AnswersEvenProblemsTradeModulePugel14thEdition.docx

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AnswersEvenProblemsTradeModulePugel14thEdition

AnswerstoEvenProblemsforThomasPugel,InternationalEconomicsText（14thEdition）

TRADEMODULE

Chapter3

WhyEverybodyTrades:

ComparativeAdvantage

Suggestedanswerstoquestionsandproblems

（inthetextbook）

2.Agree.Importspermitthecountrytoconsumemore（ordomorecapitalinvestmentusingimportedcapitalgoods）.Anythingthatisexportedisnotavailablefordomesticconsumption（orcapitalinvestment）.Althoughthislossisbad,exportsarelikeanecessaryevilbecauseexportsarehowthecountrypaysfortheimportsthatitwants.

4.Ifthecountriestradewitheachotherattherelativepriceof1W/C,thenshiftingonlyhalfwaytocompletespecializationinproductionwouldbeworseforeachcountrythanshiftingtocompletespecialization.IftheUnitedStatesshiftedonlyhalfway,thenitsnew“tradeline”wouldbeparalleltothetradelineshowninFigure3.1,anditwouldstartfromthepointontheppcthatishalfwaybetweenS0andS1.WhilethisnewtradelinewouldallowtheUnitedStatestoconsumeatapointthathadmoreconsumptionthanattheinitialS0,theUnitedStatescoulddoevenbetterbyshiftingproductionallthewaytopointsS1andconsumingalongthetradelineshowninFigure3.1.ConsumingatapointlikeCwouldhaveevenmoreconsumptionthanconsumingatapointonthenew“half-way”tradeline.Essentiallythesamereasoningcanbeusedfortherestoftheworld,foranewtradelinethatisparalleltotherestoftheworld’stradelineshowninFigure3.1,butthatbeginsatapointontherestoftheworld’sppcthatishalfwaybetweenS0andS1.

6.Usingtheinformationonthenumberoflaborhourstomakeaunitofeachproductineachcountry,youcandeterminetherelativepriceofclothineachcountrywithnotrade.Withnotrade,therelativepriceofclothis2W/C（=4/2）intheUnitedStates,anditis0.4W/C（=1/2.5）intherestoftheworld.Withfreetradetheequilibriumworldpriceofclothmustbeintherangeboundedbythesetwono-tradeprices.So,yes,itispossiblethatthefree-tradeequilibriumrelativepriceofclothis1.5W/C（1.5isgreaterthan0.4,andlessthan2）.

8.a.MoonitedRepublichasanabsoluteadvantageinwine—ittakesfewerlaborhourstoproduceabottle（10<15）.MoonitedRepublicalsohasanabsoluteadvantageinproducingcheese—ittakesfewerlaborhourstoproduceakilo（4<10）.

b.MoonitedRepublichasacomparativeadvantageincheese.Theopportunitycostofproducingakilogramofcheeseis0.4（=4/10）bottlesofwineinMoonitedRepublic,whiletheopportunityofakiloofcheeseinVintlandis0.67（=10/15）bottles.Vintlandhasacomparativeadvantageinwine.Theopportunitycostofabottleofwineis1.5kilosofcheeseinVintland,whileitis2.5kilosinMoonitedRepublic.

c.

d.Whentradeisopened,MoonitedRepublicexportscheeseandVintlandexportswine.Iftheequilibriumfreetradepriceratiois1/2bottleperkilo,MoonitedRepublicwillspecializecompletelyinproducingcheese,andVintlandwillspecializecompletelyinproducingwine.

e.WithfreetradeMoonitedRepublicproduces5（=20/4）millionkilosofcheese.Ifitexports2millionkilos,thenitconsumes3millionkilos.Itconsumesthe1millionbottlesofwinethatitimports.WithfreetradeVintlandproduces2（=30/15）millionbottlesofwine.Ifitexports1millionbottles,thenitconsumes1millionbottles.Itconsumesthe2millionkilosofcheesethatitimports.

f.Eachcountrygainsfromtrade.Eachisabletoconsumecombinedquantitiesofwineandcheesethatarebeyonditsabilitytoproducedomestically.Thefreetradeconsumptionpointisoutsideoftheproductionpossibilitycurve.

10.Ifthenumberoflaborhourstomakeabushelofwheatisreducedbyhalfto1hour,thisreinforcestheU.S.comparativeadvantageinwheat.（Infact,theUnitedStatesthenhasanabsoluteadvantageinwheat.）TheUnitedStatesisstillpredictedtoexportwheatandimportcloth.If,instead,thenumberofhourstomakeayardofclothisreducedbyhalfto2hours,thisreducestheU.S.absolutedisadvantageincloth,butitdoesnotchangethepatternofcomparativeadvantage.Therelativepriceofclothisnow1（=2/2）bushelperyardintheUnitedStateswithnotrade,butthisisstillhigherthanthepriceof0.67bushelperyardintherestoftheworld.TheUnitedStatesstillhasacomparativeadvantageinwheat,sotheUnitedStatesisstillpredictedtoexportwheatandimportcloth.

