International Economics: Theory and Policy

Paul Krugman, Maurice Obstfeld och Marc J. Melitz

Chapter 6

The Standard Trade Model - all with Video Answers

Educators

Chapter Questions

Problem 1

Assume Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how an increase in the relative price of palm oil, in relation to lubricant prices, would affect production and consumption of palm oil for Indonesia (assuming that the taste for both goods is the same in both countries). If the income effect of price change of palm oil is greater than the substitution effect, what would happen to palm oil consumption in Indonesia?

EA

Erwin Antoni

Numerade Educator

Problem 2

Due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway and an increase in the relative world price for fish, $P_{f} / P_{a}$.
a. Show how the overfishing problem can result in a decline in welfare for Norway.
b. Also show how it is possible that the overfishing problem could result in an increase in welfare for Norway.

JH

J Hardin

Numerade Educator

Problem 3

In some economies relative supply may be unresponsive to changes in prices. For example, if factors of production were completely immobile between sectors, the production possibility frontier would be right-angled, and output of the two goods would not depend on their relative prices. Is it still true in this case that a rise in the terms of trade increases welfare? Analyze graphically.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 4

The counterpart to immobile factors on the supply side would be lack of substitution on the demand side. Imagine an economy where consumers always buy goods in rigid proportions - for example, one yard of cloth for every pound of food - regardless of the prices of the two goods. Show that an improvement in the terms of trade benefits this economy as well.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 5

The Netherlands primarily exports agricultural products, while importing raw materials such as natural gas, metal ores, and grains. Analyze the impact of the following events on the Netherland's terms of trade:
a. Farm pollution in China is worsening.
b. Egypt is planning to import large quantities of liquefied natural gas.
c. Germany has a sustainable development strategy for raw materials and energy productivity.
d. OPEC's agreement with Russia cut oil production and pushing oil prices higher.
e. A rise in Netherland's tariffs on imported iron and steel.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 6

Access to adequate food is the primary concern for most countries; thus, agriculture is one of the most important industries in the world. The security and health of population has lowered the price of manufactured products relative to agricultural products. Brazil is among the top exporters of agricultural products in the whole world, an area in which the United States had been a major exporter. Using manufactured goods and agricultural products as tradable goods, create a standard trade model for the United States and Brazilian economies that show how a decline in relative prices can reduce welfare in the United States and increase it in Brazil.

James Kiss

Numerade Educator

Problem 7

Countries A and B have two factors of production, capital and labor, with which they produce two goods, $X$ and $Y$. Technology is the same in the two countries. $X$ is capital-intensive; $\mathrm{A}$ is capital-abundant.
Analyze the effects on the terms of trade and on the two countries' welfare of the following:
a. An increase in A's capital stock.
b. An increase in A's labor supply.
c. An increase in B's capital stock.
d. An increase in B's labor supply.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 8

Economic growth is just as likely to worsen a country's terms of trade as it is to improve them. Why, then, do most economists regard immiserizing growth, where growth actually hurts the growing country, as unlikely in practice?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 9

Singapore and Korea are somewhat similar in adopting eco-innovation policies: both are highly-innovative economies, with similar patterns of comparative advantage in producing eco-friendly goods and services. Korea was the first to adopt instruments for eco-innovation. Singapore is now adopting its own instruments in this direction. How would you expect this to affect the welfare of Korea? Of the United States? (Hint: Think of adding a new economy identical to that of Korea to the world economy.)

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 10

Suppose Country X subsidizes its exports and Country Y imposes a "countervailing" tariff that offsets the subsidy's effect, so that in the end, relative prices in Country $Y$ are unchanged. What happens to the terms of trade? What about welfare in the two countries? Suppose, on the other hand, that Country Y retaliates with an export subsidy of its own. Contrast the result.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 11

Explain the analogy between international borrowing and lending and ordinary international trade.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 12

Which of the following countries would you expect to have intertemporal production possibilities biased toward current consumption goods, and which would be biased toward future consumption goods?
a. A country like Egypt that has discovered large reserves of natural gas that can be exploited with massive investments.
b. A country like India that is catching up technologically due to massive outsourcing services, especially from wealthy countries.
c. A country like Germany or the United States where a ban on immigration means a limited inflow of immigrants.
d. A country like Indonesia that started developing its infrastructure to make industries more productive and cost-efficient.
e. A country like the Netherlands that aims to reduce energy and gas consumption with low investment in the use of biofuels.

Jennifer Stoner

Jennifer Stoner

Numerade Educator