978-0078021770 Chapter 14 Solution Manual

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Suggested answer to case study discussion question

Special Challenges of Transition: The international economics of the situation probably favor a

country like Ukraine reorienting itself toward the European Union. Ukrainian export

producerswill benefit from better access to buyers in high-income European countries.

Competition with productive firms and demanding buyers in these European countries will force

Ukrainian firms to improve product quality and control costs. Ukrainian buyers (both households

and firms that need production inputs) will benefit from better access to products produced by

European firms. In contrast, the main advantage to a country like Ukraine from strengthening its

orientation toward Russia and its customs union with several other CIS countries is that Russia is

the main supplier of fuels to Ukraine. In addition, to the extent that strengthening Ukraine’s legal

system (including contract laws and enforcement and property rights) and reducing corruption

are important to the development of the country, orientation toward the European Union is likely

to be more helpful. Nonetheless, reorientation toward the European Union can be difficult if

Russia exerts political influence in pursuit of Russia’s objectives in the region.

Suggested answers to end of chapter questions and problems

1. The four arguments in favor of ISI are the infant-industry argument, the

developing-government argument, the chance to improve the terms of trade for a large

importing country, and economizing on market information by focusing on selling in the

local market rather than in more uncertain foreign markets. The drawbacks to ISI are the

2. The four arguments in favor of ISI are the infant-industry argument, the

developing-government argument, the chance to improve the terms of trade for a large

importing country, and economizing on market information. The conditions under which

ISI is likely to be better than alternative strategies include the following. First, being a

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3. The available data do indicate that the relative prices of primary products have declined

since 1900, perhaps by as much as 0.8 percent per year. But there are biases in the data.

4. Two forces are likely to drive toward a deteriorating terms of trade—a decrease in the

prices of the primary product exports relative to the prices of the manufactured good

imports. First, the global demand for primary products is likely to rise more slowly than

5. For its first few years, TAR has the ability to be successful as an international cartel if its

member countries can agree on and abide by its policies. TAR will have several

advantages during its first few years. It has a fairly large share of world production, so its

actions can have a substantial impact on the world price. The price elasticity of demand is

In the longer run, the cartel is unlikely to remain successful, even if it achieves success in

its first few years. If it succeeds in raising the world price in its first years, two forces

come into play that erode its effectiveness over time. First, the price elasticity of demand

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reduce their own production to keep the world price above its competitive level by

limiting total global supply.

6. First, taxing exports of primary products could improve the country’s international terms

of trade, if the country is large enough to affect international prices (the optimal export

tax, the counterpart of the optimal import tariff presented in Chapter 8, and the national

7. a. The demand that remains for the cartel’s oil falls by 10 million barrels per day, for any

price above $5 per barrel. In the graph below, this is a shift of the demand curve for cartel

oil to the left, from D to D‘. The new demand curve for the cartel’s oil is parallel to the

original demand curve and lower by 10 million barrels. Its intercept with the price axis is

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b. The quantity demanded for the cartel’s oil is unchanged if the market price is $5 per

barrel, but each $1 increase in the market price takes away another 0.5 million barrels

from the demand remaining for the cartel’s oil. The new demand curve for the cartel’s oil

8. The prediction is that the shift to an outward oriented policy will result in an increase in

India’s growth rate, so that it is higher than India’s growth rate was before the shift, and

9. Disagree. The country is doing well using exports of manufactured products as an

important part of its development strategy. However, there is a limit to how far this policy

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10. a. Unilaterally taxing grain exports has the advantage of being collectible by a small

customs staff at the nation’s major border crossings, as in the developing-government

b. An international grain cartel is politically unlikely and would break down almost

c. This classic infant-industry argument has possibilities, but all of Chapter 10’s doubts

11. The four types of trade policies that a developing country can use in its effort to promote

growth of its economy are expanding primary product exports, raising the prices of its

primary product exports, restricting imports to encourage the growth of import-replacing

domestic production, and promoting exports of new products (other than primary

12. By itself, the reduction of Thai exports as the Thai government removed Thai-grown rice

from the market would tend to drive up the world price of rice. Why did the world price

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