INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 5: Answers
1. If external economies of scale are important in shoe production, then Chinese firms
will find it more difficult to match Korean costs, given the larger initial volume of
2. The product cycle theory does not assume perfect competition at the start of a new
product cycle; rather, an innovator will have a monopoly until the product
becomes standardized and others can imitate it and enter the industry. Also,
3. Linder predicts that more trade will occur between countries at similar levels of
income because individual countries are likely to develop differentiated but similar
products that appeal to different groups of consumers in each country. They
4. The intra-industry trade index indicates on a scale from 0 to 100 the extent to which a
country both imports and exports goods in the same industry classification. It is sensitive
5. For Country Y the corresponding entries for the four industries are as follows:
[1<minus>60/100]*100 = 40; [1<minus>60/100]*100 = 40; [1<minus>0/100]*100 =
Country Y has a higher index of intra-industry trade. An industry with balanced trade
6. The fashion industry is not likely to be perfectly competitive because each fashion
house attempts to create a unique look and image for itself. Thus, other houses are
only imperfect substitutes for what it produces. Barriers to entry exist in the form of
7. If trade by monopolistically competitive firms occurs in differentiated products that
have similar input requirements, then overall demand for labor and capital will not
8. When there are significant external economies of scale (positive spillovers), production
in the bigger country will take place at a lower average total cost. Those producers
9. The gravity model implies Trade = A GDPi GDPj /Distance. If 40 = 100*75*A/D, then
A/Distance = 0.0053. Consequently, trade between B and C will be Trade =
0.0053*75*50 = 20. We could have predicted this same result by noting that country A is
10. If firm 1 has a monopoly, then it will choose to produce 30; firm 2’s output is 0. The
duopoly solutions is for each firm to produce 20, giving total output of 40. The duopoly
11.A country may lose by opening its closed market to trade if there is a decline in output