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What is the meaning of globalization? What is its advantage and disadvantage? Why is there an antiglobalization movement?
What is the purpose of economic theory in general? Of international economic theories and policies in particular?
What simplifying assumptions do we make in studying international economics? Why are these assumptions usually justified?
Why does the study of international economics usually begin with the presentation of international trade theory? Why must we discuss theories before examining policies? Which aspects of international economics are more abstract? Which are more applied in nature?
Which are the most important international economic challenges facing the world today? What are the benefits and criticisms of globalization?
From your previous course(s) in economics, do you recall the concepts of demand, supply, and equilibrium? Do you recall the meaning of the elasticity of demand? perfect competition? factor markets? the production frontier? the law of diminishing returns? the marginal productivity theory? (If you do not remember some of these concepts, quickly review them from your principles of economics text or class notes.)
From your previous course(s) in economics, do you recall the concepts of inflation, recession, growth? Marginal propensity to consume, multiplier, accelerator? Monetary policy, budget deficit, fiscal policy? (If you do not remember some of these concepts, quickly review them from your principles of economics text or class notes.)
What are some of the most important current events that are part of the general subject matter of international economics? Why are they important? How do they affect the economic and political relations between the United States and Europe? the United States and Japan?
How is international trade related to the standard of living of the United States? of other large industrial nations? Of small industrial nations? of developing nations? For which of these groups of nations is international trade most crucial?
How can we get a rough measure of the interdependence of each nation with the rest of the world? What does the gravity model postulate?
What does international trade theory study? International trade policy? Why are they known as the microeconomic aspects of international economics?
What is the balance of payments, and what are foreign exchange markets? What is meant by adjustment in the balance of payments? Why are these topics known as the macroeconomic aspects of international economics? What is meant by open‐economy macroeconomics and international finance?
What are the basic questions that we seek to answer in this chapter? In what way is the model presented in this chapter an abstraction or a simplification of the real world? Can the model be generalized?
What is meant by complete specialization? By incomplete specialization? Why do both nations gain from trade in the first instance but only the small nation in the second?
How is the combined supply curve of both nations for each of the traded commodities determined? How is the equilibrium-relative commodity price determined with trade?
What are the results of empirical testing of the Ricardian model?
What were the mercantilists' views on trade? How does their concept of national wealth differ from today's view?
Why is it important to study the mercantilists' views on trade? How were their views different from those of Adam Smith? What is the relevance of all this today?
What was the basis for and the pattern of trade according to Adam Smith? How were gains from trade generated? What policies did Smith advocate in international trade? What did he think was the proper function of government in the economic life of the nation?
In what way was Ricardo's law of comparative advantage superior to Smith's theory of absolute advantage? How do gains from trade arise with comparative advantage? How can a nation that is less efficient than another nation in the production of all commodities export anything to the second nation?
What is the exception to the law of comparative advantage? How prevalent is it?
Why is Ricardo's explanation of the law of comparative advantage unacceptable? What acceptable theory can be used to explain the law?
Draw a figure similar to Figure 2.2 showing that the United Kingdom is now a small country, half the size shown in the right panel of Figure 2.2, and trades 20C for 30W with the United States at PW / PC = 2⁄3.
In what way is the material in this chapter more realistic than that of Chapter 2?
What is meant by gains from exchange? By gains from specialization?
Can specialization in production and mutually beneficial trade be based solely on a difference in tastes between two nations? How is this different from the more general case?
Can specialization in production and mutually beneficial trade be based exclusively on a difference in factor endowments and/or technology between two nations?
How are the tastes, or demand preferences, of a nation introduced in this chapter? Why are they needed?
Why does a production frontier that is concave from the origin indicate increasing opportunity costs in both commodities? What does the slope of the production frontier measure? How does the slope change as the nation produces more of the commodity measured along the horizontal axis? More of the commodity measured along the vertical axis?
What is the reason for increasing opportunity costs? Why do the production frontiers of different nations have different shapes?
What does a community indifference curve measure? What are its characteristics? What does the slope of an indifference curve measure? Why does it decline as the nation consumes more of the commodity measured along the horizontal axis?
What difficulties arise in the use of community indifference curves in trade theory? How can these difficulties be overcome?
What is meant by the equilibrium-relative commodity price in isolation? How is this price determined in each nation? How does it define the nation's comparative advantage?
Why does specialization in production with trade proceed only up to the point where relative commodity prices in the two nations are equalized? How is the equilibrium relative commodity price with trade determined?
Why is there incomplete specialization in production (even in a smaller nation) with increasing opportunity costs? How are the results under increasing costs different from the fixed-costs case?
What would have happened if the two community indifference curves had also been identical in Problem 9? Sketch a graph of this situation.
In Problem 9
On two sets of axes, draw identical concave production frontiers with different community indifference curves tangent to them.
