economics of public issues isbn 13 978 0134531984 2

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Chapters 29-31: Free trade and protectionism

Continuing the theme of the importance of economic institutions that we saw in Chapters 4 and 5, here we have the application of trade.We all know that most consumer goods sold today seem to come from other places, often China.The public then realizes that there is unemployment in this country, plus the fact that so many things we buy are made elsewhere.They will then put two-and-two together and ask: Why can’t we just stop importing all those products and have things made here, thus eliminating unemployment?

There are some important institutions involved here, the first of which is property rights, one of the main tenets of capitalism.When someone is in business, whether it is a local start-up or an established franchise, under the principles of capitalism they are supposed to have the right to make profits.Part of that process is to “buy cheap and sell expensive,” whether you are talking about a production process (making products) or consumer goods (selling products to the public).The public acceptance of this basic principle is an institution in itself, with a long history and tradition.However, high-cost producers may find themselves unable to compete with cheaper imports and so they may attempt to prevent importation in whatever industry they are in, simply by using lobbyists to create restrictive laws.That’s the second institution.The third one is the response by the rest of the world (such as with the WTO) to institutionalize “free trade,” allowing any and all imports and exports without any tariffs or quotas.

It’s an old game that is like the business cycle, in which there are always ups and downs.In this case it is the public and the voting bodies that are the players.This is why economics was originally dubbed “political economy,” because the cycle in either direction depends essentially on public sentiment as to which is currently accepted – free trade or restriction.These chapters do a good job of showing some of the plusses and minuses of both sides.

(1) Chapter 29 – Question 3.Assuming the contents of the Big Mac are the same everywhere, this could be a useful index of the cost of living in different countries.If you go to this website you will get a better idea of the differences:…

For the discussion of trade we don’t really need to understand PPP, but the overall point we can deduce from this is that production costs are much lower in other countries–in the US a Big Mac is $5.00 but in China it is $3.20 and in Egypt only $1.90.If this were a tradeable product, theoretically the US wouldn’t produce any, and all Big Mac’s would be imported.

This question simply asks why are the prices so different?Keep in mind there might be both internal factors (local resources) and external factors (exhange rates).You will probably need to refer to the principles of supply and demand.

(2) Chapter 30 – Question 1.First, why do you think the quality of American cars began to increase starting in the 1980s (requires a Google search)?Then, what effect did this have on a) imports of Japanese cars (generally recognized as high quality), b) Japanese imports of American cars, and c) American exports of other items besides cars?

(3) Chapter 30 – Many persons are concerned about what we (in the US) consider terrible working conditions in other countries, as well as very low environmental standards.Why do the authors state that implementing trade restrictions with such places is not an effective way to improve those conditions?What would the authors say are the causes for such conditions, and what is the hope of change for the better?

(4) Chapter 30 – Does history repeat itself?Go to the following website which details how the presidential election of 1888 and the overall political climate featured similar debates over free trade versus protectionism:…

From this article, what were the positions of the four persons mentioned – two presidents and two writers – on the issue of free trade versus protectionism?Which side won?

(5) Chapter 30 – Explain Mark Twain’s statement or belief that “the free traders win the arguments and the protectionists win the votes.”

(6) Chapter 31 – Question 1.Discuss the welfare effects of import restrictions, both though tariffs and quotas – who gains and who loses, both from a macro and a micro perspective?

(7) Chapter 31 – Question 3.The authors allude to the fact that it may be cheaper to just give each steelworker $375,000 rather than impose tariffs on imports.Let’s just make it a flat amount of only $100,000 per year, assuming they lost their job due to cheaper imports.What would be the ramifications of such a radical policy?How hard would it be to sell that to the American public?How would you “sell” the policy to make it more politically feasible?

(8) Chapter 31 – In the 1980s the US government attempted to rescue the Harley-Davidson motorcycle company (the only US-brand bike), which was losing out to various foreign makes – especially Japanese.First, take a look at the following articles, the first is a news item reporting the original policy and the second is critical of its effectiveness.

Then, do a couple more searches and see if you can settle the matter of whether the Harley bailout program was as effective (and necessary) as it appeared to be.

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