Title Keys for selected problem.pdf ✅

76783 b02.3d GGS 11/4/06 1:37 Answers to Selected Problems Chapter 1 6. a. Consumer demand theory predicts that when the price of a commodity rises (cet. par.), the quantity demanded of the commodity declines. b. Whenthe price ofimports risesto domes- tic consumers, the quantity demanded of exports can be expected to decline (if everything else remains constant). 7. a. A government can reduce a budget deficit by reducing government expen- ditures and/orincreasingtaxes. 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, and by reducing the level of its national income. 10. International trade results in lower prices for consumers but harms domestic pro- ducers of products which compete with imports. Often those domestic producers that stand to lose a great deal from im- ports band together to pressure the gov- ernment to restrict imports. Since consumers are many and unor- ganized and each individually stands to lose only very little from the import re- strictions, governments often give in to the demands of producers and impose some import restrictions. These topics are discussed in detail in Chapter 9. Chapter 2 2. 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 commodity. 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. 10. 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 Ans-1
76783 b02.3d GGS 11/4/06 1:37 in the production of cloth and exchang- ing 20C for 30W with the United States. Since the United Kingdom trades at the U.S. pretrade-relative commodity price of PW/PC = 2/3, the United Kingdom receives all of the gains from trade. Chapter 3 3. a. See Figure 3.1. b. Nation 1 has a comparative advantage in X and Nation 2 in Y. c. If the relative commodity price line has equal slope in both nations. 4. a. See Figure 3.2. b. Nation 1 gains by the amount by which point E is to the right and above point A and Nation 2 by the excess of E0 over A0 . Nation 1 gains more from trade because the relative price with trade differs more from its pretrade price than for Nation 2. 7. See Figure 3.3. The small nation will move from A to B in production and will export X in ex- change for Y so as to reach point E > A. FIGURE 3.1 FIGURE 3.2 Ans-2 Answers to Selected Problems
76783 b02.3d GGS 11/4/06 1:37 Chapter 4 6. a. See Figure 4.1. b. The quantity of imports demanded by Nation 1 at PF0 exceeds the quantity of exports of Y supplied by Nation 2. Therefore, Px/Py declines (Py/Px rises) until the quantity demanded of imports of Y by Nation 1 equals the quantity of exports of Y supplied by Nation 2 at PB = PB0. c. The backward-bending (i.e., nega- tively sloped) segment of Nation 1’s offer curve indicates that Nation 1 is willing to give up less of X for larger amounts of Y. 8. See Figure 4.2. From the left panel of Figure 4.4 in the text, we see that Nation 2 does not export any amount of commodity Y at Px/Py = 4, or Py/Px = 1 /4. This gives point A on Nation 2’s supply curve of the exports of commodity Y (S). From the left panel of Figure 4.4 in the text, we also see that at Px/Py = 2 or Py/Px = 1⁄2, Nation 2 exports 40Y. This gives point H on S. Other points on S could similarly be derived. Note that S in Figure 4.2 is identical to S in Figure 4.6 in the text, showing Nation 1’s exports of commodity X. From the left panel of Figure 4.3 in the text, we see that Nation 1 demands 60Y of Nation 2’s exports at Px/Py = Py/Px = 1. This gives point E on Nation 1’s demand curve of Nation 2’s exports of commodity Y (D). From the left panel of Figure 4.3 in the text, we can estimate that Nation 1 demands 40Y at Py/Px = 3 /2 (point R0 on D) and 120Y at Py/Px = 2 (point H0 on D). The equilibrium-relative commodity price of commodity Y is Py/Px = 1. This is determined at the intersection of D and S in Figure 4.2. At Py/Px = 3 /2, there is an ex- cess of supply of R0 R = 30Y, and Py/Px falls to Py/Px = 1. On the other hand, at Py/Px = 1⁄2, there is an excess demand of HH0 = 80Y, and Py/Px rises to Py/Px = 1. Note also that Figure 4.2 is symmetrical with Figure 4.6 in the text. 10. See Figure 4.3. In Figure 4.3, Nation 2 is the small nation, and we magnified the portion of the offer curve of Nation 1 (the large na- tion) near the origin (where Nation 1’s offer curve coincides with PA = 1 /4, Na- tion 1’s pretrade-relative commodity price with trade). This means that Nation 2 can import a sufficiently small quantity FIGURE 3.3 FIGURE 4.1 Answers to Selected Problems Ans-3
76783 b02.3d GGS 11/4/06 1:37 of commodity X without perceptibly affecting Px/Py in Nation 1. Thus, Nation 2 is a price taker and captures all of the benefits from its trade with Nation 1. The same would be true even if Nation 2 were not a small nation, as long as Nation 1 faced constant opportunity costs and did not specialize completely in the production of com- modity X with trade. FIGURE 4.2 FIGURE 4.3 Ans-4 Answers to Selected Problems