国际贸易英语版Answers to Even Problems for Thomas Pugel, International Economics Text (14th Edition).doc

Answers to Even Problems for Thomas Pugel, International Economics Text (14th Edition)TRADE MODULEChapter 3Why Everybody Trades: Comparative AdvantageSuggested answers to questions and problems (in the textbook) 2.Agree. Imports permit the country to consume more (or do more capital investment using imported capital goods). Anything that is exported is not available for domestic consumption (or capital investment). Although this loss is bad, exports are like a necessary evil because exports are how the country pays for the imports that it wants.4.If the countries trade with each other at the relative price of 1 W/C, then shifting only half way to complete specialization in production would be worse for each country than shifting to complete specialization. If the United States shifted only half way, then its new “trade line” would be parallel to the trade line shown in Figure 3.1, and it would start from the point on the ppc that is half way between S0 and S1. While this new trade line would allow the United States to consume at a point that had more consumption than at the initial S0, the United States could do even better by shifting production all the way to points S1 and consuming along the trade line shown in Figure 3.1. Consuming at a point like C would have even more consumption than consuming at a point on the new “half-way” trade line. Essentially the same reasoning can be used for the rest of the world, for a new trade line that is parallel to the rest of the worlds trade line shown in Figure 3.1, but that begins at a point on the rest of the worlds ppc that is half way between S0 and S1.6.Using the information on the number of labor hours to make a unit of each product in each country, you can determine the relative price of cloth in each country with no trade. With no trade, the relative price of cloth is 2 W/C (= 4/2) in the United States, and it is 0.4 W/C (= 1/2.5) in the rest of the world. With free trade the equilibrium world price of cloth must be in the range bounded by these two no-trade prices. So, yes, it is possible that the free-trade equilibrium relative price of cloth is 1.5 W/C (1.5 is greater than 0.4, and less than 2).8. a.Moonited Republic has an absolute advantage in wineit takes fewer labor hours to produce a bottle (1015). Moonited Republic also has an absolute advantage in producing cheeseit takes fewer labor hours to produce a kilo (410).b.Moonited Republic has a comparative advantage in cheese. The opportunity cost of producing a kilogram of cheese is 0.4 (= 4/10) bottles of wine in Moonited Republic, while the opportunity of a kilo of cheese in Vintland is 0.67 (= 10/15) bottles. Vintland has a comparative advantage in wine. The opportunity cost of a bottle of wine is 1.5 kilos of cheese in Vintland, while it is 2.5 kilos in Moonited Republic. c. d.When trade is opened, Moonited Republic exports cheese and Vintland exports wine. If the equilibrium free trade price ratio is 1/2 bottle per kilo, Moonited Republic will specialize completely in producing cheese, and Vintland will specialize completely in producing wine. e.With free trade Moonited Republic produces 5 (=20/4) million kilos of cheese. If it exports 2 million kilos, then it consumes 3 million kilos. It consumes the 1 million bottles of wine that it imports. With free trade Vintland produces 2 (=30/15) million bottles of wine. If it exports 1 million bottles, then it consumes 1 million bottles. It consumes the 2 million kilos of cheese that it imports. f.Each country gains from trade. Each is able to consume combined quantities of wine and cheese that are beyond its ability to produce domestically. The free trade consumption point is outside of the production possibility curve.10.If the number of labor hours to make a bushel of wheat is reduced by half to 1 hour, this reinforces the U.S. comparative advantage in wheat. (In fact, the United States then has an absolute advantage in wheat.) The United States is still predicted to export wheat and import cloth. If, instead, the number of hours to make a yard of cloth is reduced by half to 2 hours, this reduces the U.S. absolute disadvantage in cloth, but it does not change the pattern of comparative advantage. The relative price of cloth is now 1 (=2/2) bushel per yard in the United States with no trade, but this is still higher than the price of 0.67 bushel per yard in the rest of the world. The United States still has a comparative advantage in wheat, so the United States is still predicted to export wheat and import cloth.Chapter 4Trade: Factor Availability and Factor Proportions Are KeySuggested answers to questions and problems (in the textbook)2.Disagree. If trade is based on Hecksher-Ohlin differences in factor availability, then international trade allows each country to make better use of its resources. Relatively land-abundant countries can shift toward producing more of the land-intensive products, and relatively labor-abundant countries can shift toward producing more of the labor-intensive products. Global efficiency rises as total global production increases. This international trade is a like a positive sum game, and it is expected that each country gains from international trade in which it can exploit its Heckscher-Ohlin comparative advantage. 