Suggested answer to case study discussion question
Mercantilism: Older than Smith—And Alive Today: Key features of
mercantilism include that it places most value on domestic production and
exports, that it deemphasizes domestic consumption and denigrates general
imports of products, and that it views international trade as a zero-sum
activity. The proponents of national competitiveness are using a version of
mercantilist thinking. The emphasis is on national producers and their share
of world sales. Domestic consumers who buy imports are bad because they
are reducing domestic !rms’ share of global sales. And, the emphasis on
market share creates a zero-sum game, because the market shares must by
de!nition total 100 percent.
17
© 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.
Suggested answers to end of chapter questions and problems
1. Disagree. This statement describes absolute advantage. It would imply
that a country that has a higher labor productivity in all goods would
2. Agree. Imports permit the country to consume more (or do more capital investment using
3. Disagree. Mercantilism recommends that a country should export as much as it can
because of the purported benefits of large exports. In its original form
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
5. 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
18
© 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.
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
7. a. Pugelovia has an absolute disadvantage in both goods. Its labor input
b. Pugelovia has a comparative advantage in producing rice. Its relative
c. With no trade, the relative price of rice would be 75/100 = 0.75 unit of
d. With free trade the equilibrium international price ratio will be greater
8. a. Moonited Republic has an absolute advantage in wine—it takes fewer labor hours to
b. MoonitedRepublic has a comparative advantage in cheese. The opportunity cost of
c.
19
© 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.
1 . 5 3
1
2
W i n e V i n t l a n d
N
V
C h e e s e
W i n e
2
0 . 8
35
N
M
C h e e s e
M o o n i t e d
R e p u b l i c
d. When trade is opened, MoonitedRepublic exports cheese and Vintland exports wine. If
e. With free trade MoonitedRepublic 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
3
1
2
W i n e V i n t l a n d
N
V
C h e e s e
W i n e
2
35
N
M
C h e e s e
M o o n i t e d
R e p u b l i c
2
T
V
T
M
1
b. With free trade the United States completely specializes in producing
wheat. The U.S. real wage with respect to wheat remains 0.5 wheat unit
c. The rest of the world still has the higher real wage. Absolute advantage
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
11. For the United States (left side of Figure 3.1), the new trade line still
begins at the production point S1, and it is steeper than the initial trade
line shown in the !gure. The intercept of the new trade line with the
21
© 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.
12. a. The opportunity cost of producing a unit of product Z is 2 units (= 8/4) of product V.
b. With no trade the price of product Z in the country is 2 V/Z. With free trade and the
c. Yes, it is possible. If the price 1.5 V/Z is an equilibrium world price for product Z, then
22
© 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.