Test 1 from HW Chapters 1-8
The GATT was
an international treaty governing trade.
External economies of scale
are more likely to be associated with a perfectly competitive industry.
For trade to take place, a country must face a world relative price that is
different from the relative price that would prevail in the absence of trade.
A country has a comparative advantage in producing a good if
its opportunity cost of producing that good is lower than elsewhere.
In the accompanying diagram the curves labeled SB and CC show, for soybeans and cigars respectively, how the land-labor ratio chosen for each good's production varies with the wage-rental (w/r) ratio. Using the line drawing tool, show, for an arbitrary wage-rental (w/r) ratio, how the land-labor ratio varies across the two industries. Label this line 'w/r'. Carefully follow the instructions above and only draw the required object. From the intersection points of the CC and SB curves with the (w/r) line it can be deduced that cigars are the _______ good.
labor-intensive
The diagram to the right depicts a country's production possibilities frontier, labeled TT^1. Assume that cigars are labor-intensive and sugar is land-intensive. Output is at point 1, where the slope of the production possibilities frontier equals the negative of the relative price of cigars, -Pc/Ps. Suppose that one (and only one) of the economy's two resources increases by an amount such that the land-intensive good's maximum output increases by 125% (i.e., by a factor of 2.25), while the labor-intensive good's maximum output increases by just 20%. Given these divergent increases, it has to be the case that the resource that increased was _____.
land
The following table contains information for the hypothetical United Colonies, a country known to be very capital-abundant. It might be said that the data conflicts with the factor-proportions theory since the U.C. has exports that are ____ capital-intensive than its imports. A similar contradiction was actually detected for the post-WWII United States by Russian-born economist Wassily Leontief (1906-1999) in a landmark 1953 study. One possible explanation for the apparent "paradox" for the United States (as well as for the hypothetical United Colonies shown above) is that
less while the country is abundant in physical capital, it is even more abundant in human capital.
When an economy is open to trade, the relative price of a good is determined by the
relative supply and demand for the world.
Within each country that opens itself to international trade,
some factor owners gain, but other factor owners lose.
Over the past forty years the composition of developing-country exports has
undergone a dramatic shift from primary products to manufactures.
Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant (primarily, Southeast Asia and the Caribbean)—but those firms do not integrate with their suppliers there. On the other hand, firms in many capital-intensive industries choose to integrate with their suppliers. What could be some differences between the labor-intensive apparel and footwear industries on the one hand and capital-intensive industries on the other hand that would explain these choices? A multinational may prefer to
use a foreign affiliate if it has a proprietary technology that it is concerned about losing, which is more likely to be the case in capital-intensive industries.
In claiming that "size matters," the gravity model asserts that there is a strong empirical relationship between the size of a country's economy and the
volume of its imports and exports.
In each sector of a specific factors economy, profit-maximizing employers will demand labor up to the point where
the marginal product of labor times the price of the product equals the wage rate.
Using the appropriate drawing tool, shade in the region that represents 'Rents' given a real wage of $20. Carefully follow the instructions above and only draw the required object. At this real wage of $20, what is the total wage bill (total payment to labor)? $____. (Enter your response rounded to the nearest dollar.)
$1200
Use the following expression for the gravity model and the table's hypothetical data to answer the questions below: Tij = 0.001 x ((Yi x Yj)/Dij) Country GDP Distance from Alada: Distance from: Belam Alada $25,000 ----- 50km Belam $5,000 50km ----- Canson $______ 250km 200km What is the predicted volume of trade between Alada and Belam? If Canson has the same trading volume with Alada as does Belam, Canson's GDP must be
$2,500 $25,000
Whether an economy engages in trade or remains closed, it will always be true that the value of its consumption must equal the value of its production. Suppose that an economy produces manufactured goods (M) and food (F). This requirement is indicated by the expression: (Pm x Dm) + (Pf x Df) = (Pm x Qm) + (Pf x Qf) Pm=price of manufactured goods Pf=price of food Dm=domestic consumption of manufactured goods Df=domestic consumption of food Qm=domestic production of manufactured goods Qf=domestic production of food Assuming this country engages in trade and ends up importing food, which of the following expressions reveals (Df-Qf), its imports of food?
