Solution Key For Assigned Questions From Textbook
Solution Key For Assigned Questions From Textbook
Department of Economics
University of Waterloo
2. Mexico is quite close to the U.S., but it is far from the European Union
(EU). So it makes sense that it trades largely with the U.S. Brazil is far from
both, so its trade is split between the two. Mexico trades more than Brazil in
part because it is so close to a major economy (the U.S.) and in part because
it is a member of a free trade agreement with a large economy (NAFTA).
Brazil is farther away from any large economy and is in a free trade
agreement with relatively small countries.
3. Skip question 3
4. As the share of world GDP which belongs to East Asian economies grows,
then in every trade
relationship which involves an East Asian economy, the size of the East Asian
economy has grown. This makes the trade relationships with East Asian
countries larger over time. The logic is similar for why the countries trade
more with one another. Previously, they were quite small economies,
meaning that their markets were too small to import a substantial amount.
As they became more wealthy and the consumption demands of their
populace rose, they were each able to import more. Thus, while they
previously had focused their exports to other rich nations, over time, they
became part of the rich nation club and thus were targets for one another’s
exports.
Chapter 2
1. a. The production possibility curve is a straight line that intercepts the
apple axis at 400(1200/3) and the banana axis at 600(1200/2).
Banana
600
400 Apple
800
160 Apple
5
1.5
3. a. The relative demand curve includes the Points (1/5, 5), (1/2, 2), (1, 1),
(2, 1/2).
4. The increase in the number of workers at Home shifts out the relative
supply schedule such that the corner Points are at (1, 3/2) and (1, 5), instead
of (1/2, 3/2) and (1/2, 5). The intersection of the relative demand and relative
supply curves is now in the lower horizontal section, at the Point (2/3, 3/2). In
this case, Foreign still gains from trade but the opportunity cost of bananas
in terms of apples for Home is the same whether or not there is trade, so
Home neither gains nor loses from trade.
Chapter 4:
2. a. The box diagram has 600 as the length of two sides (representing
labour) and 60 as the length of the other two sides (representing land).
There will be a ray from each of the two corners representing the origins. To
find the slopes of these rays we use the information from the question
concerning the ratios of the production coefficients. The question states that
aLC/aTC = 20 and aLF/aTF = 5.
Since aLC/aTC = (Lc/QC)/(TC/QC) = LC/TC we have LC = 20TC. Using the same
reasoning,
aLF/aTF = (LF/QF)/(TF/QF) = LF/TF and since this ratio equals 5, we have LF = 5TF.
We can
solve this algebraically since L = LC + LF = 600 and T = TC + TF = 60.
b. The dimensions of the box change with each increase in available labour,
but the slopes of the rays from the origins remain the same. The solutions in
the different cases are as follows.
L = 800: TC = 33.33, LC = 666.67, TF = 26.67, LF = 133.33
L = 1000: TC = 46.67, LC = 933.33, TF = 13.33, LF = 66.67
L = 1200: TC = 60, LC = 1200, TF = 0, LF = 0. (complete specialization).
3. What matters is not the absolute abundance of factors, but their relative
abundance. Poor countries have an abundance of labour relative to capital
when compared to more developed countries.
4. In the Ricardian model, labour gains from trade through an increase in its
purchasing power. This result does not support labour union demands for
limits on imports from less affluent countries. The Heckscher-Ohlin model
directly addresses distribution by considering the effects of trade on the
owners of factors of production. In the context of this model, unskilled U.S.
labour loses from trade since this group represents the relatively scarce
factors in this country. The results from the Heckscher-Ohlin model support
labour union demands for import limits. In the short run, certain unskilled
unions may gain or lose from trade depending on in which sector they work,
but in theory, in the longer run, the conclusions of the Heckscher-Ohlin
model will dominate.
6. The factor proportions theory states that countries export those goods
whose production is intensive in factors with which they are abundantly
endowed. One would expect the United States, which has a high
capital/labour ratio relative to the rest of the world, to export capital-
intensive goods if the Heckscher-Ohlin theory holds. Leontief found that the
United States exported labour-intensive goods. Bowen, Leamer and
Sveikauskas found for the world as a whole the correlation between factor
endowment and trade patterns to be tenuous. The data do not support the
predictions of the theory that countries’ exports and imports reflect the
relative endowments of factors.
Chapter 5:
e. A reduction in Japan’s tariff on raw materials will raise its internal relative
price of manufactures.
This price change will increase Japan’s RS and decrease Japan’s RD, which
increases the world
RS and decreases the world RD (i.e., world RS shifts out and world RD shifts
in). The world
relative price of manufactures declines and Japan’s terms of trade
deteriorate.
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 favours production of Good X, while an increase in the labour
supply favours production of Good Y. Also, recognize the Heckscher-Ohlin
result that an economy will export that good which uses intensively the
factor which that economy has in relative abundance. Country A exports
Good X to Country B and imports Good Y from Country B.
The possibility of immiserizing growth makes the welfare effects of terms of
trade improvement due to export-biased growth ambiguous. Import-biased
growth unambiguously improves welfare for the growing country.
a. A’s terms of trade worsen, A’s welfare may increase or, less likely,
decrease, and B’s welfare
increases.
b. A’s terms of trade improve, A’s welfare increases and B’s welfare
decreases.
c. B’s terms of trade improve, B’s welfare increases and A’s welfare
decreases.
d. B’s terms of trade worsen, B’s welfare may increase or, less likely,
decrease, and A’s welfare
increases.