What would happen if the production frontiers are identical and the community indifference curves are different, but we have constant opportunity costs? Draw a graph of this.
How can the supply curve of exports and the demand curve of imports of a commodity be derived from the total demand and supply curves of a commodity in the two nations?
What do the terms of trade measure? What is the relationship between the terms of trade in a world of two trading nations? How are the terms of trade measured in a world of more than two traded commodities?
What does an improvement in a nation's terms of trade mean? What effect does this have on the nation's welfare?
In what way does our trade model represent a general equilibrium model? In what way does it not? In what ways does our trade model require further extension?
How is the equilibrium-relative commodity price with trade determined with demand and supply curves?
What is the usefulness of offer curves? How are they related to the trade model of Figure 3.4?
What do offer curves show? How are they derived? What is their shape? What explains their shape?
How do offer curves define the equilibrium-relative commodity price at which trade takes place?
What are the forces that would push any non-equilibrium relative commodity price toward the equilibrium level?
How is a nation's supply curve of its export commodity and demand for its import commodity derived from the nation's production frontier and indifference map?
Why does the use of demand and supply curves of the traded commodity refer to partial equilibrium analysis? In what way is partial equilibrium analysis of trade related to general equilibrium analysis?
Under what condition will trade take place at the pre-trade relative commodity price in one of the nations?
In what ways does the Heckscher-Ohlin theory represent an extension of the trade model presented in the previous chapters? What did classical economists say on these matters?
What were the results of empirical tests on the relationship between human capital and international trade? Natural resources and international trade? What is the status of the H-O theory today?
What is meant by factor-intensity reversal? How is this related to the elasticity of substitution of factors in production? Why would the prevalence of factor reversal lead to rejection of the H-O theorem and the factor-price equalization theorem? What were the results of empirical tests on the prevalence of factor reversal in the real world?
Did more recent research confirm or reject the H-O model?
State the assumptions of the Heckscher-Ohlin theory. What is the meaning and importance of each of these assumptions?
What is meant by labor‐intensive commodity? Capital intensive commodity? Capital-labor ratio?
What is meant by capital‐abundant nation? What determines the shape of the production frontier of each nation?
What determines the capital-labor ratio in the production of each commodity in both nations? Which of the two nations would you expect to use a higher capital-labor ratio in the production of both commodities? Why? Under what circumstance would the capital-labor ratio be the same in the production of both commodities in each nation?
If labor and capital can be substituted for each other in the production of both commodities, when can we say that one commodity is capital intensive and the other labor intensive?
What does the Heckscher-Ohlin theory postulate? Which force do Heckscher and Ohlin identify as the basic determinant of comparative advantage and trade?
What does the factor-price equalization theorem postulate? What is its relationship to the international mobility of factors of production?
Explain why the Heckscher-Ohlin theory is a general equilibrium model.
What are two important limitations of the Heckscher- Ohlin theory?
How can international trade take place according to the technological gap model? What criticisms are leveled against this model? What does the product cycle model postulate? What are the various stages in a product life cycle?
What is the relationship between the H-O theory and other trade theories?
What is the empirical relevance of the H-O theory and the new trade theories? What is the relationship between transportation costs and non-traded goods and services? How do transportation costs affect the H-O theorem? How do they affect the factor‐price equalization theorem?
What is meant by resource‐oriented industries? Market oriented industries? footloose industries? What determines the classification of the industry? How does this affect the pattern of international trade?
How do different environmental standards affect industry location and international trade?
Which assumptions of the Heckscher-Ohlin theory can be relaxed without invalidating the model?
The relaxation of which assumptions of the Heckscher-Ohlin theory require new, complementary trade theories to explain the significant portion of international trade not explained by the H-O model?
What is meant by economies of scale? How can they be the basis for international trade? What is meant by the "new international economies of scale"?
What is meant by product differentiation? Why does this result in imperfect competition? How can international trade be based on product differentiation?
How can intra‐industry trade be measured? What are the shortcomings of such a measure?
What do we mean by monopolistic competition? Why do we use this model to examine intra‐industry trade?
Why is it that the greater the number of firms is in a monopolistically competitive industry, the lower the price is, but the higher the average cost of each firm is for a given level of output?
Why is the price lower and the number of firms greater with the larger market size with trade in a monopolistically competitive industry?
What would happen if the C curve had shifted down only half as much as curve C in Figure 6.3?
What is meant when we say that the trade theory discussed in previous chapters is static in nature? What is meant by comparative statics?
What is the effect on the volume and terms of trade if a nation's offer curve shifts or rotates toward the axis measuring its exportable commodity? What type of growth and/or change in tastes in the nation will cause its offer curve to shift or rotate this way?
How does the shape of the trade partner's offer curve affect the change in the terms of trade resulting from a given shift in a nation's offer curve?
How can our trade theory of previous chapters be extended to incorporate changes in the nation's factor endowments, technology, and tastes? Is the resulting trade theory a dynamic theory of international trade? Why?