(Pm/Pf) x (Qm-Dm)
Classify each of the following transactions as belonging primarily to the sphere of international trade analysis (T) or international monetary analysis (M). (Enter T for Trade or M for Monetary.)
*Foreigners purchase US dollars - Monetary *The US imports crude oil from the Middle East - Trade *The US imposes tariffs on foreign steel - Trade *The Chinese government purchases US treasury bonds - Monetary *The Chinese currency is seen as being undervalued - Monetary
In our discussion of labor market pooling, we stressed the advantages of having two firms in the same location: If one firm is expanding while the other is contracting, it's to the advantage of both workers and firms that they be able to draw on a single labor pool. But it might happen that both firms want to expand or contract at the same time. Does this constitute an argument against geographical concentration? To answer this question, imagine that there are two companies that both use the same kind of specialized labor, say, two film studios that make use of experts in computer animation. Suppose that there are 400 workers with this special skill. Now compare two different scenarios: In scenario 1, both firms and all 400 workers are in the same city, and each firm is able to hire 200 workers. In scenario 2, the two firms, each with 200 workers, are in two different cities. Now suppose that both firms are contracting, decreasing their demand for labor down to 190 each. In the first scenario, each firm will face a local labor In the second scenario, each firm will face a local labor Thus, locating next to each other ______ disadvantages over locating far apart when both firms are contracting.
1st scenario - surplus of 10 workers. 2nd scenario - surplus of 10 workers. Thus, locating next to each other does not present any....
Assume the U.S. currently grows 2.32.3 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 200,000 laptop computers. Therefore, the opportunity cost of those 2.32.3 million tons of fruit is ______ computers. (Enter your response as an integer.) Suppose that South America could have instead produced those 2.32.3 million tons of fruit at an opportunity cost of 150,000 laptops. Because of the difference in opportunity costs between the two regions, it can be shown that trade gives the possibility of
200,000 computers a mutually beneficial rearrangement of world production.
In Home and Foreign there are two factors of production, land and labor, used to produce only one good. The land supply in each country and the technology of production are exactly the same. The marginal product of labor in each country depends on employment as shown in the table to the right. Initially, there are 11 workers employed in Home, but only 3 workers in Foreign. Find the effect of free movement of labor from Home to Foreign on employment, production, real wages, and the income of landowners in each country. In equilibrium, there will be ___ workers in Home and ___ workers in Foreign. World output will increase from ___ units to ___ units. The real wage in Home will ____ and the real wage in Foreign will _____. Landowners' income in Home will _____ and landowners' income in Foreign will increase.
7 workers in Home and 7 workers in Foreign increase from 222 units to 238 unites Home will increase and the real wage in Foreign will decrease Home will decrease and landowners' income in Foreign will increase
The sources of modern trade are largely rooted in
country differences in human and human-created resources
A century ago, most British imports came from relatively distant locations: North America, Latin America, and Asia. Today, most British imports come from other European countries. How does this fit in with the changing types of goods that make up world trade?
A century ago trade was mostly in commodities that were not produced in Europe. Today, 61 percent of trade is in manufactured goods, and as the gravity model predicts, Britain trades with the other large European economies.
From the list below, choose two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of the above examples, "learning-by-doing" is important to the dynamic increasing returns in the industry.
Biotechnology and Aircraft Design Draw a curved inward line from a higher unit cost to a high cumulative output - downward
Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada's is 60 percent larger). But Canadian trade is twice as large, relative to GDP, as Australia's. Why should this be the case?
Canada is close to a major economy AND Transportation costs for imports and exports are higher in Australia because the distance goods must travel.
