Greater exporting increases domestic output and thus increases revenues to domestic exporting firms. Because these firms would employ more resources household income would rise. Households would then use part of their greater income to buy more imported goods (imports would rise).

United States exports in 1996 were $612 billion (flow 13) and imports were $803 billion (flow 16).

Flow 14 must equal flow 13. Flow 15 must equal flow 16.

(a) Yes because the opportunity cost of radios is less (1R ; 1C) in South Korea than in the United States (1R ; 2C). South Korea should produce radios and the United States should produce chemicals.

(b) If they specialize the United States can produce 20 tons of chemicals and South Korea can produce 30 000 radios. Before specialization South Korea produced alternative B and the United States alternative U for a total of 28 000 radios (24 000 1 4 000) and 18 tons of chemicals (6 tons 1 12 tons). The gain is 2 000 radios and 2 tons of chemicals.

(c) The limits of the terms of trade are determined by the comparative cost conditions in each country before trade: 1R ; 1C in South Korea and 1R ; 2C in the United States. The terms of trade must be somewhere between these two ratios for trade to occur.

If the terms of trade are 1R ; 1 }12} C South Korea would end up with 26 000 radios (5 30 000 2 4 000) and 6 tons of chemicals. The United States would have 4 000 radios and 14 tons of chemicals (5 20 2 6). South Korea has gained 2 000 radios. The United States has gained 2 tons of chemicals.

(d) Yes the world is obtaining more output from its fixed resources.

The first part of this statement is incorrect. U.S. exports create a domestic supply of foreign currencies not a domestic demand for them. The second part of the statement is accurate. The foreign demand for dollars (from U.S. exports) generates a supply of foreign currencies to the United States.

A decline in U.S. incomes or a weakening of U.S. preferences for foreign goods would reduce U.S. imports reducing U.S. demand for foreign currencies. These currencies would depreciate (the dollar would appreciate). Dollar appreciation means U.S. exports would decline and U.S. imports would increase.

GATT is the General Agreement on Tariffs and Trade. It affects nearly everyone around the globe because its trade liberalization applies to 120 nations. Major outcomes: reduced tariffs and quotas liberalized trade in services lower agricultural subsidies enhanced protection of intellectual property rights creation of the World Trade Organization. The EU and NAFTA are free-trade blocs. GATT reduces tariffs and liberalizes trade for nearly all nations. The ascendancy of the EU and the passage of NAFTA undoubtedly encourage nations to reach the latest GATT agreement. The tariff reductions within the EU and NAFTA apply only to sellers from other nations in the blocs. The GATT provisions reduce trade barriers facing all exporting nations including those outside the trade blocs.