Type:
Solution Manual
Resource:
International Economics
Edition:
11th Edition
Author(s):
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Instructor’s Manual to Accompany
International Economics Eleventh Edition Dominick Salvatore
.
(frontmatter)
FM-1
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
TABLE OF CONTENTS • Chapter 1: Introduction Page 1-1
PART ONE: INTERNATIONAL TRADE THEORY • Chapter 2: The Law of Comparative Advantage Page 2-1 • Chapter 3: The Standard Theory of International Trade Page 3-1 • Chapter 4: Demand and Supply, Offer Curves, and the Terms of Trade Page 4-1 • Chapter 5: Factor Endowments and the Heckscher-Ohlin Theory Page 5-1 • Chapter 6: Economies of Scale, Imperfect Competition, and International Trade Page 6-1 •
Additional Essays and Problems for Part One
PART TWO: INTERNATIONAL TRADE POLICY • Chapter 8: Trade Restrictions: Tariffs Page 8-1 • Chapter 9: Nontariff Trade Barriers and the New Protectionism Page 9-1 • Chapter 10: Economic Integration: Customs Unions and Free Trade Areas Page 10-1 • Chapter 11: International Trade and Economic Development Page 11-1 • Chapter 12: International Resource Movements and Multinational Corporations Page 12-1 •
Additional Essays and Problems for Part Two
(frontmatter)
FM-2
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
PART THREE: THE BALANCE OF PAYMENTS, FOREIGN EXCHANGE MARKETS, AND EXCHANGE RATES • Chapter 13: The Balance of Payments Page 13-1 • Chapter 14: Foreign Exchange Markets and Exchange Rates Page 14-1 • Chapter 15: Exchange Rate Determination Page 15-1 •
Additional Essays and Problems for Part Three
PART FOUR:OPEN ECONOMY MACROECONOMICS AND THE INTERNATIONAL MONETARY SYSTEM •
Chapter 16: The Price Adjustment Mechanisms with Flexible and Fixed Exchange Rates Page 16-1 •
Chapter 17: The Income Adjustment Mechanism and Synthesis of Automatic Adjustments Page 17-1 • Chapter 18: Open Economy Macroeconomics: Adjustment Policies Page 18-1 •
Chapter 19: Prices and output in an Open Economy: Aggregate Demand and Aggregate Supply Page 19-1 •
Chapter 20: Flexible versus Fixed Exchange Rates, The European Monetary System, and Macroeconomic Policy Coordination Page 20-1 • Chapter 21: The International Monetary System: Past and Present Page 21-1 •
Additional Essays and Problems for Part Four
(frontmatter)
FM-3
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
INTRODUCTORY COMMENTS Purpose of this Manual The purpose of this manual is to facilitate the use of the text by the Instructor. It contains the detailed outline of each chapter, lecture guides with suggestions on how best to present the material in each chapter, the answer to the end-of-chapter problems, and a set of 12 to 18 multiple-choice questions with answers for each chapter.
Course Outlines The text includes more material than can be covered in a one-semester undergraduate course in international economics, thus providing the Instructor with a great deal of flexibility as to what to include. The core chapters for a one-semester undergraduate course in international economics are: Chapters 1-6, 9, 13-18, 21. I would cover each of these 14 chapters in one week (except for doubling up in one week) of the semester. I would skip the appendices, or make some of them optional. I would give the midterm after Chapter 9 and the final on all chapters covered at the end of the semester. Some Instructors, of course, may want to follow a different format. In an undergraduate course in international trade, I would cover Chapters 1-12, and 21. In a one-semester undergraduate course in international finance, I would cover Chapters 1, 13-21. In a graduate course in International Trade in the MA, MBA, International Affairs, and International Political Economy, I would cover Chapters 1-12, and 21. I would also cover all the appendices and assign readings from the selected bibliography at the end of each chapter. In a graduate course in International Finance in the MA, MBA, International Affairs, and International Political Economy, I would cover Chapters 1 and 13-21. I would also cover all the appendices and assign readings from the selected bibliography. In a graduate course in International Economics, I would cover all 21 chapters, with or without the appendices and other readings from the selected bibliography.
