No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 387 CHAPTER FIFTEEN ANSWERS 1. While the gains from trade are undeniable, they are not equally shared. While everyone benefits as a consumer, producers that are not competitive will suffer— their next best alternative may be significantly worse. Given the highly concentrated costs and dispersed benefits, those opposed to free trade are able to overcome rational ignorance and become a powerful special interest group (e.g., the sugar lobby). 2. Because Haiti has a lower opportunity cost than we do at the production of some goods (such as coffee or textiles). The analogy of a small child picking weeds it apropos; the opportunity cost to the U.S. of producing textiles might be a much higher valued good. 3. A. False; any good we export gives us the resources with which to import. B. False, as seen in Figure 15.3 . C. False; however that does not necessarily imply causation D. True E. True 4. If a trade deficit leads to a Current Account (CA) deficit (which it generally will), there must be a capital account surplus to balance it out: the balance of payments (BOP) must balance. 5. Trade introduces natural incentives to have cross-cultural communication. This leads to increased opportunity for missionary work. 6. A trade deficit is usually appropriate for a young growing economy, so that they can have a capital account surplus. The KA surplus enables increased domestic investment to help the young economy grow faster. 7. Mercantilism’s fundamental tenet was that the wealth of nations is found in its gold stock, whereas the true wealth of nations consists of its productive capacity. 8. Look at the figures and it should be clear! 9. In the short run, exchange rates tend to be driven by financial flows (foreign investment coming in and out of country). In the long run, trade in goods and services drives exchange rates. 10. Argument for: National Security. We need to continue producing goods that are crucial for national security, since in a time of war we cannot depend on others to provide. Counterargument: Why not just stockpile the good? Then in time of war we’d have enough to last a reasonable expected duration.