3a. Aquarius is more efficient at producing T-shirts, since a worker s daily

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1 CHAPTER 15 1a. Ada is more efficient at preparing a tax return since she can do it in less time (4 hours) than it takes Paulo (12 hours). Ada is less efficient at painting a kitchen, since she does it in more time (10 hours) than it takes Paulo (2 hours). b. Ada can prepare 2.5 (10/4) tax returns in the 10 hours it takes her to paint one kitchen. Therefore, her opportunity cost of painting a kitchen is the 2.5 tax returns she could have prepared instead, while her opportunity cost of preparing a tax return is the 0.4 kitchens she could have painted instead. Paulo can prepare (2/12) tax returns in the 2 hours it takes him to paint one kitchen. Therefore, his opportunity cost of painting a kitchen is the tax returns he could have prepared instead, while his opportunity cost of preparing a tax return is the 6 kitchens he could have painted instead. c. Based on the law of absolute advantage, each person should specialize in the activity in which they have a lower opportunity cost than does the other person. This means that Ada should specialize in preparing tax returns, since the opportunity cost of this activity is less for her (the 0.4 kitchens she could have painted instead) than for Paulo (6 kitchens). In contrast, Paulo should specialize in painting kitchens, since the opportunity cost of this activity is less for him (the tax returns he could have prepared instead) than for Ada (2.5 tax returns). 2a. Atlantica is more efficient at producing digital cameras, since a worker s daily output of cameras is higher in Atlantica (4) than in Pacifica (2). Meanwhile, Pacifica is more efficient at producing video games, since a worker s daily output of games in Pacifica is higher (10) than in Atlantica (8). b. On the basis of absolute advantage, each country should specialize in the good that they are most efficient at producing. Therefore, Atlantica should make digital cameras and Pacifica should make video games. c. In Atlantica, the opportunity cost of cameras is 2 games, since a worker in Atlantica can produce twice as many games (8) as cameras (4) in a day. Meanwhile, in Pacifica the opportunity cost of cameras is 5 games, since a worker in Pacifica can produce five times as many games (10) as cameras (2) in a day. Therefore, the terms of trade must be somewhere between 1 camera traded for 2 games in Atlantica and 1 camera traded for 5games in Pacifica. d. Before specialization and trade, daily output in Atlantica is 12 million games (= 1.5 million workers x 8 games per worker) and 6 million cameras (= 1.5 million workers x 4 cameras per worker). In Pacifica, daily output is 20 million games (= 2 million workers x 10 games per worker) and 4 million cameras (= 2 million workers x 2 cameras per worker). Therefore, total output in the two countries before specialization and trade is 32 million (= 12 m m.) games and 10 million (6 m. + 4 m.) cameras. After specialization and trade, daily output in Atlantica is 12 million cameras (= 3 million workers x 4 cameras per worker) and daily output in Pacifica is 40 million games (= 4 million workers x 10 games per worker). The result is a gain in the two countries output of both products -- 2 million (= 12 m m.) more cameras and 8 million (= 40 m m.) more games. 3a. Aquarius is more efficient at producing T-shirts, since a worker s daily Chapter

2 output of T-shirts is higher in Aquarius (40) than in Capricorn (30). Aquarius is also more efficient at producing jeans, since a worker s daily output of jeans in Aquarius is higher (4) than in Capricorn (2). b. In Aquarius, the opportunity cost of jeans is 10 T-shirts (and the opportunity cost of T-shirts is 0.10 jeans), since a worker in Aquarius can produce ten times as many T-shirts (40) as jeans (4) in a day. In Capricorn, the opportunity cost of jeans is 15 T-shirts (and the opportunity cost of T- shirts is 0.07 jeans), since a worker in Capricorn can produce fifteen times as many T-shirts (30) as jeans (2) in a day. c. On the basis of comparative advantage, each country should specialize in the good whose opportunity cost is lower than in the other country. This means that Aquarius should specialize in jeans, since this good s opportunity cost is lower in Aquarius (10 T-shirts) than in Capricorn (15 T-shirts). Meanwhile, Capricorn should specialize in T-shirts, since this good s opportunity cost is lower in Capricorn (0.07 jeans) than in Aquarius (0.10 jeans). d. The terms of trade must be somewhere between 1 pair of jeans traded for 10 T-shirts (Aquarius) and 1 pair of jeans traded for 15 T-shirts (Capricorn). e. Before specialization and trade, daily output in Aquarius is 4 million T- shirts (= workers x 40 T-shirts per worker) and jeans (= workers x 4 jeans per worker). In Capricorn, daily output is 4.5 million T-shirts (= workers x 30 T-shirts per worker) and jeans (= workers x 2 jeans per worker). Therefore, total output in the two countries before specialization and trade is 8.5 million (= 4 m m.) T- shirts and (= ) jeans. After specialization and trade, daily output in Aquarius is jeans (= workers x 4 jeans per worker) and daily output in Capricorn is 9 million T-shirts (= workers x 30 T-shirts per worker). The result is a gain in the two countries output of both products (= 9 m m.) more T-shirts and (= ) more jeans. 4a. The terms of trade must be somewhere between 1 digital music player traded for 10 cell phones (Canada) and 1 digital music player traded for 5 cell phones (South Korea). The factors that determine the exact international price of players in terms of phones are the levels of demand for each product internationally. A higher international demand for either product pushes up the product's international price in terms of the other product. b. Because the opportunity cost of digital music players is lower in South Korea (5 cell phones) than in Canada (10 cell phones), South Korea exports digital music players. Meanwhile, the opportunity cost of phones is lower in Canada (0.10 players) than in South Korea (0.20 players). Given that the South Koreans export digital music players, they want the highest possible price of players in terms of phones, which occurs when 1 player has its maximum value of 10 phones. Because Canadians export phones, they want the lowest possible price of players in terms of phones, which occurs when 1 player has its minimum value of 5 phones. Chapter

3 5a. FIGURE 15A-1 The Impact of Import Barriers on a Domestic Market for Watches In the absence of foreign imports, equilibrium in this market occurs at the intersection of the demand curve (D) and domestic supply curve (S d)(point j in the left-hand graph), with a price of $70 and a quantity of 1.6 million. b. Given an unlimited quantity supplied of foreign imports available at a price of $50, as shown by the horizontal line S i0 in the left-hand graph, equilibrium price drops to this level. Quantity demanded rises to 2.0 million and domestic quantity supplied declines to 1.2 million, with foreign imports of making up the difference. This is shown by the distance from point h to point m in the graph. c. With a $10 tariff, an unlimited quantity supplied is now available at a new equilibrium price of $60, as shown by the horizontal line S i1. When compared with the case of freely available imports, quantity demanded falls to 1.8 million and domestic quantity supplied rises to 1.4 million, with foreign imports of making up the difference. This is shown by the distance from point i to point l in the graph. Consumers are harmed by the tariff, since they pay a higher price and purchase fewer watches than previously. In contrast, domestic producers benefit from the higher price and their greater quantity supplied. Foreign producers are harmed. Though they receive the same price as previously, they sell fewer watches in the Canadian market. Finally, the Canadian government benefits because of the $4 million additional tax revenue (as shown by the shaded area in the graph). d. An import quota of watches a year means that there is now a new combined domestic and foreign supply curve, S 1, as shown in the right-hand graph. This supply curve is based on an increase in quantity supplied equal to at every possible price. The equilibrium in the market is now at a Chapter