(frontmatter)
FM-4
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Content of this Manual The lecture guide given in this manual is specifically designed for a one-semester undergraduate course in international economics. The questions for review at the end of each chapter involve only recall of what is clearly explained in the text. Their function is simply to emphasize those concepts and theories that the student needs to learn and remember. I would encourage the student to go over them on his own and check his answers in the text. I would assign the problems at the end of each chapter. These are challenging but not tricky or very time consuming. They are intended to enlist the active participation of students so as to make international economics truly come alive. The multiple-choice questions included can be used for quizzes or to be part of the midterm and final examinations. The Instructor who feels that more questions and problems would be useful can consult my small and popular paperback Theory and Problems of International Economics (4th ed., 1996) in the Schaum's Outline Series, which includes a wealth of additional multiple-choice questions and solved problems and to the Study Guide prepared for this text by Professor Arthur Raymond of Muhlenberg College. At the end of each of the four parts of this Manual, there are also additional essays and problems with answers that can be used for class exams.
A Personal Note to You, the Instructor I welcome any comment, suggestion, or opinion that you may have on the use of the text. You can correspond by e-mail directly with me or through John Wiley, and I will personally acknowledge your letter and comment on your suggestions. I will, of course, consider your comments for the next Edition of the text and would gratefully acknowledge any such contribution.
Dominick Salvatore salvatore@fordham.edu
(frontmatter)
FM-5
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
CHAPTER 1 *(Core Chapter) INTRODUCTION OUTLINE 1.1 The Globalization of the World Economy 1.1A We Live in a Global Economy Case Study 1-1: The Dell PCs, iPhones and iPads Sold in the U.S. Are Anything But American! Case Study 1-2: What Is an "American" Car? 1.1B The Globalization Challenge Case Study 1-3: Is India’s Globalization Harming the United States? 1.2 International Trade and The Nation's Standard of Living Case Study 1-4: Rising Importance of International Trade to the United States 1.3 The International Flow of Goods, Services, Labor and Capital 1.3A The International Flow of Goods and Services: The Gravity Model 1.3B The International Flow of Labor and Capital Case Study 1-4: Major Net Exporters and Importers of Capital 1.4 International Economic Theories and Policies 1.4A Purpose of International Economic Theories and Policies 1.4B The Subject Matter of International Economics 1.5 Current International Economic Problems 1.6 Organization and Methodology of the Book 1.6A Organization of the Text 1.6B Methodology of the Text Appendix:
A1.1 Basic International Trade Data A1.2 Sources of Additional International Data and Information
Key Terms Globalization Anti-globalization movement Interdependence Gravity model International trade theory International trade policy New protectionism
(ch01(10))
Foreign exchange markets Balance of payments Adjustment in the balance of payments Microeconomics Macroeconomics Open economy macroeconomics International finance
1-1
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Lecture Guide 1.
As the first chapter of the book, the general aim here is to define the field of study of international economics and its importance in today's interdependent world. The material in this chapter can be covered in two classes. I would utilize one class to cover Sections 1 to 3 and the second class to cover Sections 4 to 6. I would spend most of the second class on Section 3 on the major current international economic problems facing the United States and the world today and to show how international economics can suggest ways to solve them. This should greatly enhance students' motivation.