Chapter4

Trade:

FactorAvailabilityandFactorProportionsAreKey

Suggestedanswerstoquestionsandproblems

（inthetextbook）

2.Disagree.IftradeisbasedonHecksher-Ohlindifferencesinfactoravailability,theninternationaltradeallowseachcountrytomakebetteruseofitsresources.Relativelyland-abundantcountriescanshifttowardproducingmoreoftheland-intensiveproducts,andrelativelylabor-abundantcountriescanshifttowardproducingmoreofthelabor-intensiveproducts.Globalefficiencyrisesastotalglobalproductionincreases.Thisinternationaltradeisalikeapositivesumgame,anditisexpectedthateachcountrygainsfrominternationaltradeinwhichitcanexploititsHeckscher-Ohlincomparativeadvantage.

4.

Foragivenrelativepriceofcloth,thequantityproducedandsuppliedofclothisshownbythepointoftangencybetweentheproductionpossibilitycurveandalinewithaslopeequaltothe（negativeofthe）relativepriceratio.Byvaryingtherelativepriceofcloth,thequantitiesofclothsuppliedatdifferentrelativepricescanbedetermined,andthesecombinationsgraphedtoproduceasupplycurveforcloth.Thesameprocedurecanbeusedtoderivethesupplycurveforwheat.Thequantityofwheatmustbemeasuredfromtheverticalaxisintheproduction-possibility-curvegraph,andtherelativepriceofwheatisthereciprocaloftheslopeofthepriceline.（Thesupplycurveforwheatisactuallyacurve,notastraightline,inthiscase.）

6.Forpriceratiosbelow2bushelsperyard,thecountryexportswheatandimportscloth.Asthepricebecomeslower,thequantityproducedofclothdecreasesandthequantityconsumedofclothincreases.Thus,thequantityofimportsdemandedincreasesasthepriceratiodeclines.（Thisisthedownward-slopingdemand-for-importscurvefromChapter2.）Astherelativepriceofcloth,theimportgood,declines（equivalently,astherelativepriceofwheat,theexportgood,increases）,thecountry'stermsoftradeimprove.Astherelativepriceofclothdeclines,thecountryreacheshighercommunityindifferencecurves,sothecountry'swell-beingorwelfareisincreasing.

8.a.TheincreaseintheinternationalrelativepriceofclothcausesthepricelinetobesteeperthanthelineanchoredbypointS1.Thehigherrelativepriceofclothcreatesanincentivetoexpandclothproduction,andwheatproductiondecreasesasresourcesareshiftedtowardproducingmorecloth.ThetangencyofthenewsteeperpricelinewiththerestoftheworldproductionpossibilitycurveisatpointS2,thenewproductionpoint.WithproductionatS2andthenewpriceline,therestoftheworldtradestoreachitsnewconsumptionpointC2,determinedbythetangencywiththehighestachievablecommunityindifferencecurve,I3.

b.Therestoftheworldexportsclothandimportswheat.Thetermsoftradearetheinternationalpriceoftheexportgoodrelativetotheinternationalpriceoftheimportgood.Therefore,theincreaseintheinternationalrelativepriceofclothisanimprovementinthetermsoftradeoftherestoftheworld.Asshowninthegraphabove,asaresultofthisimprovementinitstermsoftrade,therestoftheworldgainswell-being.Thepurchasingpowerofitsexportsrises,soitgainsrealincome.

10.a.ProductionremainsatS0,andthecountrycantradewiththerestoftheworldatapriceratioofonebushelperyard.Thecountry'sconsumptionshiftstopointC0.5,andthecountryreachescommunityindifferencecurveI1.5.Thecountrygainsfromtrade—itsconsumptionpointisoutsideofitsproductioncapabilitiesanditreachesahighercommunityindifferencecurve.

b.IfthecountryadjustsitsproductionpointtothetangencyatpointS1,itcanconsumeatpointC1andreachanevenhigherindifferencecurveI2.

c.Thetradevolumegrows.Thisiseasiesttoseeforclothimports.Thequantityconsumedofclothincreasesandthequantityproducedofclothdecreases,sothequantityimportedofclothincreases.Becausetradeisbalancedinbothcasesandthepriceratioisthesame（1bushelperyard）,thevolumeofwheatexportsalsoincreases.

Chapter5

WhoGainsandWhoLosesfromTrade?

Suggestedanswerstoquestionsandproblems

（intextbook）

2.Notcorrect.First,itisnotclearwhatthisstatementmeans.Therealwageismeasuredperunitoflaborandtherealrentalrateismeasuredperunitofland.Becausetheunitsoflaborandlandarenotcomparable,itisnotclearinwhatsensetherealwageandrealrentalratecouldbe"equal.”Second,thefactorpriceequalizationtheoremholdsforeachtypeofincomeacrosscountries.Itsaysthatfreetradeleadstothesamerealwagerateforlabor（ofagiventypeorskill）indifferentcountries.Separately,italsosaysthatfreetradeleadstothesamerealrentalrate（foragiventypeofland）indifferentcountries.

4.First,youmightpointoutthatstoppingtradingwouldalsoeliminateexports,sothatmanyjobswouldbelostinexportingindustries.Itisnotclearthattherewouldbeanetgaininjobs,andanynetgainwouldlikelybesmall.Inaddition,totalemploymentinthewholeeconomyisessentiallyamacroeconomicconcernthatisbe