What effect do the various types of factor growth have on the growing nation's production frontier? What is meant by balanced growth?
What does the Rybczynski theorem postulate?
Explain neutral, labor‐saving, and capital‐saving technical progress?
How does neutral technical progress in the production of either or both commodities affect the nation's production frontier? Which type of technical progress corresponds to balanced factor growth as far as its effect on the growing nation's production frontier is concerned?
What is meant by production and/or consumption being pro-trade, antitrade, or neutral?
Which sources of growth are most likely to be pro-trade? Which sources of growth are most likely to be antitrade? Which types of commodities are most likely to result in protrude consumption? Anti-trade consumption?
What is the terms‐of‐trade effect of growth? What is the wealth effect of growth? How can we measure the change in the welfare of the nation as a result of growth and trade when the nation is too small to affect relative commodity prices? When the nation is large enough to affect relative commodity prices?
The data in Table 7.2 indicate that the United States has the smallest increase in output per worker, no improvements in efficiency, and a small improvement in technology in relation to other developed countries in the table. This seems to contradict the information in Table 6.5. How can this seeming contradiction be resolved?
What is the effect of the tariff on the degree of specialization in production in a small nation? The volume of trade? The welfare of the nation? The distribution of income between the nation's relatively abundant and scarce factors?
Draw a figure similar to Figure 8.1 for Nation 1 but with the quantity of commodity Y on the horizontal axis and the dollar price of Y on the vertical axis. Draw SY for Nation 1, identical to SX for Nation 2 in Figure 8.1, but draw DY for Nation 1 crossing the vertical axis at PY = $8 and the horizontal axis at 80Y. Finally, assume that PY = $1 under free trade and that Nation 1 then imposes a 100 percent ad valorem import tariff on commodity Y. With regard to your figure, indicate the following for Nation 1:
(a) The level of consumption, production, and imports of commodity Y at the free trade price of PY = $1.
(b) The level of consumption, production, and imports of commodity Y after Nation 1 imposes the 100 percent ad valorem tariff on commodity Y.
(c) What are the consumption, production, trade, and revenue effects of the tariff?
How would the result in Problem 8 be affected if Nation 1 were instead assumed to be a large nation?
In Problem 8
Using the Stolper-Samuelson theorem, indicate the effect on the distribution of income between labor and capital in Nation 1 (assumed to be a small nation) when it imposes an import tariff on commodity Y.
What happens if the two nations retaliate against each other's optimum tariff several times?
For the statement of Problem 1:
(a) Determine the dollar value of the consumer surplus before and after the imposition of the tariff.
(b) Of the increase in the revenue of producers with the tariff (as compared with their revenues under free trade), how much represents increased production costs? Increased rent, or producer surplus?
(c) What is the dollar value of the protection cost, or deadweight loss, of the tariff?
In Problem 1
Draw a figure similar to Figure 8.1 for Nation 1 but with the quantity of commodity Y on the horizontal axis and the dollar price of Y on the vertical axis. Draw SY for Nation 1, identical to SX for Nation 2 in Figure 8.1, but draw DY for Nation 1 crossing the vertical axis at PY = $8 and the horizontal axis at 80Y. Finally, assume that PY = $1 under free trade and that Nation 1 then imposes a 100 percent ad valorem import tariff on commodity Y. With regard to your figure, indicate the following for Nation 1:
Suppose that a nation reduces import tariffs on raw materials and intermediate products but not on finished products. What effect will this have on the rate of effective protection in the nation?
For the given in Problem 4:
(a) Recalculate g if ti = 20 percent and ai = 0 6.
(b) What general conclusion can you reach about the relationship between g and t from your answer to Problem 4 in Chapter 3 and Problem 6(a) above?
In Problem 4
Calculate the rate of effective protection when t (the nominal tariff on the final commodity) is 40 percent, ai (the ratio of the cost of the imported input to the price of the final commodity in the absence of tariffs) is 0.5, and ti (the nominal tariff on the imported input) is 40 percent.
Using the Stolper-Samuelson theorem, indicate the effect on the distribution of income between labor and capital in Nation 1 (assumed to be a small nation) when it imposes an import tariff on commodity Y?
What is meant by an ad valorem, a specific, and a compound tariff? Are import or export tariffs more common in industrial nations? In developing nations?
Using general equilibrium analysis and assuming that a nation is large, indicate the effect of an import tariff on the nation's offer curve, the nation's terms of trade, the volume of trade, the nation's welfare, and the distribution of income between the nation's relatively abundant and scarce factors.
What is meant by the optimum tariff? What is its relationship to changes in the nation's terms of trade and volume of trade?
Why are other nations likely to retaliate when a nation imposes an optimum tariff (or, for that matter, any import tariff)? What is likely to be the final outcome resulting from the process of retaliation?
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