Chapter 1 Study Questions

1. What factors explain why the world's trading nations have become increasingly
interdependent, from an economic and political viewpoint, during the post-World War Il era?
Explanation:
After the Second World War, several factors contributed to the growing interdependence
among the world's trading nations. The Union E was formed to ensure the free movement of
goods, services, capital, and people. Multinational corporations helped in globalization by
attracting foreign direct investment. The market power enjoyed by OPE countries led the
non-member countries to pursue their objectives of oil production, thus leading to
interdependence among countries. Creation of the euro at the turn of the twenty-first century
promoted international trade within the euro-area by eliminating some exchange rate
uncertainties. Finally, the emergence of Country C as an economic power in the 2000s further
increased international trade between Country C and other countries of the world. These
factors contributed to growing interdependence between nations.

Answer:
The factors are as follows:
 The formation of Union E in the 1950s
 Rising importance of multinational corporations in 1960s
 Market power enjoyed by OPE countries in 1970s
 Creation of euro at the turn of the twenty-first century and rise of Country C as an
emerging economic power in early 2000s

2. What are some of the major arguments for and against an open trading system?
Explanation:
An open trading system is one that allows fair and non-discriminatory trade with other
nations. An open trading system leads to increased levels of consumption and investment
because open trading leads higher overall production. Since goods are produced by the
countries having a comparative advantage in producing them, cost efficiency is attained due
to which goods are available at lower prices. The export and import of goods also increases
the variety of goods available to people for consumption.
However, an open trading system leads to huge job losses in industries who now import
rather than manufacture. Many also fear losing their jobs in the import-competing sector.
Many blue-collar jobs, white-collar jobs, and service jobs are outsourced overseas. Workers
of developed countries lose competitiveness when production is done in modern factories
built by companies in low-wage countries, making them equally productive. These
disadvantages to workers are the arguments against an open trading system.
Answer:
Some arguments in support of an open trading system are that there is an increase in the
levels of consumption and investment by people, commodities are available at lower prices
and a wide variety of products are available for consumption due to trade.
Some arguments against an open trading system include the adverse effects to workers in the
form of job loss due to imports, fear of getting laid off in import-competing sectors or major
jobs being sent overseas.

3. What significance does growing economic interdependence have for a country like the
United States?
Explanation:
Economic interdependence arises between countries when countries do not produce all the
commodities domestically, they import certain commodities while exporting others.
Reduction in trade barriers and technological improvements led to an increase in world trade
for the Country U. Manufactured goods in the Country U are more affected by competition in
the recent time. Much of the Country U manufactured products are possible only due to the
materials imported from abroad. Besides goods and services, movements in labor and capital
also measure economic interdependence as movement of labour affects the labour markets by
bringing cheap or skilled labour for example to a country. The movement of capital affects
financial markets as well due to the investment of foreign capital in the country, further
leading to an increase in international banking as well.

Answer:
Growing economic interdependence has major significance for a country like Country U in
many dimensions which include the trade of goods and services, ownership of production
facilities, dependence on imported materials, labor force, and financial markets. The imports
and exports of Country U amount to a substantial part of its GDP. Being a major leader in
world trade, the significance is even noticeable when specific products are considered like
personal computers which would have been impossible without imported sub-parts from
abroad.

4. What factors influence the rate of growth in the volume of world trade?
Explanation:
Right from the Industrial Revolution, technological change has brought a profound increase
in productivity and it has brought down transportation costs as well. In addition to this, it has
also increased the volume of trade as a large number of products can be produced in a very
short time, thus increasing exports. Also, the level of economic activity directly affects the
volume of international trade. During periods of high economic growth the volume of trade
rises, while it falls during periods of recession.
Multilateral trade negotiations lead to the free movement of goods and services between the
participant nations, thus increasing trade. Lower trade barriers further lead to an increase in
the volume of trade. Financial liberalization allows utilizing foreign capital for production.
This helps in increasing investment, and eventually the volume of trade rises.
Instead of completing the whole production process in one country, often some part of the
work is subcontracted abroad, mainly in lower-wage paying countries. This has a dual
advantage- on one hand, it reduces the total cost of production of that good, and on the other
hand it removes geographical boundaries, thus easing trade and increasing the volume of
goods traded.

Answer:
The level of economic activity, technological change, multilateral trade negotiations, lower
trade barriers, financial liberalization, and subcontracting work abroad greatly and favorably
affect the volume of world trade.

