克魯格曼教材《國際經濟學》國際金融習題答案解析要點

.

/

Chapter2

1．Homehas1200unitsoflaboravailable.Itcanproducetwogoods,applesandbananas.Theunitlaborrequirementinappleproductionis3,whileinbananaproductionitis2.

a．Graphouttheproductionpossibilitiesfrontier:

b．Whatistheopportunitycostofapplesintermsofbananas?

c．Intheabsenceoftrade,whatwouldthepriceofapplesintermsofbananasbe?

Intheabsenceoftrade,sincelaboristheonlyfactorofproductionandsupplydecisionsaredeterminedbytheattemptsofindividualstomaximizetheirearningsinacompetitiveeconomy,onlywhenwillbothgoodsbeproduced.So

2．Homeisasdescribedinproblem1.Thereisnowalsoanothercountry,Foreign,withalaborforceof800.Foreign’sunitlaborrequirementinappleproductionis5,whileinbananaproductionitis1.

a．GraphForeign’sproductionpossibilitiesfrontier:

b．Constructtheworldrelativesupplycurve.

3．Nowsupposeworldrelativedemandtakesthefollowingform:Demandforapples/demandforbananas=priceofbananas/priceofapples.

a．Graphtherelativedemandcurvealongwiththerelativesupplycurve:

∵Whenthemarketachievesitsequilibrium,wehave

∴RDisahyperbola

b．Whatistheequilibriumrelativepriceofapples?

TheequilibriumrelativepriceofapplesisdeterminedbytheintersectionoftheRDandRScurves.

RD:

RS:

∴

∴

c．Describethepatternoftrade.

∵

∴Inthistwo-countryworld,Homewillspecializeintheappleproduction,exportapplesandimportbananas.Foreignwillspecializeinthebananaproduction,exportbananasandimportapples.

d．ShowthatbothHomeandForeigngainfromtrade.

InternationaltradeallowsHomeandForeigntoconsumeanywherewithinthecoloredlines,whichlieoutsidethecountries’productionpossibilityfrontiers.Andtheindirectmethod,specializinginproducingonlyoneproductionthentradewithothercountry,isamoreefficientmethodthandirectproduction.Intheabsenceoftrade,Homecouldgainthreebananasbyforegoingtwoapples,andForeigncouldgainbyoneforegoingfivebananas.Tradeallowseachcountrytotradetwobananasforoneapple.HomecouldthengainfourbananasbyforegoingtwoappleswhileForeigncouldgainoneapplebyforegoingonlytwobananas.SobothHomeandForeigngainfromtrade.

4．Supposethatinsteadof1200workers,Homehad2400.Findtheequilibriumrelativeprice.WhatcanyousayabouttheefficiencyofworldproductionandthedivisionofthegainsfromtradebetweenHomeandForeigninthiscase?

RD:

RS:

∴

∴

Inthiscase,Foreignwillspecializeinthebananaproduction,exportbananasandimportapples.ButHomewillproducebananasandapplesatthesametime.AndtheopportunitycostofbananasintermsofapplesforHomeremainsthesame.SoHomeneithergainsnorlosesbutForeigngainsfromtrade.

5．SupposethatHomehas2400workers,buttheyareonlyhalfasproductioninbothindustriesaswehavebeenassuming,Constructtheworldrelativesupplycurveanddeterminetheequilibriumrelativeprice.Howdothegainsfromtradecomparewiththoseinthecasedescribedinproblem4?

Inthiscase,thelaborisdoubledwhiletheproductivityoflaborishalved,sothe＂effectivelabor＂remainsthesame.Sotheanswerissimilartothatin3.AndbothHomeandForeigncangainfromtrade.ButForeigngainslessercomparewiththatinthecase4.

6．"Koreanworkersearnonly$2.50anhour;ifweallowKoreatoexportasmuchasitlikestotheUnitedStates,ourworkerswillbeforceddowntothesamelevel.Youcan’timporta$5shirtwithoutimportingthe$2.50wagethatgoeswithit."Discuss.

Infact,relativewagerateisdeterminedbycomparativeproductivityandtherelativedemandforgoods.Korea’slowwagereflectsthefactthatKoreaislessproductivethantheUnitedStatesinmostindustries.Actually,tradewithalessproductive,lowwagecountrycanraisethewelfareandstandardoflivingofcountrieswithhighproductivity,suchasUnitedStates.Sothispauperlaborargumentiswrong.

7．JapaneselaborproductivityisroughlythesameasthatoftheUnitedStatesinthemanufacturingsector<higherinsomeindustries,lowerinothers>,whiletheUnitedStates,isstillconsiderablymoreproductiveintheservicesector.Butmostservicesarenon-traded.SomeanalystshavearguedthatthisposesaproblemfortheUnitedStates,becauseourcomparativeadvantageliesinthingswecannotsellonworldmarkets.Whatiswrongwiththisargument?

