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CHAPTER 4
EXTENSIONS AND TESTS OF THE CLASSICAL MODEL OF TRADE
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10. You are given the following Classical-type table indicating the number of days of labor
input needed to make one unit of output of each of the five commodities in each of the
two countries. Assume that the wage rate in England is £20 per day, that the wage rate in
Portugal is 40 euros per day, and that the fixed exchange rate is £1 = 3 euros.
Good A Good B Good C Good D Good E
England 1 day 5 days 2 days 1 day 4 days
Portugal 4 days 4 days 1 day 2 days 5 days
With the given information, what will be the trade pattern if the two countries engage in
trade?
a. England will export good A and import goods B, C, D, and E.
11. In Question #10 above, suppose that one-half day of labor must be used to transport a
good internationally, no matter which good is considered and which country is doing the
exporting. With this addition of transportation costs, England will export good(s)
__________ and will import good(s) __________.
a. A; B, C, D, and E
12. Suppose that the wage rate in country A is three times the wage rate in country B. In this
situation, in the context of the Classical/Ricardo trade model, country A would be able to
export goods to country B in industries where
a. A’s workers were less than one–third as productive as B’s workers.
13. You are given the following Classical-type table showing the output of 10 days labor in
the production of each of the two commodities in each of the two countries. Assume that
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the U.K. worker’s wage is £30 per day and that the fixed exchange rate is $2 = £1.
Food Clothing
United States 30 units 30 units
United Kingdom 20 units 15 units
. If trade is taking place between the two countries, what is the “upper limit” to the U.S.
worker’s wage per day?
a. $30
14. In the situation in Question #13 above, if trade is taking place, what is the lower limit” to
the U.S. worker’s wage per day?
a. $30
15. Given the following Classical-type table shows the number of days of labor input
required to obtain one unit of output of each of the three commodities in each of the two
countries:
good T good X good Y
United Kingdom 4 days 5 days 3 days
United States 4 days 4 days 2 days
Suppose that the wage rate in the United Kingdom is £30 per day, the wage rate in the
United States is $40 per day, and the exchange rate is £1 = $1. In this situation, the
United Kingdom will
a. export good T and import goods X and Y.
16. In Question #15 above, if the U.S. wage rate is $40 per day and the exchange rate is £1 =
$1, what is the upper limit to the wage rate in the United Kingdom that is consistent with
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two-way trade between the countries?
a. £26⅔ per day
17. The following Classical-type table shows the number of days of labor input required to
obtain one unit of output of each of the two commodities in each of the three countries:
clothing wheat
Spain 3 days 6 days
United States 2 days 5 days
England 4 days 6 days
Given this information, the United States has an absolute advantage over Spain in
d. neither good, and the United States also has an absolute advantage over England in
neither good.
18. In the three-country world in Question #17, which one of the following statements is
TRUE?
a. Posttrade prices (terms of trade) of 1 wheat:2.5 clothing (or 1 clothing:0.4 wheat)
would give all the gains from trade to the United States.
19. In the table in Question #17 above, when trade is taking place among the three countries,
__________ will always be exporting wheat and __________ will always be exporting
clothing.
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a. the United States; England
(Questions 20-24 draw on Appendix material.)
20. You are given the following Dornbusch-Fischer-Samuelson (DFS) graph, where a1 = the
labor-time needed per unit of output in any given industry in the home country, a2 = the
labor-time needed per unit of output in any given industry in the foreign country, W1 =
the wage rate in the home country, and W2 = the wage rate in the foreign country. The
exchange rate e is assumed = 1.
