ch03.docx
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ch03.docx
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ch03
*CHAPTER3
(CoreChapter)
THESTANDARDTHEORYOFINTERNATIONALTRADE
OUTLINE
3.1Introduction
3.2TheProductionFrontierwithIncreasingCosts
3.2aIllustrationofIncreasingCosts
3.2bTheMarginalRateofTransformation
3.2cReasonforIncreasingOpportunityCostsandDifferentProductionFrontiers
3.3CommunityIndifferenceCurves
3.3aIllustrationofCommunityIndifferenceCurves
3.3bTheMarginalRateofSubstitution
3.3cSomeDifficultieswithCommunityIndifferenceCurves
3.4EquilibriuminIsolation
3.4aIllustrationofEquilibriuminIsolation
3.4bEquilibriumRelativeCommodityPricesandComparativeAdvantage
Case3-1:
RevealedComparativeAdvantageoftheUnitedStates,
theEuropeanUnion,andJapan
3.5TheBasisforandtheGainsfromTradewithIncreasingCosts
3.5aIllustrationoftheBasisforandtheGainsfromTradewithIncreasingCosts
3.5bEquilibriumRelativeCommodityPriceswithTrade
3.5cIncompleteSpecialization
CaseStudy3-2:
SpecializationandExportConcentrationinSelectedCountries
3.5dSmallCountryCasewithIncreasingCosts
3.5eTheGainsfromExchangeandfromSpecialization
CaseStudy3-3:
JobLossesinHighU.S.Import-CompetingIndustries
CaseStudy3-4:
InternationalTradeandDeindustrializationintheUnitedStates,
theEuropeanUnion,andJapan
3.6TradeBasedonDifferencesinTastes
APPENDIX:
A3.1ProductionFunctions,Isoquants,IsocostsandEquilibrium
A3.2ProductionTheorywithTwoNations,TwoCommoditiesandTwoFactors
A3.3DerivationoftheEdgeworthBoxDiagramandProductionFrontiers
A3.4SomeImportantConclusions
KeyTerms
IncreasingopportunitycostsRevealedcomparativeadvantage
Marginalrateoftransformation(MRT)Equilibriumrelativecommoditypricewithtrade
CommunityindifferencecurvesIncompletespecialization
Marginalrateofsubstitution(MRS)Gainsfromexchange
AutarkyGainsfromspecialization
EquilibriumrelativecommoditypriceinisolationDeindustrialization
LectureGuide
1.InthefirstlectureofChapter3,IwouldcoverSections1,2,and3.Section2canbe
coveredquickly,exceptfor2b,whichrequirescarefulexplanationbecauseofitssubsequent
importance.Carefulexplanationisalsorequiredfor3b.IwouldassignProblems1and2.
2.Inthesecondlecture,IwouldcoverSections4,5a,and5b.Thisisthebasictrademodel
anditisessentialforthestudenttomasteritcompletely.Tothisend,Iwouldassignand
gradeProblems3and4.
3.Inthethirdlecture,Iwouldcovertheremainderofthechapter.Thetopicshererepresent
elaborationsofthebasictrademodel.Iwouldassignproblems5,6,and7andgoover
problem7inclasseventhoughitsanswerisalsointhebackofthebook.Iwouldmakethe
Appendicesoptionalforthosestudentsintheclasswhohavehadintermediatemicrotheory.
AnswertoProblems
1.a)SeeFigure1.
b)TheslopeofthetransformationcurveincreasesasthenationproducesmoreofXand
decreasesasthenationproducesmoreofY.Thesereflectincreasingopportunitycostsas
thenationproducesmoreofXorY.
2.a)SeeFigure2.
Wehavedrawncommunityindifferencecurvesasdownwardornegativelyslopedbecause
asthecommunityconsumesmoreofXitwillhavetogiveupsomeofYtoremainon
thesameindifferencecurve.
b)TheslopemeasureshowmuchofYthenationcangiveupbyconsumingonemoreunit
ofXandstillremainatthesamelevelofsatisfaction;theslopedeclinesbecausethemore
ofXandthelessofYthenationisleftwith,thelesssatisfactionitreceivesfrom
additionalunitsofXandthemoresatisfactionitreceivesfromeachretainedunitofY.
c)III>IItotherightoftheintersection,whileII>IIItotheleft.
Thisisinconsistentbecauseanindifferencecurveshouldshowagivenlevelofsatisfaction.
Thus,indifferencecurvescannotcross.
3.a)SeeFigure3onpage22.
b)Nation1hasacomparativeadvantageinXandNation2inY.
c)Iftherelativecommoditypricelinehasequalslopeinbothnations.
4.a)SeeFigure4.
b)Nation1gainsbytheamountbywhichpointEistotherightandabovepointAand
Nation2bytheexcessofE'overA'.Nation1gainsmorefromtradebecausetherelative
priceofXwithtradediffersmorefromitspretradepricethanforNation2.
5.a)SeeFigure5.InFigure5,SreferstoNation1'ssupplycurveofexportsofcommodityX,whileDreferstoNation2'sdemandcurveforNation1'sexportsofcommodityX.DandSintersectatpointE,determiningtheequilibriumPB=Px/Py=1andtheequilibriumquantityofexportsof60X.
b)AtPx/Py=11/2thereisanexcesssupplyofexportsofR'R=30XandPx/Pyfallstoward
equilibriumPx/Py=1.
c)AtPx/Py=1/2,thereisanexcessdemandofexportsofHH'=80XandPx/Pyrises
towardPx/Py=1.