Answer to Problems 1.
a) International economic problems reported in our daily newspapers are likely to include: • • • • • • •
Slow growth and high unemployment in advanced economies; trade controversies between the United States, Europe, Japan, and China; excessive volatility of exchange rates; huge and unsustainable trade deficits of the United States; structural unemployment in advanced economies and insufficient restructuring in transition economies; deep poverty in many developing nations; resource scarcity, environmental degradation and climate changes
b) The effect of each of the above problems on the U.S. economy are: ● ● • • • • •
stagnant standard of living and economic suffering; increased protectionism and the danger of trade wars; discourages foreign trade and investments; can result in trade protectionism and/or deep dollar depreciation; reduces advanced countries' imports of goods and services from the rest of the world; can lead to political instability abroad that would adversely affect the U.S.; endangers future standard of living in the U.S. and abroad.
c) The effect of each of the current international economic problems can affect each of us, as follows: ● ●
•
(ch01(10))
Can lose job and suffer financial losses; pay higher prices for imported products; great fluctuations in the price of imported products and cost of foreign travel;
1-2
Dominick Salvatore
International Economics – 11th Edition
• • • • 2.
Instructor’s Manual
can lead you to support demands for trade protection; slower growth of wages and incomes; can lead to higher taxes to help poor countries; can result in higher taxes and price of fuel and other products.
a) Five industrial nations not mentioned are: France, Italy, Spain, Sweden, and Austria. b) See Table 1A. Note that, generally, smaller nations have higher percentages of imports and exports to GDP. The exception is Spain, which though economically smaller than Italy, has a smaller percentage of imports and exports to GDP than Italy.
Table 1A Economic Interdependence as Measured by Imports and Exports as a Percentage of GDP, 2010
Nation France Italy Spain Sweden Austria
Imports as a percent of GDP 27.7 28.5 28.4 44.1 50.5
Exports as a percent of GDP 25.4 26.7 26.2 49.9 55.3
Source: International Financial Statistics (Washington, D.C., IMF, November 2011).
3.
a) Five developing nations not mentioned in the text are: Brazil, Pakistan, Colombia, Morocco, and Tunisia. b) See Table 1B. Note that, once again, the smaller the nation, the greater is its economic interdependence.
(ch01(10))
1-3
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Table 1B Economic Interdependence as Measured by Imports and Exports as a Percentage of GDP, 2010
Nation Brazil Pakistan Peru Morocco Tunisia
Imports as a percent of GDP
Exports as a percent of GDP
12.1
11.2
19.0
12.9
22.8
25.78
39.5
28.6
47.9
45.0
Source: IFS (Washington, D.C., IMF, November 2011).
4.
Trade between the United States and Brazil is much larger than trade between the United States and Argentina. Since Brazil is larger and closer than Argentina, this trade does follow the predictions of the gravity model.
5.
a) Mankiw’s Economics (6th., 2011) includes the following microeconomics topics: • • • • • • • • • • •
b)
(ch01(10))
The market forces of demand and supply; elasticity and its application; the theory of consumer choice; consumers, producers, and the efficiency of markets; the costs of production; firms in competitive markets; monopoly; oligopoly; monopolistic competition; markets for the factors of production; the demand for resources;
Just as the microeconomics parts of your principles text deal with individual consumers and firms, and with the price of individual commodities and factors of production, so do Parts One and Two of this text deal with production and consumption of individual nations with nations with and without trade, and with the relative price of individual commodities and factors of production.
1-4
Dominick Salvatore
International Economics – 11th Edition
c)
Instructor’s Manual
Mankiw’s Economics (6th., 2011) includes the following microeconomics topics: measuring a nation’s income and the cost of living; • • • • • • • • • • •
production and growth; savings investment and the financial system; unemployment and its natural rate; the monetary system, growth and inflation; money growth and inflation; open-economy macroeconomics: basic concepts; a macroeconomic theory of the open economy; aggregate demand and aggregate supply; the influence of monetary and fiscal policy on aggregate demand; the short-run trade off between inflation and unemployment five debates over macroeconomic policy.
d)
Just as the macroeconomics parts of your principles text deal with the aggregate level of savings, consumption, investment, and national income, the general price level, and monetary and fiscal policies, so do Parts Three and Four of this text deal with the aggregate amount of imports, exports, the total international flow of resources, and the policies to affect these broad aggregates.
