Book Title
International Economics: Theory and Policy 9th Edition

978-0132146654 Chapter 6 Solution Manual

December 18, 2019
In panel a, the reduction of Norway’s production possibilities away from fish cause the production of
fish relative to automobiles to fall. Thus, despite the higher relative price of fish exports, Norway moves
down to a lower indifference curve representing a drop in welfare.
3. An increase in the terms of trade increases welfare when the PPF is right-angled. The production
point is the corner of the PPF. The consumption point is the tangency of the relative price line and the
highest indifference curve. An improvement in the terms of trade rotates the relative price line about
its intercept with the PPF rectangle (since there is no substitution of immobile factors, the production
imports it purchases. 4. The difference from the standard diagram is that the indifference curves
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Chapter 6 The Standard Trade Model    25
5. The terms of trade of Japan, a manufactures (M) exporter and a raw materials (R) importer, is the world
relative price of manufactures in terms of raw materials (pM/pR). The terms of trade change can be
a. Oil supply disruption from the Middle East decreases the supply of raw materials, which increases
the world relative supply of manufactures to raw materials. The world relative supply curve shifts
b. Korea’s increased automobile production increases the supply of manufactures, which increases
c. U.S. development of a substitute for fossil fuel decreases the demand for raw materials. This
increases world RD, and the world relative demand curve shifts out, increasing the world relative
d. A harvest failure in Russia decreases the supply of raw materials, which increases the world RS.
e. A reduction in Japan’s tariff on raw materials will raise its internal relative price of manufactures
6. The declining price of services relative to manufactured goods shifts the isovalue line clockwise so
that relatively fewer services and more manufactured goods are produced in the United States, thus
reducing U.S. welfare.
7. These results acknowledge the biased growth which occurs when
there is an increase in one factor of production. An increase in the capital stock of either country
favors production of good X, while an increase in the labor supply favors production of good Y. Also,
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Chapter 6 The Standard Trade Model    26
8. Immiserizing growth occurs when the welfare deteriorating effects of a worsening in an economy’s
terms of trade swamp the welfare improving effects of growth. For this to occur, an economy must
9. India opening should be good for the United States if it reduces the relative price of goods that
China sends to the United States and hence increases the relative price of goods that the United States
exports. Obviously, any sector in the United States hurt by trade with China would be hurt again by
10. What matters for welfare are the external terms of trade. Suppose that country X exports good A and
imports good B, while country Y exports good B and imports good A. The export subsidy in country
X will raise the internal price of the export good A, leading to an increase in production of good A
and decrease demand of good A. As a result, the world price of the good A falls. The tariff on good A
in country Y will increase production and decrease demand for good A in country Y, leading to a
reduction in the world price of good A relative to good B. Thus, the terms of trade in country X falls
and the terms of trade in country Y rise. Country X is worse off, while country Y is better off.
consumption in exchange for future consumption. In other words, these countries will borrow in the
current period from countries that have a relative preference for future consumption. Much like
international trade, the relative amount of current consumption that is traded for future consumption
is determined by the relative price of future consumption, defined as 1/(1 r), where r is the real
12. Comparative advantage in international borrowing and lending is driven by the relative price of future
consumption, and more specifically, the real interest rate. As the real interest rate rises, the relative price
of future consumption 1/(1 r) falls. Effectively, a country with a high real interest rate is one that has
high returns on investment. Such a country will prefer to borrow today and take advantage of the high
return on investment and enjoy the fruits of current investment with high returns in the future.
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Chapter 6 The Standard Trade Model    27
a. Countries like Argentina and Canada should have high real interest rates as there are large
b. Countries like the United Kingdom in the 19th century or the United States today will have
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley