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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
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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