Practise comparative advantage, PPC diagrams and free-trade calculations in IB Economics HL questions covering specialization, imports, exports and trade effects.
Study the extract and data below and answer the questions that follow.
American shrimp farmers taste victory
(1) American shrimp farmers have received good news from a United States (US) ruling that could lead to tariffs being imposed on imports from competing countries.
(2) US producers in the Gulf Coast were suffering from a significant oil spill in 2010. The higher fuel costs as a result of the spill have made it hard to compete with foreign shrimp farms, which they say receive government subsidies. The US producers claim such subsidies threaten to destroy the domestic shrimp business. The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically.
(3) The US Department of Commerce ruled that five countries - China, Ecuador, India, Malaysia and Vietnam - improperly subsidized shrimp that were exported to the American market. The department rejected accusations of improper subsidies by Thailand and Indonesia, two of the biggest US shrimp suppliers.
(4) The US International Trade Commission will now have to decide whether the subsidies harmed the American industry. If so, the US would impose tariffs on shrimp imports from the five countries. The proposed US tariffs could be as much as 54.5 %.
(5) The US shrimp farmers claim that the Indian government pays extra to cover shipping costs on shrimp going to the US and that China provides subsidized loans to its shrimp farmers. They argue that these violate World Trade Organization (WTO) rules.
(6) The five countries disputed the US Department of Commerce's decision. The Vietnamese producers state that, "This is an unfair decision affecting the lives of more than 600000 shrimp farmers and processors in Vietnam". Chinese officials have said that there was no evidence of improper Chinese subsidies and that US tariffs on Chinese shrimp would violate WTO rules.
(7) The US shrimp farmers say they need tariffs to allow them to compete fairly with Asian farmers, noting that high fuel prices are keeping some shrimp boats at the dock. "The price received by our farmers is not enough to cover their variable costs," said a lawyer, who represents the US shrimp farmers.
(8) Large US retailers and food distributors oppose the tariffs saying that the US shrimp industry had support from the oil company, BP, which has paid billions of US dollars to those affected by its 2010 oil spill.
(9) US politicians and shrimp farmers commented on problems they are facing, saying that, "not only is shrimping an industry, but it is a way of life".
Figure 1: Amount of shrimp imported to the US compared with domestic catch (thousands of tons)
Using a supply and demand diagram with international trade values from the text, explain the statement that "The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically" (paragraph (2)) (Does not need to be to scale).
Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.
Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.
Sketch and label a diagram to illustrate comparative advantage between Country X and Country Y on Figure 4.
Figure 4
Outline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas.
Outline one reason why it might not be in a country's best interests to specialize according to the principle of comparative advantage.
The market for oranges in Country Z is illustrated on Figure 5.
Figure 5
The domestic demand and supply for oranges are given by the functions
where P is the price of oranges in dollars per kilogram ( per kg ), Q d is the quantity of oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of kg per month). The world price of oranges is per kg.
Due to increased awareness of the possible health benefits of vitamin C , the demand for oranges in Country Z increases by 60000 per month at each price.
Calculate the change in expenditure on imported oranges as a result of the increase in demand.