4 price of $60 and a quantity of 1.8 million, which is made up of 1.4 million in domestic supply and in imports (point n in the graph). When compared with the case of freely available imports (point o in the graph), consumers are harmed by the import quota, since they pay a higher price and purchase fewer watches than previously. In contrast, domestic producers benefit from the higher price and their greater quantity supplied. Though foreign producers lose because they sell fewer watches in the Canadian market, this loss is partly counteracted by the extra revenue they receive due to the higher price they can charge (as shown by the shaded rectangle in the graph). 6. A legal requirement of bilingual labelling of products sold in Canada affects foreign producers of some imported items. For these businesses, items destined for Canada have to be treated separately during production. This may raise average costs of these items to such an extent that Canadian sales are no longer profitable. In such cases, labelling restrictions can act as an effective, though hidden, non-tariff barrier on imports. A possible example is a foreign-made board game whose packaging is considered to be an essential product attribute. Because of the difficulty in supplying separate packaging for the Canadian market, the board game s producer may choose not to sell in Canada at all. 7. Domestic businesses in a particular industry can receive significant benefits when governments impose tariffs on foreign competitors or provide the domestic businesses with subsidies. If the benefits are due to a perception that the businesses are part of an infant industry, then those businesses will prefer to keep their perceived "infantile" status. 8. The answer depends on the weighting of the costs and benefits for Canadian citizens of freer trade between Canada and those Latin American countries, such as Chile, who are the likeliest participants in an expansion of NAFTA. Supporters of expansion stress the added product variety, competition, and productivity gains that would stem from increased trade between Canada and the new NAFTA members. On a more immediate level, supporters also emphasize the new markets and investment opportunities for Canadian businesses and wealthholders that would arise from an enlarged free trade area in the Americas. Critics of NAFTA's expansion emphasize the possible decline in Canadian environmental and safety standards as Canadian governments react to the added incentives for businesses to move production to from Canada to NAFTA countries whose standards are loosest. On a more immediate level, critics also focus on possible further declines in the wages of Canadian unskilled workers due to the movement of production that employs this type of labour to low-wage countries. 9. According to critics of trade liberalization, free trade between countries with divergent income levels leads to more environmental damage and worse employment safety standards, since businesses have an incentive to locate production in low-income countries, where environmental and safety standards tend to be lax. This puts pressure on high-income countries to reduce their standards to maintain their international competitiveness. According to critics, free trade between dissimilar countries can also put downward pressure on wages for unskilled labour in high-income countries, since businesses will make use of trade liberalization to employ unskilled workers in countries with low wage levels. On the other hand, supporters of trade liberalization suggest that free trade between countries with divergent income levels can be particularly beneficial to consumers in both types of countries, since the gains from comparative advantage are particularly pronounced when countries have significant cost differences. Supporters also argue that trade agreements can provide a framework for making environmental and safety standards more consistent among both high-income and low-income countries. Chapter

5 Finally, supporters suggest that free trade s negative effect on unskilled workers in high-income countries is more than offset by the accompanying increase in average living standards in both low-income and high-income countries. 10. Because of increasing returns to scale, it often makes sense for transnational corporations to place global production of specific product lines (such as particular models of a car) in one location. When cost differences and trade barriers between particular countries are of minor significance (as in the case of Canada and the U.S.), these single-site production facilities may be located with little concern for national borders. The result, as in the case of the Canada-U.S. auto trade, is a large flow of imports and exports of similar products between the two countries. 11. Answers will vary, depending on which set of factors is emphasized: either (i) the disadvantages that the WTO has caused because of the partial loss of Canadian political sovereignty over trade issues, and the short-term costs to Canada associated with particular WTO decisions (for example, on agriculture and auto trade), and (ii) the long-term gradual increase in Canadian trade flows associated with WTO-sponsored trade liberalization. Internet Application Questions 1a. The answer is found in links to 'The WTO', 'Basics', and 'Principles of the trading system'. Most favoured nation (MFN) status refers to the principle that, on trade issues, all WTO members should treat all other WTO members in the same way (in other words, by providing them with MFN status). b. The answer is found in links to 'The WTO', 'What is the WTO', 'About the WTO', 'Basics', and 'Principles of the trading system'. National treatment refers to the principle that, once a product from one WTO member has entered a national market of another WTO member, it should be treated no differently than a domestic product would be. c. The answer is found in links to 'The WTO', 'What is the WTO', 'About the WTO', 'The agreements', and 'Anti-dumping etc.'. Dumping refers to a situation where a product is sole by a business at a lower price in a foreign market than it is in the business s home market. In cases where this is viewed as being unfair competition, WTO members can retaliate against other WTO members that allow businesses to engage in this practice. d. The answer is found in links to 'The WTO', 'What is the WTO', 'About the WTO', 'The agreements', and 'The plurilaterals'. Plurilateral agreements are those that include some, but not all, WTO members. The four plurilateral agreements involve civil aircraft, government procurement, dairy products, and bovine meat. 2. Answers found by dividing the exports or imports related to each country or region by Canada's total annual exports or imports. 3a. Answer found in links to 'Economy', 'Trade', 'Data', 'Exports', and '3686' (Total Exports to Individual Countries, Unadjusted (Raw), Monthly, in Thousands of Dollars). Click on 'Mthly D Total' and then press down the control key and click on 'Mthly D United States'. Then click on 'Go' and 'Go'. Under 'Output Format' click on '2D Line Graph', under 'From Date' click on '1950', and under 'Display Option' click on '% of D Total'. Then press 'Go'. You can print out the resulting graph. b. Canada's exports to the US have risen from about 60% to over 80% of total Chapter

