978-0132146654 Chapter 9 Solution Manual

Type

Quiz

Book Title

International Economics: Theory and Policy 9th Edition

ISBN 13

978-0132146654

December 18, 2019

nAnswers to Textbook Problems

1. The import demand equation, MD, is found by subtracting the home supply equation from the Home

2. a. Foreign’s export supply curve, XS, is XS  40  40  P. In the absence of trade, the price is 1.

b. When trade occurs, export supply is equal to import demand, XS  MD. Thus, using the equations

3. a. The new MD curve is 80  40  (P t) where t is the specific tariff rate, equal to 0.5. (Note: In

solving these problems, you should be careful about whether a specific tariff or ad valorem tariff

is imposed. With an ad valorem tariff, the MD equation would be expressed as MD  80  40 

(1 t)P.) The equation for the export supply curve by the foreign country is unchanged.

MD  XS

b. and c. The welfare of the Home country is best studied using the combined numerical and

graphical solutions presented below in Figure 9-1.

Chapter 9 The Instruments of Trade Policy 43

Figure 9-1

where the areas in the figure are:

4. Using the same solution methodology as in Problem 3, when the Home country is very small

relative to the Foreign country, its effects on the terms of trade are expected to be much less. The

small country is much more likely to be hurt by its imposition of a tariff. Indeed, this intuition is

shown in this problem. The free trade equilibrium is now at the price $1.09 and the trade volume

is now 36.40.

With the imposition of a tariff of 0.5 by Home, the new world price is $1.045, the internal Home price is

$1.545, Home demand is 69.10 units, Home supply is 50.90, and the volume of trade is 18.20. When

Home is relatively small, the effect of a tariff on world price is smaller than when Home is relatively

5. The effective rate of protection (ERP) is defined as (Vt  Vw)/Vw, where Vt is the value added under

protection and Vw is the value added under free trade. We define value added as the difference between

Chapter 9 The Instruments of Trade Policy 44

6. The effective rate of protection takes into consideration the costs of imported intermediate goods.

7. We first use Foreign’s export supply and Home’s import demand curves to determine the new

world price. The Foreign supply of exports curve, with a Foreign subsidy of 0.5 per unit, becomes

XS  40  40(1 0.5)  P. The equilibrium world price is 1.2 and the internal Foreign price is 1.8.

8. a. False, unemployment has more to do with labor market issues and the business cycle than with

tariff policy. Empirical estimates suggest that the cost to society of jobs saved through tariffs is

exorbitantly high and tariffs may actually increase unemployment in nonprotected industries.

9. At a price of $10 per bag of peanuts, Acirema imports 200 bags of peanuts. A quota limiting the

import of peanuts to 50 bags has the following effects:

a. Set MD  50 to find the post-quota price: 350  15P  50. The price of peanuts rises to $20 per

bag.

Chapter 9 The Instruments of Trade Policy 45

10. The reason is largely that the benefits of these policies accrue to a small group of people and the

costs are spread out over many people. Thus, those that benefit care far more deeply about these

11. It would improve the income distribution within the economy since wages in manufacturing

would increase, and real incomes for others in the economy would decrease due to higher prices