75 percent tariff that was imposed on its imports of
potatoes from Lebanon.
22. Explain how the removal of the tariff on potato imports will change the price that Jordanian
buyers pay for potatoes, the quantity of potatoes produced in Jordan, and the quantity of
potatoes imported.
The tariff removal lowers the Jordanian price of potatoes. As a result, the quantity of potatoes
consumed in Jordan increases and the quantity produced decreases. Imports of potatoes into Jordan
increase because the amount of the shortage of potato increased.
23. How would the Jordanian and Lebanese gains from trade change after the removal of the tariff.
Who in Jordan will lose and who will gain?
The increase in trade means that Jordanian and Lebanese gains from trade increase. In Jordan,
producers lose from the removal of the tariff because the tariff removal lowered the price in
Jordan, so producer surplus decreased. The Jordanian government also loses revenue from the
tariff removal. Potato consumers, on the other hand, gain as the tariff removal lowered the price of
potatoes in Jordan which leads to an increase in the consumer surplus.

© 2019 Pearson Education Ltd.

Use the following information to work Problems 24 and 25.
With free trade between Australia and the United States, Australia would export beef to the United
States. But the United States imposes an import quota on Australian beef.
24. Explain how this quota influences the price that U.S. consumers pay for beef, the quantity of
beef produced in the United States, and the U.S. and the Australian gains from trade.
The quota raises the price of beef in the United States. By raising the U.S. price, the quota
increases the quantity of beef produced in the United States and decreases the quantity of beef
consumed in the United States. The U.S. and Australian gains from trade decrease.
25. Explain who in the United States gains from the quota on beef imports and who loses.
U.S. beef producers gain from the quota. The people who hold the import quota rights also gain.
U.S. beef consumers lose from the quota.

26. The Cost of Bringing Home American Jobs

Donald Trump says he’ll bring home jobs lost to China and Mexico. It is possible but costly.
American consumers would face higher prices and those on low incomes would suffer most
because they spend a high share of their income on clothes, shoes, and toys—things that are
made at low cost and imported.
Source: CNNMoney, April 14, 2016
a. What are the arguments for bringing jobs back to America? Explain why these arguments are
faulty.
The primary argument advanced for being jobs back to America is that it will increase
employment in America and the benefits to the U.S. workers who gain these jobs outweigh the
costs of restricting trade. The fact this argument is off base is demonstrated by comparing the cost
of saving a job to the wage paid on the job. The cost of restricting trade falls on American
consumers, especially low-income Americans, who would face higher prices for imported products
such as clothes, shoes, and toys. The cost inflicted on U.S. consumers from higher prices
outweighs the benefit of a job to the worker, that is, the wage rate paid on the job.
b. Is there any merit in bringing jobs back?
There is merit to the workers whose jobs are brought back and/or and who might not receive any
government assistance if their jobs are not brought back. There also is merit to the politicians who
can obtain a reward from lobbyists for the protection. There is no merit, however, to society as a
whole.

Economics in the News

27. After you have studied Economics in the News on pp. 208–209, answer the following
questions.
a. What was the value of U.S. imports from Mexico in 2015 and why would the value of
imports fall if a 20 percent tariff were imposed on them?
U.S. imports from Mexico were $303 billion in 2015. A 20 percent tariff would raise the price of
imports, thereby decreasing the quantity of goods and services imported.
b. How do the elasticities of demand and supply influence the revenue that a tariff generates?
The elasticities of demand and supply affect the revenue a tariff will raise because they determine
the quantity that will be imported after the tariff is imposed. Imposing a tariff on Mexican imports
raises their price in the United States. If the U.S. demand and U.S. supply for these imports are
very inelastic, then the quantity demanded will decrease only slightly while the quantity supplied
will increase only a little. Both effects lead to a small decrease in imports and, accordingly, a large
amount of tariff-generated revenue.
122 CHAPTER 7

c. Who in the United States would benefit and who would lose from a 20 percent tariff on
imports from Mexico?
U.S. producers of import-competing
products would benefit from a tariff. So,
too, would the U.S. government because it
would gain revenue. U.S. consumers would
lose. Overall the United States loses
because the tariff creates a deadweight
loss.
d. Illustrate your answer to part (c) with an
appropriate graphical analysis.
Figure 7.8 shows the effect of the tariff.
Before the tariff, the price is $50 per unit,
indicated by the line labeled PW. The
United States produces 1.67 million units
and consumes 7 million units, so the
United States imports 5.33 million units
from Mexico. U.S. consumer surplus is
equal to area A + area B + area C + area E
+ area F + area G. U.S. producer surplus is
equal to area H. The 20 percent tariff raises
the price in the United States to $60 per
unit, shown by the line labeled PW + tariff. At this price the United States produces 2.33 million
units and consumes 5 million units, thereby importing 2.67 million units. U.S. consumer surplus
falls to area A + area C while U.S. producer surplus increases to area B + area H. The U.S.
government receives tariff revenue equal to area E. There is a deadweight loss created equal to
area F + area G.
28. Argentina’s Lesson for Trump: Tariffs Made Poverty Worse
In 2011, Argentina wanted to protect manufacturing workers, so it imposed a 35 percent tariff
on imported smartphones, computers, and tablets. Blackberry moved jobs to Argentina, but
Apple and others passed. Compare Argentine and U.S. prices: iPhone 7 Plus $1,400 versus
$869; iPad Pro $1,300 versus $699. Argentina is now removing this tariff.
Source: CNNMoney, April 7, 2017
a. Explain how Argentina’s tariff on smartphone and tablet imports changes the country’s
production, consumption, and imports of these items. Illustrate your answer with an
appropriate graphical analysis.
The tariff on smartphone and tablet imports
raises their price in Argentina. The higher
price increases Argentinian production and
decreases both Argentinian consumption
and importation. Figure 7.9 illustrates the
situation for an iPad Pro. With no tariff, the
price would be $699, indicated by the line
labeled PW. Argentinian producers would
manufacture 1 million iPads and
Argentinian consumers would purchase 6
million iPads, so 5 million iPads would be
imported. The tariff raises the price to

© 2019 Pearson Education Ltd.

 $1,300, shown by the line labeled PW + tariff. At this price, Argentinian producers manufacture
2.5 million iPads and Argentinian consumers purchase 3 million iPads, so 500,000 iPads are
imported.
b. Show on your graph the changes in consumer surplus and producer surplus that result from
the tariff on smartphones and tablets.
Before there is a tariff, the Argentinian consumer surplus equals area A + area B + area C and
Argentinian producer surplus equals area E. With the tariff, Argentinian consumer surplus equals
area A and Argentinian producer surplus equals area B + area E.
c. Who in Argentina will oppose the tariff cuts?
Opposing the tariff cuts will be those who gain from the tariffs, specifically the producers, who
gain substantial producer surplus, and perhaps some in the government, which gains tariff revenue.