4.For a given relative price of cloth, the quantity produced and supplied of cloth is shown by the point of tangency between the production possibility curve and a line with a slope equal to the (negative of the) relative price ratio. By varying the relative price of cloth, the quantities of cloth supplied at different relative prices can be determined, and these combinations graphed to produce a supply curve for cloth. The same procedure can be used to derive the supply curve for wheat. The quantity of wheat must be measured from the vertical axis in the production-possibility-curve graph, and the relative price of wheat is the reciprocal of the slope of the price line. (The supply curve for wheat is actually a curve, not a straight line, in this case.)6.For price ratios below 2 bushels per yard, the country exports wheat and imports cloth. As the price becomes lower, the quantity produced of cloth decreases and the quantity consumed of cloth increases. Thus, the quantity of imports demanded increases as the price ratio declines. (This is the downward-sloping demand-for-imports curve from Chapter 2.) As the relative price of cloth, the import good, declines (equivalently, as the relative price of wheat, the export good, increases), the countrys terms of trade improve. As the relative price of cloth declines, the country reaches higher community indifference curves, so the countrys well-being or welfare is increasing. 8. a.The increase in the international relative price of cloth causes the price line to be steeper than the line anchored by point S1. The higher relative price of cloth creates an incentive to expand cloth production, and wheat production decreases as resources are shifted toward producing more cloth. The tangency of the new steeper price line with the rest of the world production possibility curve is at point S2, the new production point. With production at S2 and the new price line, the rest of the world trades to reach its new consumption point C2, determined by the tangency with the highest achievable community indifference curve, I3. b.The rest of the world exports cloth and imports wheat. The terms of trade are the international price of the export good relative to the international price of the import good. Therefore, the increase in the international relative price of cloth is an improvement in the terms of trade of the rest of the world. As shown in the graph above, as a result of this improvement in its terms of trade, the rest of the world gains well-being. The purchasing power of its exports rises, so it gains real income.10. a.Production remains at S0, and the country can trade with the rest of the world at a price ratio of one bushel per yard. The countrys consumption shifts to point C0.5, and the country reaches community indifference curve I1.5. The country gains from tradeits consumption point is outside of its production capabilities and it reaches a higher community indifference curve. b.If the country adjusts its production point to the tangency at point S1, it can consume at point C1 and reach an even higher indifference curve I2. c.The trade volume grows. This is easiest to see for cloth imports. The quantity consumed of cloth increases and the quantity produced of cloth decreases, so the quantity imported of cloth increases. Because trade is balanced in both cases and the price ratio is the same (1 bushel per yard), the volume of wheat exports also increases.Chapter 5Who Gains and Who Loses from Trade?Suggested answers to questions and problems (in textbook)2.Not correct. First, it is not clear what this statement means. The real wage is measured per unit of labor and the real rental rate is measured per unit of land. Because the units of labor and land are not comparable, it is not clear in what sense the real wage and real rental rate could be equal.” Second, the factor price equalization theorem holds for each type of income across countries. It says that free trade leads to the same real wage rate for labor (of a given type or skill) in different countries. Separately, it also says that free trade leads to the same real rental rate (for a given type of land) in different countries.4.First, you might point out that stopping trading would also eliminate exports, so that many jobs would be lost in exporting industries. It is not clear that there would be a net gain in jobs, and any net gain would likely be small. In addition, total employment in the whole economy is essentially a macroeconomic concern that is best addressed through macroeconomic policies (the topic of Part Four of this book). Second, national well-being is much more than jobs. If we ended all trade, we would be giving up the gains from trade. Trade allows the country to sell some of its production as exports. These exports are used to pay for imports. Imports allow us to expand our consumption by giving us access to low-priced goods (and to goods that we cannot or do not produce domestically). 6.A decrease in the relative price of wheat leads to a decrease in domestic production of wheat. This is also an increase in the relative price of cloth, so there is an increase in the production of cloth. In the short run factors are mainly tied to their initial industries, because there is limited mobility between industries. With a lower price of wheat and lower production, there is less demand for land and labor in the wheat industry, and both land and labor initially employed in the wheat industry tend to lose earnings (real income). With a higher price of cloth and efforts to expand cloth production, there is more demand for both land and labor in the cloth industry, and both land and labor initially employed in the cloth industry tend to gain earnings. In the long run, factors are mobile between industries. The shrinking of wheat production (assumed to be land-intensive) releases a relatively large amount of land and relatively little labor, while the expansion of the cloth industry requires a relatively large amount of labor and relatively little land. Thus, labor (throughout the economy) benefits from strong demand for its services, and the earnings of labor throughout the economy increase. Land (throughout the economy) experiences weak demand and the earnings of land decreases. The Stolper-Samuelson theorem predicts these long-run effects. A decrease in the relative price of wheat leads to a decrease