5. Identify the major fallacies of international trade.

Explanation:
It is believed that trade is a zero-sum game where one wins and the other loses, implying that
if one trade partner benefits or earns profits, the other will surely suffer losses. In reality,
trade is a positive-sum game. It benefits both the nations involved as each nation produces the
goods in which it has a comparative advantage which results in a higher production relative
to the pre-trade production.
Another fallacy of trade is the belief that imports harm the economy while exports benefit it.
It is believed that trade leads to loss of jobs in the import-competing sector as that good is
now imported from abroad, resulting in unemployment and decrease in economic growth in
the nation. The reality is that while trade leads to fall in employment in the import sector, it
also leads to an increase in demand for exports, thus increasing employment there. Therefore,
it causes a fall in employment in one sector while increasing demand and eventually
employment in another sector.
Furthermore, it is believed that tariffs and quotas by restricting the imports, will expand
domestic import competing industries and employment will be created. This is in reality, only
the half side of the story. Reducing imports also reduces the dollars foreigners get to buy
exports from the domestic country. Thus, the reduction of imports through trade barriers also
reduces exports, and reduces employment in the export industry.

Answer:
  Trade results in a zero-sum game, which means that one partner benefits at the
expense of the other partner. However, this is a fallacy since both partners can benefit
from trade.
 It is a common belief that imports decrease a nation's economic growth and increase
unemployment in the economy. However, importing goods where the country has a
comparative disadvantage, as is done in most cases, will not hamper economic growth
and job prospects, jobs just shift from one sector to another.
 It is conventionally believed that quotas and tariffs will protect jobs in importing-
product sector but a fall in imports is accompanied by a fall in exports which leads to
fall in employment in the export industry.

6. What is meant by international competitiveness? How does this concept apply to a firm, an
industry, and a nation?
Explanation:
Competitiveness is defined by the ability of a firm, industry, or nation to compete against
other firms, industries, or nations in terms of costs of production, productivity and quality of
goods. International competitiveness refers to the firm, industry or nation's ability to produce
low cost, good quality products by workers who have higher productivity.
Each of the three sectors- firm, industry and the nation tries to compete against other firms,
industries, and nations on three important aspects - cost of production, quality of goods and
productivity of workers. If a firm, industry or nation is able to produce better quality products
at lower costs, it can be said to be internationally competitive as it can withstand foreign
competition from foreign firms, industries and nations. Productivity of workers also plays an
important role in determining the international competitiveness as it varies from country to
country. Therefore a higher productivity helps to keep the country more competitive.

Answer:
International competitiveness refers to the ability of an economy to produce good quality
goods at lower cost. When the workers of a country have a high productivity in a particular
industry, the country is said to be internationally competitive in that industry.
In terms of costs of production, quality of goods, and productivity, if a firm, industry or
nation is able to produce better commodities than others, it is said to be internationally
competitive.

7. What do researchers have to say about the relation between a firm's productivity and
exposure to global competition?
Explanation:
In the presence of global competition, firms need to manufacture products that meet the
standards of global producers. As a result, the workers of the firm work hard and try to
increase their productivity by increasing their output per work hour so that they can withstand
foreign competition by producing more output. Firms also improve their production process
so that they produce at a lower cost and charge lower prices. In this way, global competition
leads to an increase in a firm's productivity.

Answer:
According to researchers, exposure to global competition increases a firm's productivity as it
gives them the incentive to produce goods of better quality at lower cost and charge lower
prices than their competitors so that it can withstand foreign competition. As a result of global
competition, workers strive hard to produce good quality products that meet global standards.

8. When is international trade an opportunity for workers? When is it a threat to workers?

Explanation:
International trade is both an opportunity and a threat for workers. It is an opportunity for the
workers employed in the exporting industry. The incomes of workers in these sectors will rise
and more workers will also get employed in this sector.
International trade is a threat to workers employed in the import-competing sectors of the
domestic country, that is the sectors where goods similar to the imported goods are produced.
In these sectors, workers lose their jobs as these goods are being imported from foreign
countries, the incomes also reduce.

Answer:
International trade is an opportunity for workers employed in the exporting industries. It
increases the incomes and productivity of workers in such industries.
International trade is a threat to workers employed in the importing industry. This leads to job
losses in these import-competing sectors and thus reduces incomes of workers in those
sectors.

9. Identify some of the major challenges confronting the international trading system.
Explanation:
With increasing international trade, fair labour standards have become a major challenge.
Trade often allows unfair competition from countries that lack labour standards. Due to trade,
countries where labor is cheap can export their labor to countries where export is
comparatively expensive. The difference in labor quality is not considered in such a scenario.
Trade policies often ignore such international labour standards. Another major issue that is
ignored by trade policies is environmental concerns. Economists argue that trade
organizations often take decisions that undermine environmental regulations. Therefore,
labour standards and environmental concerns are major challenges confronting the
international trading system.

Answer:
Ensuring labour standards and issues related to the environment are some challenges
confronting the international trading system.