6.
a) Consumer demand theory predicts than when the price of a commodity rises (cet. par.), the quantity demanded of the commodity declines. When the price of imports rises to domestic consumers, the quantity demanded of imports can be expected to decline (if everything else remains constant).
7.
a) A government can reduce a budget deficit by reducing government expenditures and/or increasing taxes. b) A nation can reduce or eliminate a balance of payments deficit by taxing imports and/or subsidizing exports, by borrowing more abroad or lending less to other nations, as well as by reducing the level of its national income.
8.
(ch01(10))
a) Nations usually impose restrictions on the free international flow of goods, services, and factors. Differences in language, customs, and laws also hamper these international flows. In addition, international flows may involve receipts and payments in different currencies, which may change in value in relation to one another through time. This is to be contrasted with the interregional flow of goods, services, and factors, which face no such restrictions as tariffs and are conducted in terms of the same currency, usually in the same language, and under basically the same set of customs and laws.
1-5
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
b) Both international and interregional economic relations involve the overcoming of space or distance. Indeed, they both arise from the problems created by distance. This distinguishes them from the rest of economics, which abstracts from space and treats the economy as a single point in space, in which production, exchange, and consumption take place. 9.
We can deduce that nations benefit from voluntarily engaging in international trade because if they did not gain or if they lost they could avoid those losses by simply refusing to trade. Disagreement usually arises regarding the relative distribution of the gains from specialization in production and trade, but this does not mean that each nation does not gain from trade.
10.
International trade results in lower prices for consumers but harms domestic producers of products, which compete with imports. Often those domestic producers that stand to lose a great deal from imports band together to pressure the government to restrict imports. Since consumers are many and unorganized and each individually stands to lose only very little from the import restrictions, governments often give in to the demands of producers and impose some import restrictions. These topics are discussed in detail in Chapter 8.
11.
A nation can subsidize exports of the commodity to other nations until it drives the competing nation's industry out of business, after which it can raise its price and benefit from its newly acquired monopoly power. Some economists and politicians in the United States have accused Japan of doing just that (i.e., of engaging in strategic trade and industrial policy at the expense of U.S. industries), but this is a very complex and controversial aspect of trade policy and will be examined in detail in Chapter 9.
12.
a) When the value of the U.S. dollar falls in relation to the currencies of other nations, imports become more expensive for Americans and so they would purchase a smaller quantity of imports. b) When the value of the U.S. dollar falls in relation to the currencies of other nations, U.S. exports become chapter for foreigners and so they would purchase a greater quantity of U.S. exports.
(ch01(10))
1-6
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Multiple-Choice Questions
1. Which of the following products are not produced at all in the United States? *a. Coffee, tea, cocoa b. steel, copper, aluminum c. petroleum, coal, natural gas d. typewriters, computers, airplanes 2. International trade is most important to the standard of living of: a. the United States *b. Switzerland c. Germany d. England 3. Over time, the economic interdependence of nations has: *a. grown b. diminished c. remained unchanged d. cannot say 4. A rough measure of the degree of economic interdependence of a nation is given by: a. the size of the nations' population b. the percentage of its population to its GDP *c. the percentage of a nation's imports and exports to its GDP d. all of the above 5. Economic interdependence is greater for: *a. small nations b. large nations c. developed nations d. developing nations 6. The gravity model of international trade predicts that trade between two nations is larger a. the larger the two nations b. the closer the nations c. the more open are the two nations *d. all of the above
(ch01(10))
1-7
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