One use to which a gravity model can be put is as an assessment tool of the effectiveness of a trade agreement. The figures above summarize data for a group of hypothetical countries. According to the figure on the left, trade prior to any agreement among the countries is ________ with predictions from the gravity model. Suppose that countries D and B reach a trade pact that substantially lowers trade impediments between them. According to the figure on the right, the agreement appears to have been
Consistent Effective
Suppose that GDP for each country in the table to the right doubled. Complete the following table Values of Exports ($ trillion) To: A B C D A -- 3.2 0.8 0.8 B 3.2 -- 0.8 0.8 C 0.8 0.8 -- 0.2 D 0.8 0.8 0.2 -- Does this mean that if the GDP of every country in the world doubled, world trade would quadruple? No.
Country /%Share of World Spending / GDP ($ trillion) A - 40 - 4 B - 40 - 4 C - 10 - 1 D - 10 - 1 Values of Exports ($ trillion) To: A B C D A -- 1.6 0.4 0.4 B 1.6 -- 0.4 0.4 C 0.4 0.4 -- 0.1 D 0.4 0.4 0.1 --
Suppose that the resource base in Country X can produce either 100 units of alpha or 300 units of beta. Similarly, suppose that Country Y's resource base is capable of producing 100 units of alpha or 200 betas. Clearly, the opportunity cost of 100 alphas is lower in Based on this result, it would be best for Country X to concentrate on good Complete the following table to reveal the changes in production if country X stops producing alphas while country Y shifts resources out of its beta industry to concentrate on alphas.
Country Y beta Hypothetical changes in Production -----units of alpha / units of beta country X -100 +300 country Y +100 -200 total 0 +100
The quantity of direct foreign investment by the United States into Mexico has increased dramatically during the last decade. How would you expect this increased quantity of direct foreign investment to affect migration flows from Mexico to the United States, all else being equal?
Direct foreign investment has increased the amount of capital per worker in Mexico. This will increase the marginal product of labor and increase the real wage, which should slow the flow of labor from Mexico.
Suppose a specific factors economy produces two goods: X and Y. Given that the economy is open to trade, and assuming that D is consumption, Q is production, and P is price, the budget constraint can be defined as
Dx-Qx = (Py/Px)*(Qy-Dy)
Consider the figure to the right, in which two countries (country A and country B) that can produce a good are subject to forward-falling supply curves. In this case, the two countries have the same costs, so that their supply curves are identical. What would you expect to be the pattern of international specialization and trade? What would determine who produces the good? What are the benefits of international trade in this case? Do they accrue only to the country that gets the industry?
If one country starts out as a producer of a good, then all production will occur in that particular country and it will export to the rest of the world. Likely historical accident or chance would determine who produces the good. Consumers in both countries are better off because of lower prices.
International trade based on scale economies is likely to be associated with
None of the above: the law of diminishing returns. Ricardian comparative advantage. comparative advantages associated with Heckscher-Ohlin factor-proportions. absolute advantages due to resource abundance.
Recently, computer programmers in developing countries such as India have begun doing work formerly done in the United States. This shift has undoubtedly led to substantial pay cuts for some programmers in the United States. Answer the following two questions: How is this possible when the wages of skilled labor are rising in the United States as a whole? Which of the following arguments would trade economists make against seeing these wage cuts as a reason to block outsourcing of computer programming?
In the short run, programmers with specific skills that compete with Indian workers may face wage cuts, while, in the long run, programming in general becomes more efficient, which can increase wages for others in the industry. All of the above: It is possible for those who gain from outsourcing to compensate those who lose. Allowing programming to be done more cheaply expands the production possibilities frontier of the US, making the entire country better off on average. The income distribution effects from outsourcing are not specific to international trade.
The table to the right gives the employment share of four industries within the three regions of a country. Which, if any, of these industries would you classify as tradable?
Industries A and B
All Hondas produced in the United States come from plants in Ohio, Indiana, or Alabama.
Internal economies of scale
All airframes for Airbus, Europe's only producer of large aircraft, are assembled in Toulouse, France.
