1. Study Questions #1. Ch 3.
Which of the following are effects of transportation costs on international trade patterns? Check all that apply.
Points:
1 / 1
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Explanation:
Transportation costs refer to the costs of moving goods, including freight charges, packing and handling expenses, and insurance premiums. These costs are an obstacle to trade and impede the realization of gains from trade liberalization. Differences across countries in transportation costs are a source of comparative advantage and affect the volume and composition of trade. Transportation costs also affect the location of industry since firms recognize that transportation costs in addition to production costs affect profitability. A firm achieves its best location when it can minimize its total operating costs, including production and transportation costs. When transportation costs are added to the prices of traded goods, a nation’s volume of trade decreases. See sections: “Trade Effects,” “Factor–Price Equalization,” and “Intra-industry Trade.”
2. Study Questions #2. Ch 3.
Complete the following paragraph to explain how the international movements of products and factor inputs promote an equalization of factor prices among nations.
The Stolper–Samuelson theorem states that an increase in the price of a product![]()
increases the income earned by resources that are used intensively in its production. Conversely, a decrease in the price of a product![]()
decreases the income of the resources that it uses intensively. The theorem![]()
does not state that all the resources used in the export industries are better off.
Points:
1 / 1
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Explanation:
The factor-endowment theory provides a comprehensive way to analyze gains and losses from trade. The effects of trade on the distribution of income are summarized in the Stolper–Samuelson theorem, an extension of the theory of factor–price equalization. The theorem suggests that a capital-abundant nation enjoys relatively cheap capital and thus specializes in and exports capital-intensive goods. This leads to increased demand for capital, which forces up the price of capital and thus the price of capital-intensive goods. The opposite occurs in the capital-scarce country. The basis for further specialization and trade ceases when the capital prices and product prices in each nation equate. See section: “Who Gains and Loses from Trade? The Stolper–Samuelson Theorem.”
3. Study Questions #3. Ch 3.
Evaluate the following statement explaining how the factor-endowment theory differs from Ricardian theory in explaining international trade patterns.
True or False: The Heckscher–Ohlin theory maintains that factor endowments determine a nation’s comparative advantage.
Points:
1 / 1
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Explanation:
In assuming labor is the only factor of production, Ricardo characterized labor productivity as the sole basis of comparative advantage and thus of trade. By allowing for multiple factors of production, by contrast, the Hecksher–Ohlin theory can account for the determinants of comparative advantage, namely, relative factor endowments. Additionally, the multiple-factor framework of the Heckscher–Ohlin theory can be used to account for the distributional effects of trade. The Stolper–Samuelson theorem, an extension of the Heckscher–Ohlin theory, states that an increase in the price of a product increases the income earned by factors used intensively in its production, while a decrease in the price of a product reduces the income of factors used intensively in its production. See section: “The Factor-Endowment Theory.”
4. Study Questions #4. Ch 3.
Evaluate the following statement.
True or False: The Stolper–Samuelson theorem states that the abundant resource that fosters comparative advantage realizes a decrease in income and the scarce resource realizes an increase in its income regardless of industry.
Points:
1 / 1
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Explanation:
The Stolper–Samuelson theorem states that the export of products embodying large amounts of relatively cheap, abundant factors makes those factors less abundant domestically, leading to higher prices and thus an increased share of national income for these factors. The magnification effect is an extension of the Stolper-Samuelson theorem that suggests that the change in the price of a resource is greater than the change in the price of the good that uses the resource relatively intensively in its production process.
Suppose that as the U.S. starts trading, the price of aircraft (capital intensive good) increases by 6% and the price of textiles (labor intensive good) decreases by 3%.
According to the magnification effect, the price of capital must![]()
rise by![]()
more than 6%, and the price of labor must![]()
fall by![]()
more than 3%. If the price of capital increases by more than 6%,![]()
owners of capital are better off whereas![]()
workers are worse off.
Points:
1 / 1
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Explanation:
In this case, the magnification effect implies that the price of capital must rise by more than 6%, while the price of labor must fall by more than 3%. If the price of capital increases by 6%, owners of capital are better off whereas workers are worse off. See section: “Who Gains and Loses From Trade? The Stolper–Samuelson Theorem.”
5. Study Questions #5. Ch 3.
An empirical test of the factor-endowment theory, undertaken by Wassily Leontief in 1954, revealed that the U.S. capital/labor ratio for export industries was lower than that of its import-competing industries.
Evaluate the following statement to indicate whether it accurately explains how the Leontief paradox challenges the overall applicability of the factor-endowment model.