7. International economics deals with: a. the flow of goods, services, and payments among nations b. policies directed at regulating the flow of goods, services, and payments c. the effects of policies on the welfare of the nation *d. all of the above 8. International trade theory refers to: *a. the microeconomic aspects of international trade b. the macroeconomic aspects of international trade c. open economy macroeconomics or international finance d. all of the above 9. Which of the following is not the subject matter of international finance? a. foreign exchange markets b. the balance of payments *c. the basis and the gains from trade d. policies to adjust balance of payments disequilibria 10. Economic theory: a. seeks to explain economic events b. seeks to predict economic events c. abstracts from the many detail that surrounds an economic event *d. all of the above 11. Which of the following is not an assumption generally made in the study of international economics? a. two nations b. two commodities *c. perfect international mobility of factors d. two factors of production 12. In the study of international economics: a. international trade policies are examined before the bases for trade b. adjustment policies are discussed before the balance of payments c. the case of many nations is discussed before the two-nations case *d. none of the above
(ch01(10))
1-8
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
13. International trade is similar to interregional trade in that both must overcome: *a. distance and space b. trade restrictions c. differences in currencies d. differences in monetary systems 14. The opening or expansion of international trade usually affects all members of society: a. positively b. negatively *c. most positively but some negatively d. most negatively but some positively 15. An increase in the dollar price of a foreign currency usually: a. benefit U.S. importers *b. benefits U.S. exporters c. benefit both U.S. importers and U.S. exporters d. harms both U.S. importers and U.S. exporters 16. Which of the following statements with regard to international economics is true? a. It is a relatively new field *b. it is a relatively old field c. most of its contributors were not economists d. none of the above
(ch01(10))
1-9
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
CHAPTER 2 *(Core Chapter) THE LAW OF COMPARATIVE ADVANTAGE
OUTLINE 2.1 Introduction 2.2 The Mercantilists' Views on Trade Case Study 2-1: Munn's Mercantilistic Views on Trade Case Study 2-2: Mercantilism Is Alive and Well in the Twenty-first Century 2.3 Trade Based on Absolute Advantage: Adam Smith 2.3A Absolute Advantage 2.3B Illustration of Absolute Advantage 2.4 Trade Based on Comparative Advantage: David Ricardo 2.4A The Law of Comparative Advantage 2.4B The Gains from Trade 2.4C Exception to the Law of Comparative Advantage 2.4D Comparative Advantage with Money Case Study 2-3: The Petition of the Candlemaker 2.5 Comparative Advantage with Opportunity Costs 2.5A Comparative Advantage and the Labor Theory of Value 2.5B The Opportunity Cost Theory 2.5C The Production Possibility Frontier Under Constant Costs 2.5D Opportunity Costs and Relative Commodity Prices 2.6 The Basis and the Gains from Trade Under Constant Costs 2.6A Illustration of the Gains from Trade 2.6B Relative Commodity Prices with Trade 2.7 Empirical Tests of the Ricardian Model Case Study 2-4: Relative Unit Labor Costs and Relative Exports – United States and Japan Appendix:
(ch02.doc)
A2.1 Comparative Advantage with More than Two Commodities A2.2 Comparative Advantage with More than Two Nations
2-1
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Key Terms Basis for trade Gains from trade Pattern of trade Mercantilism Absolute advantage Laissez-faire Law of comparative advantage
Labor theory of value Opportunity cost theory Production possibility frontier Constant opportunity cost Relative commodity prices Complete specialization Small country case
Lecture Guide 1.
This is a long and crucial core chapter and may require four classes to cover a adequately. In the first lecture, I would present Sections 1, 2, and 3. These are short s sections and set the stage for the crucial law of comparative advantage.
2.
In the second lecture of Chapter 2, I would concentrate on Section 4 and carefully explain the law of comparative advantage using simple numerical examples as in the text. The crucial parts here are 4b (which explains the law) and 4d (which establishes the link between trade theory and international finance). I find that the numerical explanations before the graphical analysis really helps the student to truly understand the law. The simple lawyer-secretary example should also render the law more immediately relevant to the student. I would also assign Problems 1-6.
3.
In the third lecture, I would cover Sections 2.5 and 2.6a. I would pay particular attention to Sections 2.5c, 2.5d, and 2.6, which are the heart of the chapter.