Internal economies of scale
Why do internal economies of scale lead to imperfectly competitive industries?
Large firms have cost advantages over small firms.
The United States' imports from 1945 through 1970 were more capital-intensive than its exports. One would have expected that the United States would have imported more labor-intensive goods and exported capital-intensive goods during this period. This phenomenon that occurred in the United States is known as the During the time period 1945-1970 the U.S. exported more
Leontief paradox. technologically-intensive goods.
The international debt crisis of early 1982 was precipitated when _____ could not pay its international debts.
Mexico
The figure to the right summarizes 2006 data (Source: CIA World Factbook) for the seven Central American economies and their trade with the United States. Legend B - Belize H - Honduras CR - Costa Rica N - Nicaragua ES - El Salvador P - Panama G - Guatemala Based on this figure, anomalies in trade appear most evident for
Panama and Guatemala. (On the diagram, Panama and Guatemala are the outliers)
Which of the following is true regarding the expansion in multinational production and outsourcing?
Relocating production to take advantage of cost differences leads to overall gains from trade.
Over the last few decades, East Asian economies have increased their share of world GDP. Similarly, intra-East Asian tradelong dash—that is, trade among East Asian nationslong dash—has grown as a share of world trade. More than that, East Asian countries do an increasing share of their trade with each other. Using the gravity model, explain why East Asian countries do an increasing share of their trade with each other.
Since the GDP of East Asian countries has grown, the product of any two East Asian countries' GDP is now larger. And as the gravity model predicts, the trade volume between them has grown.
What is a "forward-falling supply curve"?
The supply curve of a perfectly competitive industry with external economies.
Although trade creates gains for some and losses for others, economists do not, generally, stress the income redistribution effects of international trade. Which of the following is NOT a reason why economists tend to de-emphasize the impact of international trade on the distribution of income?
Those that lose from trade tend to be marginally impacted by trade, poorly organized, and largely devoid of political influence
The U.S. labor movement—which mostly represents blue-collar workers rather than professionals and highly educated workers—has traditionally favored limits on imports from less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?
Using the Ricardian model, this policy would not be rational. However, considering the Heckscher-Ohlin model, which specifically addresses income distribution, unskilled labor, the scarce resource, loses from trade.
In the United States where land is cheap, the ratio of land to labor used in cattle raising is higher than that of land used in wheat growing. But in more crowded countries, where land is expensive and labor is cheap, it is common to raise cows by using less land and more labor than Americans use to grow wheat. Can we still say that raising cattle is land-intensive compared with farming wheat? Why or why not?
Yes. As long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country.
Recall the model with firm performance differences in a single integrated market discussed in the chapter. Now assume that a new technology becomes available. Any firm can adopt the new technology, but its use requires an additional fixed-cost investment. The benefit of the new technology is that it reduces a firm's marginal cost of production by a given amount. a. Could it be profit maximizing for some firms to adopt the new technology but not profit maximizing for other firms to adopt that same technology? Which firms would choose to adopt the new technology? How would they be different from the firms that choose not to adopt it? Assuming that if a firm invests in the technology, it will face a fixed cost T, but face a marginal cost cT which is lower than its marginal cost c without the technology, b. Now assume that there are also trade costs. In the new equilibrium with both trade costs and technology adoption, firms decide whether to export and also whether to adopt the new technology. Would exporting firms be more or less likely to adopt the new technology relative to nonexporters? Why? A firm that exports faces a higher marginal cost than one that does not export, and will therefore be ___ likely to use this new technology.