in the real rental rate of land (the factor used intensively in the decreasing-price industry) and an increase in the real wage of labor (the factor used intensively in the other, rising-price industry).8. a.If all factors are immobile, the increase in the relative price of corn and the effort to expand corn production tends to benefit the earnings of all factors initially employed in corn production. This is also a decrease in the relative price of vehicles, so that vehicle production tends to decrease. This means that all factors initially employed in the vehicle industry tend to lose earnings. b.If all factors are freely mobile between the corn and vehicle industries, the winners and losers depend on the increased demand for each factor as corn production expands, relative to the release of each factor as vehicle production decreases. The labor-intensity of the two industries is almost the same ($0.60 of labor use per dollar of corn output and $0.59 per dollar of vehicle output). The overall demand for labor is affected only a little as vehicle production shrinks and corn production expands, because the release of labor by vehicles closely matches the need for additional labor in corn. Labor throughout the economy is likely to be affected only a little by the change. Corn is relatively land-intensive. The extra demand for land as corn expands, relative to the smaller amount released as vehicles shrink, leads to an increase in the real return to land. Vehicles is capital-intensive. The release of capital as vehicles shrink, relative to the smaller amount demanded as corn expands, leads to a decrease in the real return to capital.10.According to Figure 5.3, Japan is relatively abundant in physical capital, highly-skilled labor, and medium-skilled labor. Japan is relatively scarce in unskilled labor and arable and forest land. Japan is also relatively scarce in natural resources generally. (1) The following appear to be consistent with the predictions of the Heckscher-Ohlin theory. Japan is a substantial net importer of food (land-intensive), metal ores and crude petroleum products (natural resource-intensive), and clothing and accessories and shoes and other footwear (unskilled labor-intensive). Japan is a substantial net exporter of iron and steel (physical capital-intensive). Substantial net exports of automobiles also appear to be consistent with the Heckscher-Ohlin theory, to the extent that their production is relatively physical capital-intensive (or skilled labor-intensive). (2) The following appear to inconsistent. The substantial net imports of pharmaceuticals, aircraft, and medical instruments appear to be inconsistent with the Heckscher-Ohlin theory, as production of these products is intensive in skilled labor. In addition, the imports and exports of soaps and cleaners are almost the same.Chapter 6Scale Economies, Imperfect Competition, and TradeSuggested answers to questions and problems (in textbook)2.Scale economies exist when unit (or average) cost declines as production during a period of time is larger. (1) The key role of scale economies in the analysis of markets that are monopolistically competitive is to provide an incentive for larger production levels of each variety of the industrys product. The product is differentiated, but it is not fully customized to each individual consumers exact desires. Larger production runs of each variety of the product can benefit from scale economies. Still, these scale economies apply mainly to relatively small levels of production, so that a large number of firms and product varieties can exist and compete in the market. (2) The key role of scale economies in the analysis of oligopoly is that they drive firms to become large, so that a small number of firms come to dominate the market. These scale economies apply over a large range of output, so that firms that are large relative to the size of the market enjoy cost advantages over any smaller rivals.4.If the government is going to permit free export of the pasta (no export taxes or export limits), then the government should choose to form the industry as a monopoly. The country is likely to gain more from trade if it charges a higher price to foreign buyers, because the country benefits from higher export prices and better terms of trade. A monopoly will charge higher prices (in order to maximize its profits), in comparison with the equilibrium price for a comparable but competitive industry. Because all of the product is exported, there is no concern with charging domestic consumers high prices. The goal is to charge foreign buyers high prices. The gains from better terms of trade accrue mainly to the monopoly as higher profits. This benefits the country as long as the monopoly is owned by the countrys residents (or the countrys government can gain some of these profits through taxation).6. a.The market equilibrium price depends on how intensely Boeing and Airbus compete in order to gain sales. A low-price equilibrium occurs if Boeing and Airbus compete intensely to gain extra sales, including attempts to use price-cutting to steal sales from each other. A high-price equilibrium occurs if Boeing and Airbus recognize that price competition mainly serves to depress the profits of both firms, so that they both restrain their urges to compete using low prices. b.From the perspective of the well-being of the United States or Europe, a high-price equilibrium could be desirable because it involves setting high prices on export sales to other countries. This equilibrium results in sales to domestic buyers at high prices, so there is some loss of pricing efficiency domestically. But the benefits to the country from charging high prices on exports and improving its terms of trade can easily be larger, so that overall the high-price equilibrium can be desirable. c.The low-price outcome is desirable f