International Trade

HW #2 – Specific Factors Model

Problem 1

Because the United States is an oil-importing country, a sharp decrease in the price of oil would improve the United States' terms of trade and most Americans would perceive the price decrease as good for the US economy. But states that produce oil would experience an economic decline. Why?

Problem 2

The Specific Factors model explains how international trade can affect the distribution of income within a country. Why do economists object to using protectionist trade policy to mitigate or reverse those distributional effects? What alternative proposals would economists suggest to mitigate the distributional effects of trade?

Problem 3

Why might groups of people who lose from international trade be more informed, cohesive and motivated than groups who gain from trade? Discuss.

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