a firm with low marginal costs will need a higher level of output to justify the technology than a firm with high marginal costs. b. higher .... more
Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished automobile. Because more firms increase competition in the market, the market price falls as more firms enter an automobile market, or specifically P=17,000+(150/n), where n represents the number of firms in a market. Assume that the initial size of the U.S. and the European automobile markets are 300 million and 533 million people, respectively. a. Calculate the equilibrium number of firms in the U.S. and European automobile markets without trade. b. What is the equilibrium price of automobiles in the United States and Europe if the automobile industry is closed to foreign trade? c. Now suppose that the United States decides on free trade in automobiles with Europe. The trade agreement with the Europeans adds 533 million consumers to the automobile market, in addition to the 300 million in the United States. How many automobile firms will there be in the United States and in Europe combined? What will be the new equilibrium price of automobiles?
a. In the U.S., there will be 3 firms. In Europe, there will be 4. b. The equilibrium price in the U.S. is $17050. The equilibrium price in Europe is $17037.5. c. The combined number of firms will be 5. The equilibrium price will be $17030. d. Prices fall in part (c) relative to part (b) because there are more firms in the combined market than in each of the individual markets. Consumers are better off with trade not only because of lower prices but because they now have more variety to choose from.
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. a. Using the line drawing tool, draw Home's production possibility frontier. Label the curve PPF. b. What is the opportunity cost of apples in terms of bananas? c. In the absence of trade, what would the price of apples in terms of bananas be? ____ Why?___
a. start at 600 bananas, draw diagonally to the right to 400 apples b. 1.5 bananas c. 1.5 bananas per apple; without trade, the relative prices of the goods are equal to their relative unit labor requirements.
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land). Initially, both countries have the same supply of labor (250 units each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a. Show how the decrease in the supply of capital for Home affects its production possibility frontier b. Given the decreasein the supply of capital for Home, the relative supply of Home (defined as Q1/Q2) is further to the _____ than the relative supply for Foreign. c. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)? If both countries open to trade, Home will export ______ and Foreign will export _____. d. Describe how opening up to trade affects all three factors (labor, capital, land) in both countries. Owners of
a. start at the same 250, move line to the left on x axis - label ppf 1 b. left c. good 2. good 1. d. land in Home and owners of capital in Foreign will benefit from trade, while owners of capital in Home and owners of land in Foreign will be hurt
This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: aLS = number of labor hours needed to produce a unit of steel in Home; aLC= number of labor hours needed to produce a unit of calico in Home; PS=the price per ton of steel; PC=the price per bolt of calico Which of the following represents the opportunity cost of calico? In the absence of international trade, Home will have to produce both calico and steel for itself. However, it will do so only if
aLC/aLS All of the above are correct: PC/aLC=PS/aLS PC/PS=aLC/aLS Workers are indifferent as to where (Calico or Steel) they work
The figure to the right shows curves representing the average cost of hockey pucks produced in Canada (ACc) and the Slovak Republic (ACsr) as well as the Slovak demand (Dsr) and the world demand (Dworld) for hockey pucks. Assuming that Canada's historical association with hockey led it to first manufacture hockey pucks, this figure indicates that the Slovak Republic will import pucks from Canada rather than produce pucks themselves since Slovak producers can initially produce pucks If no trade in hockey pucks were allowed and the Slovak Republic were forced to be self-sufficient, then
at cost C0, which exceeds Canada's price P1 Slovak producers and players would both benefit
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. There is now also another country, Foreign, with a labor force (L) of 800. Foreign's unit labor requirement in apple production (aLA) is 5, while in banana production (bLB) it is 1. a. Derive the equation for Foreign's production possibility frontier (assume the quantity of bananas is the dependent variable): Qb=(800/1) - (5/1) x Qa b. Which of the 4 diagrams represents the world relative supply curve given the above information?
b. Choice C (1.5 to 0.5 on x) (1.5 up to 5) (5 over to 1 on x)
According to your figure, newly-emerging producers in Beta will
be able to enter the market even though they lack Alpha's experience. (b/c the price is lower for Beta than Alpha)
Despite major gains, Chinese manufacturing workers have much lower productivity than their U.S. counterparts. Chinese service workers are relatively more productive, but most services aren't tradable. So which matters for Chinese wages--—manufacturing or service productivity? For Chinese wages,
both sectors matter because Chinese wages are a function of productivity and prices in all sectors.