True or False: The Leontief tests, as well as a number of empirical tests that followed, suggest that the determinants of trade are more complex than those predicted in the basic factor-endowment theory. This is because a large amount of international trade is not between industrialized and developing countries but is among industrialized countries with similar resource endowments. Thus, such factors as technology, demand conditions, and a time dimension to comparative advantage must also be considered.
Points:
1 / 1
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Explanation:
In 1954, Wassily Leontief found that the capital/labor ratio for U.S. export industries was lower than that of U.S. import-competing industries. He thus concluded that U.S. exports were less capital intensive than its import-competing goods, a conclusion known as the Leontief paradox because it contradicted the predictions of the factor-endowment theory. Leontief’s empirical findings brought into question the applicability of the factor-endowment theory by suggesting that the United States predominantly exported labor-intensive goods. This conclusion contradicted the prediction of the factor-endowment theory when applied to the United States. To strengthen his conclusion, Leontief repeated his tests only to again find that U.S. import-competing goods were more capital intensive than U.S. exports. Leontief’s discovery was that America’s comparative advantage lay in something other than capital-intensive goods. The empirical tests highlighted the importance of the fact that a large amount of international trade is not between industrialized and developing countries but is among industrialized countries with similar resource endowments. Thus, the determinants of trade are more complex than those identified by the basic factor-endowment theory, as factors such as technology, economies of scale, and demand conditions must also be included in the model. See section: “Is the Factor-Endowment Theory a Good Predictor of Trade Patterns? The Leontief Paradox.”
6. Study Questions #6. Ch 3.
Evaluate the following statement to indicate whether it accurately explains Staffan Linder’s theory of overlapping demands.
True or False: According to Linder’s theory of overlapping demands, the foreign markets with the greatest export potential are found in nations with consumer demands similar to those of domestic consumers.
Points:
1 / 1
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Explanation:
Staffan Linder, a Swedish economist in the 1960s, maintained that the factor-endowment theory is valid for trade in primary products, but the theory of overlapping demands best applies to trade in manufactured goods. Linder states that a nation’s exports are thus an extension of the production for the domestic market. See section: “Overlapping Demands as a Basis for Trade.”
7. Study Questions #7. Ch 3.
The product life cycle theory views a variety of![]()
manufactured goods as going through a trade cycle, during which a nation initially is an![]()
exporter , then loses its markets, and finally becomes an![]()
importer of the product.
Points:
1 / 1
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Explanation:
The product life cycle theory views a variety of manufactured goods as going through a trade cycle, during which a nation initially is an exporter, then loses its export markets, and finally becomes an importer of the product.
Which of the following is an accurate statement regarding empirical studies of trade cycles?
Points:
1 / 1
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Explanation:
Empirical studies have demonstrated that trade cycles do exist for manufactured goods at some times. See section: “Technology as a Source of Comparative Advantage: The Product Cycle Theory.”
8. Study Questions #8. Ch 3.
True or False: Economies of scale exist when expansion of the scale of production causes total production costs to increase more than proportionately to output, which causes long-run average costs of production to increase.
Points:
1 / 1
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Explanation:
Economies of scale (increasing returns to scale) exist when an expansion of the scale of productive capacity of a firm or industry causes total production costs to increase less than proportionately to output. Thus, long-run average costs of production decrease. See section: “Economies of Scale and Comparative Advantage.”
Which of the following are correct descriptions of the effects of economies of scale on world trade patterns? Check all that apply.
Points:
1 / 1
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Explanation:
Economies of scale are classified as internal economies and external economies. Internal economies of scale arise within a firm itself and are built into the shape of its long-run average cost curve. External economies of scale exist when the firm’s average costs decrease as the industry’s output increases. A key aspect of economies of scale is the home market effect, the tendency of countries to specialize in products for which there is significant domestic demand. In particular, by locating near its largest market, an industry can minimize shipping costs even as it takes advantage of economies of scale. See section: “Economies of Scale and Comparative Advantage.”
9. Study Questions #9. Ch 3.
Which of the following accurately defines intra-industry trade?
Points:
1 / 1
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Explanation:
Inter-industry trade refers to the exchange between nations of products of different industries. Intra-industry trade, on the other hand, refers to two-way trade in a similar product. Determinants of intra-industry trade include the following: (1) overlapping demand segments in trading countries, (2) the extent to which domestic producers ignore “minority” consumer tastes, and (3) economies of scale associated with differentiated goods. See section: “Intra-industry Trade.”
10. Study Questions #10. Ch 3.
Which of the following are problems encountered when attempting to implement industrial policy? Check all that apply.