4.
In the fourth lecture, I would cover the remainder of the chapter. The crucial section here is 2.6b and the most difficult concept to explain is the shape of the combined supply curve for wheat and cloth. The appendixes could be made optional for the more enterprising students in the class. I would also assign Problems 7-13.
Answer to Problems 1.
In case A, the United States has an absolute advantage in wheat and the United Kingdom in cloth. In case B, the United States has an absolute advantage (so that the United Kingdom has an absolute disadvantage) in both commodities. In case C, the United States has an absolute advantage in wheat but has neither an absolute advantage nor disadvantage in cloth. In case D, the United States has an absolute advantage over the United Kingdom in both commodities.
(ch02.doc)
2-2
Dominick Salvatore
International Economics – 11th Edition
2.
Instructor’s Manual
In case A, the United States has a comparative advantage in wheat and the United Kingdom in cloth. In case B, the United States has a comparative advantage in wheat and the United Kingdom in cloth. In case C, the United States has a comparative advantage in wheat and the United Kingdom in cloth. In case D, the United States and the United Kingdom have a comparative advantage in neither commodities.
3.
In case A, trade is possible based on absolute advantage. In case B, trade is possible based on comparative advantage. In case C, trade is possible based on comparative advantage. In case D, no trade is possible because the absolute advantage that the United States has over the United Kingdom is the same in both commodities.
4.
a) The United States gains 1C. b) The United Kingdom gains 4C. c) 3C < 4W < 8C. d) The United States would gain 3C while the United Kingdom would gain 2C.
5)
a) The cost in terms of labor content of producing wheat is 1/4 in the United States a and 1 in the United Kingdom, while the cost in terms of labor content of producing cloth is 1/3 in the United States and 1/2 in the United Kingdom. b) In the United States, Pw=$1.50 and Pc=$2.00. c) In the United Kingdom, Pw=£1.00 and Pc=£0.50.
6)
a) With the exchange rate of £1=$2, Pw=2.00 and Pc=$1.00 in the United Kingdom, so that the United States would be able to export wheat to the United Kingdom and the United Kingdom would be able to export cloth to the United States. b) With the exchange rate of £1=$4, Pw=$4.00 and Pc=$2.00 in the United Kingdom, so that the United States would be able to export wheat to the United Kingdom, but the United Kingdom would be unable to export any cloth to the United States.
(ch02.doc)
2-3
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
c) With £1=$1, Pw=$1.00 and Pc=$0.50 in the United Kingdom, so that the United Kingdom would be able to export both commodities to the United States. d) $1.50 < £1.00 < $4.00. 7.
a) See Figure 1. b) In the United States Pw/Pc=3/4, while in the United Kingdom, Pw/Pc=2. c) In the United States Pc/Pw=4/3, while in the United Kingdom Pc/Pw=1/2.
8.
See Figure 2. The autarky points are A and A' in the United States and the United Kingdom, respectively. The points of production with trade are B and B' in the United States and the United Kingdom, respectively. The points of consumption are E and E' in the United States and the United Kingdom, respectively. The gains from trade are shown by E > A for the U.S. and E' > A' for the U.K.
9.
a) If DW(US+UK) shifted up in Figure 2.3, the equilibrium relative commodity price of wheat would also rise by 1/3 to PW/PC=4/3. Since the higher DW(US+UK) would still intersect the vertical portion of the SW(US+UK) curve, the United States would continue to specialize completely in the production of wheat and produce 180W, while the United kingdom would continue to specialize completely in the production of cloth and produce 120C. b) Since the equilibrium relative commodity price of cloth is the inverse of the relative commodity price of wheat, if the latter rises to 4/3, then the former falls to ¾.. This means that DC(UK+US) shifts down by 1/3 in the right panel of Figure 2.3.
