2. Explain the relevance of this case study to the material seen in class?
① Comparative Advantage
-Korea should specialize in the production of color TVs and United States should specialize in the production of agricultural products according to comparative advantage. This is because comparative advantage says that a country should produce goods that it can produce more efficiently and buy the goods that it produces less efficiently from other countries.
-In the passage, it says that people in Korea and the United States often thought of trade as an economic war, rather than a ‘win-win’ situation for all. However, this is totally wrong. If the countries specialize in the production according to the comparative advantage, then the potential world production would be greater with unrestricted free trade than it is with restricted trade.
② Ad Valorem Tariff
-An ad valorem tariff is levied on the color TVs. The reason for this is that United States wouldn’t apply tax as a fixed charge for each kilogram of the TVs.
-A Voluntary Export Restraint works like an import quota and Korea voluntarily restricted its exports to United States under its request after becoming a major exporter of color television receivers. Following the repeal of the VER in 1982, the export volume rose greatly and this shows that VER was binding or effective. Also we can say that for United States, it was more costly compared to a tariff as revenue under a tariff becomes rents earned by Korea.
-In the passage, it says that agriculture has always had a special place in Korea, and the political institutions and even consumers would support protection for agricultural goods in order to protect the farmers. Actually Korea applies quota system on its rice. Every year, Korea is supposed to import 20,000 more tons compared to the previous year, and this year Korea imports…...