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Suggested answer to case study discussion question
The Dutch Disease and Deindustrialization: There are several reasons
that developments in energy products are prominent as examples of Dutch
disease. First, the discovery of major new energy sources, especially new
sources of recoverable oil and natural gas, is itself newsworthy. Second, the
discoveries are often large, and there is often an incentive to develop
production rather quickly. Third, developing large-scale extraction requires
large amounts of resources, which shift away from other uses rather quickly.
So, the changes in resource allocation happen quickly and by a large
amount, making the resulting changes more noticeable and dramatic. Most
other shifts in resource usage in the national economy as an industry
expands are not as large or develop more gradually over time.
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© 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. By expanding its export industries, Pugelovia wants to sell more exports
to the rest of the world. This increase in export supply tends to lower the
2. Disagree. According to the Rybczynski theorem, an increase in the country's labor force
will result in an increase in the quantity produced of the labor-intensive good, and a
3. The drought itself reduces production in these Latin American countries
and tends to lower their well-being. (Their production-possibility curves
shrink inward.) But the lower export supply of co+ee tends to raise the
4. Disagree. Immiserizing growth can occur if growth in the country leads the country to
want to trade more, and the country's terms of trade deteriorate by a large amount. If a
5. R&D is a production activity that is intensive in the use of highly skilled
labor (scientists and engineers) and perhaps in the use of capital that
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© 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. According to the product life cycle approach, the technological originator of a product
eventually will import the product. But its overall trade need not develop into chronic
7. a. This is balanced growth through increases in factor endowments. The
b. This is balanced growth through technology improvements of similar
c. The intercept of the production-possibility curve with the cloth axis
does not change. (If there is no wheat production, then the improved
8. a. This can lead to a reversal of the trade pattern. If the initially scarce factor grows by
b. This can lead to a reversal of the trade pattern. If a country initially exported a product
c. This can lead to a reversal of the trade pattern. Consider a country that initially exports
9. a. The entire U.S. production-possibility curve shifts out, with the outward
shift relatively larger for the good that is intensive in capital. If the U.S.
b. According to the Rybczynski theorem, the quantity produced of
machinery increases and the quantity produced of clothing decreases if
the product price ratio is unchanged. The extra capital is employed in
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© 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.
c. The U.S. willingness to trade increases. With growth of production and
income, the United States wants to consume more of both goods.
d. The increase in demand for imports tends to increase the international
e. The change in the international equilibrium price ratio is a decline in the
U.S. terms of trade. U.S. well-being could decline— immiserizing growth
10. a. Typically we expect that the drought in East Asia would result in East Asia demanding
b. The increase in East Asian demand for imports of food (or, equivalently, the decrease in
c. In the United States, there is no drought and no change in the U.S. production possibility
curve. The increase in the relative price of food (decrease in the relative price of clothing)
causes production to shift from S1 to S2, more food produced and less clothing produced
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© 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.
d. According to the Stolper-Samuelson theorem, the factor (land) used intensively in food
11. a. The U.S. production-possibility curve shifts out for all points except its
b. The U.S. willingness to trade probably decreases because the United
States is now capable of producing its import good at a lower cost.
c. The decrease in U.S. demand for imports reduces the equilibrium
12. a. For the rest of the world, the production possibility curve does not change, but the
equilibrium relative price of clothing declines. Production in the rest of the world shifts
53
© 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. Well-being in the rest of the world decreases because its terms of trade deteriorate. The
13. a. With unchanged product prices, wheat production increases by 25
b. Along the new production-possibility curve, the change in product
14. a. Country B produces at point J, Q1 of oats and no newts, and trades with the rest of world
L
V
Newts
b. When Country B gains the newt technology, it can produce newts, so its capabilities are a
complete bowed-out production-possibility curve. The intercept of the ppc with the oat
axis remains at point J—possession of newt technology does not alter Country B’s
production quantity if it does not produce any newts.
c. Both are possible. It depends on the shape and position of Country B’s new ppc, relative
d. In the initial situation, the key driver of the trade pattern was the technology difference.
Because Country B had a relative disadvantage in newt technology (it did not have this
production technology), it imported newts and exported oats.
15. South Korea allowed more international trade with the rest of world,
and this probably contributed in important ways to the country’s rapid
growth since the 1960s. First, the country bene2ted from the standard
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© 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.