In this Dornbusch-Fischer-Samuelson graph, moving to the right along the A line
indicates goods in which the __________ country has greater relative efficiency; further,
the introduction of technical progress in the foreign country would, other things equal, be
reflected in __________ shift of the curve.
a. home; an upward
21. In the Dornbusch-Fischer-Samuelson graph in Question #20 above, a good that is located
on the horizontal axis to the left of the point directly below the intersection of the A curve
with the C curve will be exported by the __________ country, and, for this good,
__________.
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a. home; a2/a1 < W1/W2 (or a1/a2 > W2/W1)
22. In the Dornbusch-Fischer-Samuelson model of Question #20 above, a uniform
improvement in labor productivity in all of the home country’s industries would shift the
A schedule __________ and would lead to the export of a __________ number of goods
by the home country than the number exported before the productivity improvement.
d. downward and to the left; smaller
23 In the Dornbusch-Fischer-Samuelson model of Question #20 above, a rise in labor
productivity in the home country would cause real national income to __________ in the
home country and __________ in the foreign country.
a. increase; to decrease
d. decrease; also to decrease
24. In the Dornbusch-Fischer-Samuelson model of Question #20 above, a shift in tastes and
preferences towards home country goods will cause the __________ schedule to pivot
__________.
a. A; downward and to the left
25. In the context of the Classical/Ricardo model, suppose that, in an industry X, the
productivity of U.S. workers is three times the productivity of Chinese workers. At the
same time, suppose that the wage rate paid to Chinese workers is 20% of the wage rate
paid to U.S. workers. In this situation, the unit labor cost of producing good X would be
__________ in China than in the United States and therefore, in this two-country
Classical/Ricardo context, __________.
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d. higher; the United States would export good X to China
26. In a Ricardo-type model, if Portuguese workers can produce three times as much wine
per
day as English workers but only twice as much cloth per day as English workers, then, if
Portuguese wages are 30 euros per day, the upper limit to English wages per day is
__________. (Assume 1 euro = £1.)
a. £10
27. Suppose that the labor requirements per unit of output in each of the two industries in
each of three countries are as follows:
Wheat Cloth
Spain 2 days 3 days
France 2 days 2 days
United States 1 day 3 days
In this situation, with an international terms of trade of 1 cloth:2 wheat (or 1 wheat:½
cloth), __________ would export cloth and import wheat; if the terms of trade were,
instead, 1 wheat:¾ cloth (or 1 cloth:1⅓ wheat), __________ would export cloth and
import wheat.
a. France and the United States; Spain
28. Suppose that, in a Classical model with two goods, Germany can produce 50 units of
steel with one day of labor and 30 units of textiles with one day of labor; Switzerland can
produce 45 units of steel with one day of labor and 45 units of textiles with one day of
labor. If the exchange rate is fixed at 1 Swiss franc = 1 euro and if the Swiss wage rate is
10 francs per day, then, in trading equilibrium, German wages
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a. must be greater than 10 euros per day.
29. Given the following Ricardo-type table showing the amount of labor input required to
produce one unit of output of each of the two goods in each of the two countries:
Shirts Machines
France 3 days 5 days
Germany 2 days 4 days
If the wage rate in France is €60 per day (i.e., 60 euros per day), what is the upper limit to
the wage rate per day in Germany (which also uses the euro) that is compatible with two-
way trade between the countries?
a. €40
30. Given the following Classical-type table showing the fixed money prices of each good in
each of the two countries: Shoes Wine
United States $20/pair $10/bottle
Switzerland 100 francs/pair 40 francs/bottle
If the exchange rate is flexible, the upper limit to the price of the dollar (i.e., the number
of Swiss francs per dollar above which there is export of both goods by Switzerland) is
d. 0.20 francs = $1.
31. Given the following Classical-type table showing the number of days of labor input
required to obtain one unit of output of each of the two commodities in each of the three
countries:
wine clothing
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Denmark 4 days 6 days
Germany 3 days 3 days
Portugal 5 days 9 days
Which one of the following statements is correct?
a. If trade is taking place, Germany will always be exporting wine.
32. Given the following Ricardo-type table showing the amount of labor input required to
produce one unit of output of each of the two goods in each of the two countries:
Wheat Clothing
United Kingdom 6 days 5 days
United States 4 days 3 days
Suppose that the U.S. wage rate is $60 per day and that the exchange rate is $2 = £1 (or
£0.5 = $1). In this situation, the lower limit for the U.K. wage rate in order to have two-
way trade would be __________ per day.
d. £50