978-0078021770 Chapter 4 Solution Manual

Suggested answers to end of chapter questions and problems

1. Disagree. The Hecksher–Ohlin theory indicates that two

countries will trade with each other because of dierences in

2. Disagree. If trade is based on Hecksher-Ohlin differences in factor

availability, then international trade allows each country to make better use

3. Pugelovia has 20 percent of the world’s labor [20/(20 + 80)], whereas it has

30 percent

4. As shown below, for a given relative price of cloth, the quantity produced

and supplied of cloth is shown by the point of tangency between the

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5. Refer to the graphs below. To derive the country’s cloth

demand curve, we need to ‘nd the price line for each price

ratio, and then ‘nd the tangency with a community

indierence curve. The tangency indicates the quantity

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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 country’s terms of trade

improve. As the relative price of cloth declines, the country reaches higher

community indifference curves, so the country’s well-being or welfare is

increasing.

7. a. With increasing marginal opportunity cost, Puglia’s

production-possibility curve has a bowed-out shape, as shown

in the graph on the next page. With no international trade,

the country produces and consumes at the point at which one

of Puglia’s community indierence curves (I1) is tangent to

the production-possibility curve at point N. The slope of the

price line at this tangency indicates that the no-trade relative

price of pasta is 4.

b. The world relative price of pasta (3) is lower than Puglia’s

no-trade relative price (4), so Puglia will import pasta.

Looked at the other way, the world relative price of togas

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(1/3) is higher than Puglia’s no-trade price (1/4), so Puglia

will export togas. In the graph below, the price line whose

slope indicates a relative price of 3 T/P is tangent to the

production-possibility curve at point R. With free trade,

production of pasta declines in Puglia and resources shift to

producing togas. With the price line based on the relative

price of 3 T/P and production at point R, Puglia chooses its

consumption to reach the highest possible community

indierence curve (I2), the one that is tangent to this price

line at point V.

c. Puglia gains from trade. One way to see this is that trade

allows Puglia to consume amounts of the two products that

are beyond its own abilities to produce these products (point

V is outside of the ppc). Another way to see this is that Puglia

reaches a higher community indierence curve (I2 is better

that I1).

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

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forwarded, distributed, or posted on a website, in whole or part.

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

achievablecommunityindifference curve, I3.

W h e a t

C l o t h

P r i c e =

1 . 3 W / C

P r i c e =

1 W / C

I

3

I

2

C

2

C

1

S

1

S

2

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

10. a. Production remains at S0, and the country can trade with the rest of the world

b. If the country adjusts its production point to the tangency at point S1, it can

c. The trade volume grows. This is easiest to see for cloth imports. The

11. a. They could make 7 wheat, with no cloth production.

b. They could make 6 cloth, with no wheat production.

c. The ppc is not a straight line between (6 cloth, 0 wheat)

and (0 cloth, 7 wheat). Rather, it has four parts with dierent

slopes. Here is a tour of the ppc, starting down on the cloth

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forwarded, distributed, or posted on a website, in whole or part.

12. Firms in industries that obtain key inputs through complicated, longer-term

contracts benefit from a national legal system that leads to strong

enforcement of contracts. In a country with a weak legal system in which

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forwarded, distributed, or posted on a website, in whole or part.