Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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 dierences 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
23
© 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.
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
indierence curve. The tangency indicates the quantity
24
© 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. 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 indierence 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
25
© 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.
(1/3) 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
indierence 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 indierence 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
26
© 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.
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 dierent
slopes. Here is a tour of the ppc, starting down on the cloth
28
© 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. 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
29
© 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.
