Chapter 9

• How does the principle of comparative advantage benefit countries?


  It allows countries to specialize in what they do best through trade.
• What tools have been developed to analyze how markets work in relation to international trade?

  Supply, demand, equilibrium, consumer surplus, and producer surplus.
• How did other nations respond to the tariffs imposed by the U.S.?


  They imposed their own tariffs on many goods imported from the United States.
• Why is the textile market a suitable case for studying gains and losses from international trade?


  Textiles are produced in many countries, and there is significant world trade in textiles.
• What is the initial condition of the Isolandian textile market before trade?


  It is isolated from the rest of the world with no imports or exports allowed.
• What happens to the domestic price in Isoland when trade is allowed?


  The domestic price adjusts to balance the quantity supplied and demanded.
• What does the sum of consumer and producer surplus measure in the textile market?


  It measures the total benefits that buyers and sellers receive from participating in the market.
• What are the three questions the new president of Isoland asks her team of economists regarding trade policy?


  1. What will happen to prices and quantities with trade? 2. Who gains and loses from free trade? 3. Should a tariff be part of the new trade policy?
• What determines whether Isoland will become a textile importer or exporter?


  The comparison of the domestic price of textiles to the world price.
• What has happened to the textile and clothing industry in the U.S. over the past century?


  It has declined significantly and is no longer a major part of the U.S. economy.
• What is the term for the price prevailing in world markets?


  World price.
• What does it indicate if the world price of textiles exceeds the domestic price?


  Isoland will export textiles once trade is permitted.
• What does a low domestic price of textiles suggest about Isoland's production costs?


  It suggests that Isoland has a comparative advantage in producing textiles.
• How does the small-economy assumption simplify the analysis of international trade for Isoland?


  It means Isoland's actions have negligible effects on world markets, treating them as price takers.
• Why did many U.S. firms struggle to produce textiles and clothing profitably?


  They faced foreign competitors that could produce quality goods at lower costs.
• What is the current status of textiles and clothing consumption in the U.S.?


  Most textiles and clothing consumed are imported.
• What important questions does the story of the textile industry raise for economic policy?


  How does international trade affect economic well-being, and who gains or loses from free trade?
• What principle was introduced in Chapter 3 regarding international trade?


  The principle of comparative advantage.
• What does the principle of comparative advantage suggest about trade among countries?


  All countries can benefit from trading because it allows specialization.
• What was lacking in the analysis of international trade in Chapter 3?


  It did not explain how the international marketplace achieves gains from trade or how those gains are distributed.
• What tools have been developed to analyze how markets work in relation to international trade?

  Supply, demand, equilibrium, consumer surplus, and producer surplus.
• What major policy initiative did President Trump undertake in 2018 regarding international trade?


  He imposed tariffs on a range of goods imported from abroad.
• How did other nations respond to the tariffs imposed by the U.S.?


  They imposed their own tariffs on many goods imported from the United States.
• Why is the textile market a suitable case for studying gains and losses from international trade?


  Textiles are produced in many countries, and there is significant world trade in textiles.
• What is the initial condition of the Isolandian textile market before trade?


  It is isolated from the rest of the world with no imports or exports allowed.
• What happens to the domestic price in Isoland when trade is allowed?


  The domestic price adjusts to balance the quantity supplied and demanded.
• What are the three questions the new president of Isoland asks her team of economists regarding trade policy?


  1. What will happen to the price and quantity of textiles? 2. Who gains and loses from free trade? 3. Should a tariff be part of the new trade policy?
• What is the world price in the context of international trade?


  The price prevailing in world markets for a good.
• How do Isolandian economists determine if Isoland will be a textile importer or exporter?


  By comparing the current Isolandian price of textiles to the world price.
• What indicates that Isoland has a comparative advantage in producing textiles?


  If the domestic price is low compared to the world price.
• What does the small-economy assumption imply for Isoland's actions in the world market?


  Isoland's actions have negligible effects on world markets.
• What happens to the domestic price when Isoland becomes an exporting country?


  The domestic price rises to equal the world price.
• What are the effects of trade on consumer and producer surplus in Isoland when it becomes an exporter?


  Producer surplus increases while consumer surplus decreases.
• What does the area D represent in the analysis of an exporting country?


  The increase in total surplus indicating the gains from trade.
• What conclusions can be drawn from the analysis of an exporting country?


  Domestic producers are better off, and domestic consumers are worse off, but total surplus increases.
• What happens when the domestic price before trade is above the world price?


  The domestic price must equal the world price, and Isoland becomes a textile importer.
• How does the supply curve of the rest of the world behave in the context of Isoland as a small economy?


  The supply curve is perfectly elastic because Isoland can buy as many textiles as it wants at the world price.
• What happens when the domestic quantity supplied is less than the domestic quantity demanded in Isoland?


  Isoland becomes a textile importer.
• Why is the supply curve of the rest of the world considered perfectly elastic for Isoland?


  Because Isoland is a small economy and can buy as many textiles as it wants at the world price.
• What are the gains and losses from trade in Isoland?


  • Domestic consumers benefit as they can buy textiles at a lower price.
  • Domestic producers are worse off as they sell textiles at a lower price.
  • Consumer surplus increases, while producer surplus decreases.
  • Total surplus increases due to the gains from trade.