6.TheFigureinProblem5isconsistentwithFigure3-4inthetext.Fromtheleftpanelof
Figure3-4,weseethatNation1suppliesnoexportsofcommodityXatPx/Py=1/4(point
A).ThiscorrespondswiththeverticalorpriceinterceptofNation1'ssupplycurveof
exportsofcommodityX(pointA).
TheleftpanelofFigure3-4alsoshowsthatatPx/Py=1,Nation1iswillingtoexport60X
(pointE).ThesameisshownbyNation1'ssupplycurveofexportsofcommodityX.
TheotherpointsonNation1'ssupplycurveofexportsinthefigureofProblem5canalso
bederivedfromtheleftpanelofFigure3-4,butthisisshowninChapter4withoffer
curves.
Nation2'sdemandcurveforNation1'sexportsofcommodityXcouldbederivedfromthe
rightpanelofFigure3-4,asshowninChapter4.Whatisimportantisthatwecanusethe
DandSfigureinProblem5toexplainwhytheequilibriumrelativecommoditypricewith
tradeisPx/Py=1andwhytheequilibriumquantitytradedofcommodityXis60unitsin
Figure3-4.
7.SeeFigure6onpage24.
ThesmallnationwillmovefromAtoBinproduction,exportsXinexchangeforYsoas
toreachpointE>A.
8.a)ThesmallnationspecializesintheproductionofcommodityXonlyuntilitsopportunity
costandrelativepriceofXequalsPW.Thisusuallyoccursbeforethesmallnationhas
becomecompletelyspecializedinproduction.
b)Underconstantcosts,specializationisalwayscompleteforthesmallnation.
9.a)SeeFigure7.
b)SeeFigure8.
10.IfthetwocommunityindifferencecurveshadalsobeenidenticalinProblem9therelative
commoditypriceswouldalsohavebeenthesameinbothnationsintheabsenceoftradeand
nomutuallybeneficialtradewouldbepossible
11.Ifproductionfrontiersareidenticalandthecommunityindifferencecurvesdifferentinthe
twonations,butwehaveconstantopportunitycosts,therewouldbenomutuallybeneficial
tradepossiblebetweenthetwonations
12.SeeFigure11
13.ItistruethatMexico'swagesaremuchlowerthanU.S.wages(aboutonefifth),butlabor
productivityismuchhigherintheUnitedStatesandsolaborcostsarenotnecessarily
higherthaninMexico.Inanyevent,tradecanstillbebasedoncomparativeadvantage.
App.1.SeeFigure12
CommodityXistheL-intensivecommodityinNation2(asinNation1)becausetheproductioncontractcurvebulgestowardtheL-axisoriseverywheretotheleftofthediagonal.
App.2.SinceLandKarereleasedfromtheproductionofXinahigherratiothanareabsorbedintheproductionofY,wagesfallinNation2.ThisleadstothesubstitutionofLforKintheproductionofXandY,sothattheK/Lratiofallsintheproductionofbothcommodities.
Multiple-ChoiceQuestions
1.Aproductionfrontierthatisconcavefromtheoriginindicatesthatthenationincurs
increasingopportunitycostsintheproductionof:
a.commodityXonly
b.commodityYonly
*c.bothcommodities
d.neithercommodity
2.Themarginalrateoftransformation(MRT)ofXforYrefersto:
a.theamountofYthatanationmustgiveuptoproduceeachadditionalunitofX
b.theopportunitycostofX
c.theabsoluteslopeoftheproductionfrontieratthepointofproduction
*d.alloftheabove
3.Whichofthefollowingisnotareasonforincreasingopportunitycosts:
*a.technologydiffersamongnations
b.factorsofproductionarenothomogeneous
c.factorsofproductionarenotusedinthesamefixedproportionintheproductionofallcommodities
d.forthenationtoproducemoreofacommodity,itmustuseresourcesthatarelessandlesssuitedintheproductionofthecommodity
4.Communityindifferencecurves:
a.arenegativelysloped
b.areconvextotheorigin
c.shouldnotcross
*d.alloftheabove
5.Themarginalrateofsubstitution(MRS)ofXforYinconsumptionreferstothe:
a.amountofXthatanationmustgiveupforoneextraunitofYandstillremainonthesameindifferencecurve
*b.amountofYthatanationmustgiveupforoneextraunitofXandstillremainonthesameindifferencecurve
c.amountofXthatanationmustgiveupforoneextraunitofYtoreachahigherindifferencecurve
d.amountofYthatanationmustgiveupforoneextraunitofXtoreachahigherindifferencecurve
6.WhichofthefollowingstatementsistruewithrespecttotheMRSofXforY?
a.Itisgivenbytheabsoluteslopeoftheindifferencecurve
b.declinesasthenationmovesdownanindifferencecurve
c.risesasthenationmovesupanindifferencecurve
*d.alloftheabove
7.Whichofthefollowingstatementsaboutcommunityindifferencecurvesistrue?
a.Theyareentirelyunrelatedtoindividuals'communityindifferencecurves
b.theycro
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