In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (Pc/Ps) and the wage-rental ratio (w/r). From the slope of this curve, it can be determined that
cigars are labor-intensive while soybeans are capital-intensive.
A century ago each country's exports were shaped largely by
climate and natural resources.
Most Scotch whiskey comes from Scotland.
comparative advantage
Much of the world's best wine comes from France.
comparative advantage
Half of the world's large jet aircraft are assembled in Seattle.
economies of scale
Most of the world's aluminum is smelted in Norway or Canada.
economies of scale
Most semiconductors are manufactured in either the United States or Japan.
economies of scale
We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods (apples and bananas), and that each country has only one factor of production, labor. The graph to the right shows the world relative supply and relative demand curves. As in the two country case, the flat sections of the RS curve are countries with different unit labor requirement ratios (aLA/aLB). Referring to the graph, countries to the left of the equilibrium relative price would ______ apples to the countries to the right of the intersection.
export
Suppose the United Colonies (a hypothetical country) happens to be the world's most capital-abundant country. According to the factor-proportions (aka Heckscher-Ohlin) model, the U.C. would be expected to The following table contains information for the United Colonies for a recent year. Compute the capital-labor ratio for U.C.'s imports and exports and record the values in the table's boxes. (Enter your responses as integers.) Factor Content of U.C. Exports and Imports for 2006 Capital per billion dollars (Imports = $2800. Exports=$2700) Labor (person years) per billion dollars (Imports=14. Exports=18) Capital-labor ration (dollars per worker) (Imports = 200. Exports=150) Are the table's results consistent with the Heckscher-Ohlin model's prediction?
export capital-intensive goods and import labor-intensive goods. No.
A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina.
external economies of scale
Cranbury, New Jersey, is the artificial flavor capital of the United States.
external economies of scale
External economies of scale occur when average costs
fall as the industry grows larger but rise as the representative firm grows larger.
Cost-benefit analysis of international trade
focuses attention on conflicts of interest within countries.
The coordination of international macroeconomic policies among sovereign nations
has only recently been advocated by economists.
Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant (primarily, Southeast Asia and the Caribbean)—but those firms do not integrate with their suppliers there. On the other hand, firms in many capital-intensive industries choose to integrate with their suppliers. What would these choices imply for the extent of intra-firm trade across industries? That is, in what industries would a greater proportion of trade occur within firms? Intra-firm trade will be
higher in industries with a high degree of vertical FDI.
The graph to the right depicts a specific factors economy that produces two goods: cloth and food. Assuming that the country is open to trade, at the lower relative price, (Pc/Pf)^1, the economy
imports cloth and exports food
Consider the response of firms in a world with two identical countries (Home and Foreign). Assume that a firm must incur an additional cost t for each unit of output that it sells to customers across the border. Consider the decisions of firms 1 and 2 (with marginal costs c1 and c2) in the figures below. Firm 1 can profitably operate
in both the domestic and the export markets
Since World War II (the early 1950s), the proportion of most countries' production being used in some other country
increased
Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of
international trade analysis.
The figure to the right shows Home's monopolistically competitive market for computers which, initially, has 9 firms. According to the relationship shown in the graph, product price (PP) and market size are ____ related. The inverse relationship between market size and product price occurs because:
inversely an increase in market size allows each firm to produce more and thus have a lower average cost. The resulting economic profit entices new firms to enter, putting downward pressure on price.
In the context of the "2 by 2 by 2" idealized factor-proportions model, assume the following facts about the world: In each country (Home and Foreign) coal is the labor-intensive good; Home is the labor-abundant country. From these few facts, it can be asserted that before trade According to the model, the establishment of trade between Home and Foreign will ultimately bring
in Home, workers earn less, land earns more, and the relative price of coal is lower than in Foreign. an equalization of both the relative prices of goods and factor prices.
The degree of specialization predicted by the basic Ricardian model
is much more extreme than is observed in the real world.