6 Canadian exports during this period. 4.Supporters of incorporating minimal standards in international agreements point to the moral arguments associated with the exploitation of children in many employment contexts, as well as the harm child labour causes to the economies where it is common, by detracting from the mental and physical those citizens who are forced to work as children. Critics point out that there is no agreed upon definition of child labour. They also sometimes point out what they see as the positive aspects of child labour, given the opportunities for socialization and training it provides. ANSWERS TO QUESTIONS AT THE END OF 'SHIFTING GEARS' 1. The three eras of economic development distinguished by Beck are the commodity-processing era, the manufacturing era, and the technology era. a) Examples of engines are the steel industry in the commodity-processing era, the machine-tool industry in the manufacturing era and the computer industry in the technology era. b) Examples of virtuosos are William Kelly and Henry Bessemer (developers of an inexpensive and efficient method of making steel) in the commodityprocessing era, Henry Ford (the developer of the first mass-produced car) in the manufacturing era, and Jack Kilby (the inventor of the computer microchip) in the technology era. c) Examples of characteristic technologies are fabricating primary resources in the commodity-processing era, assembly-line production in the manufacturing era, and robotics in the technology era. d) Examples of fast-track jobs are primary-industry jobs in the commodityprocessing era, blue-collar work in the manufacturing era, and science-related employment in the technology era. e) Examples of losers are merchants in the commodity-processing era, railways in the manufacturing era, and paper producers in the technology era. f) Examples of emerging industries are the auto industry in the commodityprocessing era, the semiconductor industry in the manufacturing era and genetic engineering in the technology era. g) Examples of roadblocks are lack of standards in the commodity-processing era, the lack of integrated circuits in the manufacturing era and the lack of international protection for intellectual property in the technology era. 2. Not only does Canada possess plentiful supplies of some of the most important minerals used in the technology era, it is highly competitive in such crucial industries as telecommunications, and has a well-educated and adaptable workforce, 70 percent of which is already employed in the new economy. ANSWERS TO QUESTIONS AT THE END OF 'GLOBALIZATION: MYTHS, FACTS AND CONSEQUENCES' (at the Online Learning Centre) 1. The evidence suggests that national borders are still significant obstacles to the free flow of products, money and people. This is because borders between countries reduce the sense of association and bonds of trust on which Chapter

7 economic activity depends. In addition, strict immigration laws have made it much harder to emigrate across national borders - in particular, between Canada and the US. 2. With more social capital within a country, markets work more effectively, increasing economic efficiency. People are more willing to engage in trade and exchange, which expands the benefits associated with absolute and comparative advantage. Chapter