(ch02.doc)
2-4
Dominick Salvatore
International Economics – 11th Edition
(ch02.doc)
Instructor’s Manual
2-5
Dominick Salvatore
International Economics – 11th Edition
10.
Instructor’s Manual
If DW(US+UK) intersected SW(US+UK) at PW/PC=2/3 and 120W in the left panel of Figure 2.3, this would mean that the United States would not be specializing completely in the production of wheat. The United Kingdom, on the other hand, would be specializing completely in the production of cloth and exchanging 20C for 30W with the United States. Since the United Kingdom trades at U.S. the pre-trade relative commodity price of PW/PC=2/3 in the United States, the United Kingdom receives all of the gains from trade.
11.
See Figure 3 on page 15 and the discussion in the last paragraph of Section 2.6b in the text.
12.
a) The Ricardian model was tested empirically by showing the positive correlation between relative productivities and the ratio of U.S.to U.K. exports to third countries and by the negative correlation between relative unit labor costs and relative exports b) The Ricardian trade model was confirmed by the positive relationship found between the relative labor productivity and the ratio of U.S. to U.K. exports to third countries, as well as by the negative relationship between relative unit labor costs and relative exports. c) Even though the Ricardian model was more or less empirically confirmed we still need other models because the former assumes rather than explains comparative advantage (i.e, it does not explain the reason for the different labor productivities in different nations) and cannot say much regarding the effect of international trade on the earnings of factors of production. d) The United States has a comparative disadvantage in the production of textiles. Restricting textile imports would keep U.S. workers from eventually moving into industries in which the United States has a comparative advantage and in which wages are higher.
(ch02.doc)
2-6
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
Answer to Problem in Appendix 2 The numbers in the following table refer to the cost or price of commodities X, Y, and Z in nations A, B, and C in terms of the same currency. Thus, nation A exports commodity X to nations B and C; nation B exports commodity Y to nations A and C; nation C exports commodity Z to nations A and B.
Commodity
X Y Z
A 1 3 4
Nation B 2 1.5 3
C 3 2 2
Multiple-Choice Questions
1. The Mercantilists did not advocate: *a.free trade b. stimulating the nation's exports c. restricting the nations' imports d. the accumulation of gold by the nation 2. According to Adam Smith, international trade was based on: *a. absolute advantage b. comparative advantage c. both absolute and comparative advantage d. neither absolute nor comparative advantage 3. What proportion of international trade is based on absolute advantage? a. All b. most *c. some d. none
(ch02.doc)
2-7
Dominick Salvatore
International Economics – 11th Edition
Instructor’s Manual
4. The commodity in which the nation has the smallest absolute disadvantage is the commodity of its: a. absolute disadvantage b. absolute advantage c. comparative disadvantage *d. comparative advantage 5. If in a two-nation (A and B), two-commodity (X and Y) world, it is established that nation A has a comparative advantage in commodity X, then nation B must have: a. an absolute advantage in commodity Y b. an absolute disadvantage in commodity Y c. a comparative disadvantage in commodity Y *d. a comparative advantage in commodity Y 6. If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input): a. nation A has a comparative disadvantage in commodity X b. nation B has a comparative disadvantage in commodity Y *c. nation A has a comparative advantage in commodity X d. nation A has a comparative advantage in neither commodity 7. With reference to the statement in Question 6: a Px/Py=1 in nation A b. Px/Py=3 in nation B c. Py/Px=1/3 in nation B *d. all of the above 8. With reference to the statement in Question 6, if 3X is exchanged for 3Y: a. nation A gains 2X *b. nation B gains 6Y c. nation A gains 3Y d. nation B gains 3Y 9. With reference to the statement of Question 6, the range of mutually beneficial trade between nation A and B is: a 3Y < 3X < 5Y b. 5Y < 3X < 9Y *c 3Y < 3X < 9Y d. 1Y < 3X < 3Y
(ch02.doc)
2-8
Dominick Salvatore