Points:
1 / 1
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Explanation:
Industrial policy refers to a governmental strategy intended to revitalize, improve, and/or develop an industry. Governmental policies intended to foster an industry’s development include loan guarantees, research and development subsidies, low interest rate loans, trade protection, and the like. Creating comparative advantage requires the government to identify industries with the highest growth prospects. Problems of industrial policy include the following: (1) difficulties in identifying growth-oriented industries and (2) the potential for government policy makers to be unduly influenced by their voting constituents. See section: “Dynamic Comparative Advantage: Industrial Policy.”
11. Study Questions #11. Ch 3.
Evaluate the following statement about the effect of government regulatory policies on an industry’s international competitiveness.
True or False: Government regulatory policies weaken antitrust laws and increase the future competitiveness of affected industries.
Points:
1 / 1
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Explanation:
Government regulations imposed on domestic producers lead to higher production costs and a decrease in competitiveness. Thus, although such regulations may improve the well-being of the public, they negatively affect trade performance. Nations that impose more stringent and costly government regulations on their producers, relative to other countries, tend to lessen their international competitiveness. For example, environmental regulation adds to the costs of domestic steel companies making the United States more dependent on foreign-produced steel. However, regulations provide American households with cleaner water and air, and thus a higher quality of life. The competitiveness of other American industries, such as forestry products, may benefit from cleaner air and water. These effects must be considered when forming an optimal environmental regulatory policy. See section: “Government Regulatory Policies and Comparative Advantage.”
12. Study Questions #12. Ch 3.
Evaluate the following statement explaining the factors determining international trade in services.
True or False: The principle of absolute advantage applies to international trade in services.
Points:
1 / 1
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Explanation:
As with trade in manufactured goods, the principle of comparative advantage also applies to trade in services. International trade in business services is governed by factors such as these: (1) employee skills and compensation levels, (2) a firm’s ability to organize its employees in a productive manner, (3) availability of capital equipment, and (4) potential for economies of scale made possible by a market’s size. See section: “Factor-Price Equalization.”
13. Study Questions #13. Ch 3.
STEP: 2 of 2
The following two graphs show the markets for TV sets in Sweden and Norway.
Use the graphs to answer the questions that follow.
Assume there are no transportation costs. With trade, the price of
$22.5
brings about balance in exports and imports. At this price,
600
TV sets are traded. With trade, Sweden produces
900
TV sets and consumes
300
TV sets, and Norway produces
300
TV sets and consumes
900
TV sets.
Points:
1 / 1
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Explanation:
One way to determine the price that brings about balance between imports and exports, assuming no transportation costs, is to find the price at which the excess of quantity supplied over quantity demanded in the exporting country equals the excess of quantity demanded over quantity supplied in the importing country. You can determine that at a price of $22.50, the excess of quantity supplied over quantity demanded in Sweden (the exporting country) equals the excess of quantity demanded over quantity supplied in Norway (the importing country). As shown on the following graphs, at this price, 600 TV sets are traded. With trade, Sweden produces 900 TV sets and consumes 300 TV sets, and Norway produces 300 TV sets and consumes 900 TV sets.
Now suppose the per-unit transportation cost from Sweden to Norway is $5. With trade, the transportation cost changes the price of TV sets in Sweden to
$20
and in Norway to
$25
. Sweden will produce
800
TV sets and consume
400
TV sets, thus exporting
400
TV sets. Norway will produce
400
TV sets and consume
800
TV sets, thus importing
400
TV sets.
Points:
1 / 1
Close Explanation
Explanation:
The per-unit transportation cost imposes a $5 wedge between the price of TV sets in Sweden and in Norway. Thus, you should find prices for the two countries, $5 apart, at which the excess of quantity supplied over quantity demanded in Sweden (exports) equals the excess of quantity demanded over quantity supplied in Norway (imports). You can see that the price of TV sets in Sweden will be $20, and the price of TV sets in Norway will be $25. Sweden will produce 800 TV sets and consume 400 TV sets, thus exporting 400 TV sets. Norway will produce 400 TV sets and consume 800 TV sets, thus importing 400 TV sets. See section: “Factor-Price Equalization.”
TOTAL SCORE: 3/5
14. Study Questions #14. Ch 3.
Complete the following statement explaining the impact of transportation costs on the extent of specialization.
With the introduction of transportation costs, the degree of specialization in production between the two nations![]()
decreases , the volume of trade![]()
decreases , and the gains from trade![]()
decrease .
Points:
1 / 1
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Explanation:
In the absence of transportation costs, free trade results in the equalization of prices of traded goods, as well as resource prices, in the trading nations. With the introduction of transportation costs, the low-cost exporting nation produces less, consumes more, and exports less; the high-cost importing nation produces more, consumes less, and imports less. The degree of specialization in production between the two nations decreases, as do the gains from trade.
See section: “Transportation Costs and Comparative Advantage.”