In the current Post-Industrial economy, international trade in services (including banking and financial services)
is relatively small
An important insight of international trade theory is that when countries exchange goods and services one with the other, it
is usually beneficial to both countries.
International capital markets
link the capital markets of individual countries AND have grown significantly since the 1960s.
The diagram to the right shows the Home economy's pretrade equilibrium at point X. If this economy opens itself to trade, its consumption point _______ its production point. Now suppose that trade commences between Home and the rest of the world and, as a result, the relative price of coal in Home rises. Click on the diagram anywhere to activate the relative price selector and use it to increase the price to 1.2 units of sugar (per unit of coal). Which part of Home's budget constraint would represent choices in which Home's residents are unambiguously better off compared to their pretrade equilibrium?
may deviate from The portion inside the shaded region.
The figure to the right illustrates the causes and effects of international labor mobility between two countries, Home and Foreign (*). The horizontal axis represents the total world labor force. The workers employed in Home are measured from the left, the workers employed in Foreign from the right. The left vertical axis shows the marginal product of labor in Home; the right vertical axis shows the marginal product of labor in Foreign. Suppose the initial allocation of labor has L^3 workers in Home and 0*L^3 workers in Foreign. Given this initial allocation, labor can be expected to From the perspective of the world economy, this migration of labor is desirable since
migrate from Foreign to Home total world output rises by DAE.
The claim that trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other countries is shown by the Ricardian model to
miss the point because it fails to consider the alternative, which would be even lower wages.
In the figure to the right the curve labeled PP shows, for a "typical" monopolistically competitive market, the relationship between product price and the number of firms. This curve is negatively sloped because
more firms give rise to more intense competition, and hence a lower price.
In the real world, the dividing line between trade and monetary issues is
neither simple nor clear-cut.
Internal economies of scale
occur when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.
External economies of scale
occur when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm.
In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why? In Texas and Louisiana, 1986 was a year of economic decline because in these two states,
oil production was reduced.
Since the end of World War II, the view within the advanced democracies concerning the amount of trade has
recently been questioned by a largely political movement composed of traditional protectionists and new ideologues.
It is fairly common for an industrial cluster to break up and for production to move to locations with lower wages when the technology of the industry is no longer rapidly improving—when it is no longer essential to have the absolutely most modern machinery, when the need for highly skilled workers has declined, and when being at the cutting edge of innovation conveys only a small advantage. Explain this tendency of industrial clusters to break up in terms of the theory of external economies. As technological change and innovation slows in an industry,
specialized suppliers, labor market pooling, and knowledge spillovers, which are the reasons clusters are more efficient than individual firms, become less important; thus, firms will seek out low cost production locations and the cluster will breakdown.
A product is produced in a monopolistically competitive industry with economies of scale. If this industry exists in two countries, and these two countries engage in trade one with the other, then we would expect
that this trade will lead to greater product differentiation.
The figure to the right shows curves representing the average cost of hockey pucks produced in Canada (ACc) and the Slovak Republic (ACsr) as well as the world demand (D) for hockey pucks. It is assumed that the world demand for pucks can be satisfied entirely by either country. According to this figure, economic efficiency considerations would ideally have hockey puck production located in Suppose, however, that hockey puck production is first established in Canada, where the game of hockey is said to have originated. In this case Canada's producers will effectively block the entry of new Slovak producers because
the Slovak Republic their prevailing price is below the average cost for a Slovak start-up firm.
Assume a specific factors economy produces two goods, cloth and food, and that when representing this economy graphically, cloth is on the x-axis and food is on the y-axis. For a trading economy,
the budget constraint is tangent to the production possibility frontier at the chosen production point.
According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is
the distance between them.
Assume a specific factors economy produces two goods, cloth and food, and that when representing the output of this economy graphically, cloth is on the x-axis and food is on the y-axis. When the price of cloth increases by 33% and the price of food does not change does not change,
the wage rate rises by less than the increase in the price of cloth