Thecompetitiveadvantageofanyindustrydependsonboththerelativeproductivitiesoftheindustriesandtherelativewagesacrossindustries.Sotherearefouraspectsshouldbetakenintoaccountbeforewereachconclusion:boththeindustriesandservicesectorsofJapanandU.S.,notjustthetwoservicesectors.Sothisstatementdoesnotbadeonthereasonablelogic.

8．AnyonewhohasvisitedJapanknowsitisanincrediblyexpensiveplace;althoughJapaneseworkersearnaboutthesameastheirU.S.counterparts,thepurchasingpoweroftheirincomesisaboutone-thirdless.Extendyourdiscussingfromquestion7toexplainthisobservation.<Hint:Thinkaboutwagesandtheimpliedpricesofnon-tradegoods.>

TherelativehigherpurchasingpowerofU.S.issustainedandmaintainedbyitsconsiderablyhigherproductivityinservices.Becausemostofthoseservicesarenon-traded,Japanesecouldnotbenefitfromthoselowerservicecosts.AndU.S.doesnothavetofacealowerinternationalpriceofservices.SothepurchasingpowerofJapaneseisjustone-thirdoftheirU.S.counterparts.

9．Howdoesthefactthatmanygoodsarenon-tradedaffecttheextentofpossiblegainsfromtrade?

Actuallythegainsfromtradedependedontheproportionofnon-tradedgoods.Thegainswillincreaseastheproportionofnon-tradedgoodsdecrease.

10．Wehavefocusedonthecaseoftradeinvolvingonlytwocountries.Supposethattherearemanycountriescapableofproducingtwogoods,andthateachcountryhasonlyonefactorofproduction,labor.Whatcouldwesayaboutthepatternofproductionandinthiscase?<Hint:Tryconstructingtheworldrelativesupplycurve.>

Anycountriestotheleftoftheintersectionoftherelativedemandandrelativesupplycurvesexportthegoodinwhichtheyhaveacomparativeadvantagerelativetoanycountrytotherightoftheintersection.Iftheintersectionoccursinahorizontalportionthenthecountrywiththatpriceratioproducesbothgoods.

Chapter3

In1986,thepriceofoilonworldmarketsdroppedsharply.SincetheUnitedStatesisanoil-importingcountry,thiswaswidelyregardedasgoodfortheU.S.economy.YetinTexasandLouisiana1986wasayearofeconomicdecline.Why?

ItcandeducethatTexasandLouisianaareoil-producingstatesofUnitedStates.Sowhenthepriceofoilonworldmarketsdeclined,therealwageofthisindustryfellintermsofothergoods.Thismightbethereasonofeconomicdeclineinthesetwostatesin1986.

2。Aneconomycanproducegood1usinglaborandcapitalandgood2usinglaborandland.Thetotalsupplyoflaboris100units.Giventhesupplyofcapital,theoutputsofthetwogoodsdependsonlaborinputasfollows:

Toanalyzetheeconomy’sproductionpossibilityfrontier,considerhowtheoutputmixchangesaslaborisshiftedbetweenthetwosectors.

Graphtheproductionfunctionsforgood1andgood2.

Graphtheproductionpossibilityfrontier.Whyisitcurved?

Q1

Q2

L1

L2

PPF

ThePPFiscurvedduetodecliningmarginalproductoflaborineachgood.Thetotallaborsupplyisfixed.SoasL1rises,MPL1falls;correspondingly,asL2falls,MPL2rises.SoPPgetssteeperaswemovedownittotheright.

Themarginalproductoflaborcurvescorrespondingtotheproductionfunctionsinproblem2areasfollows:

Supposethatthepriceofgood2relativetothatofgood1is2.Determinegraphicallythewagerateandtheallocationoflaborbetweenthetwosectors.

Withtheassumptionthatlaborisfreelymobilebetweensectors,itwillmovefromthelow-wagesectortothehigh-wagesectoruntilwagesareequalized.Soinequilibrium,thewagerateisequaltothevalueoflabor’smarginalproduct.

Theabscissaofpointofintersectionillustratedaboveshouldbebetween<20,30>.Sinceweonlyhavetofindouttheapproximateanswer,linearfunctioncouldbeemployed.

ThelaborallocationbetweenthesectorsisapproximatelyL1=27andL2=73.Thewagerateisapproximately0.98.

Usingthegraphdrawnforproblem2,determinetheoutputofeachsector.Thenconfirmgraphicallythattheslopoftheproductionpossibilityfrontieratthatpointequalstherelativeprice.

Q1

Q2

L1

L2

PPF

TherelativepriceisP2/P1=2andwehavegottheapproximatelaborallocation,sowecanemploythelinearfunctionagaintocalculatetheapproximateoutputofeachsector:Q1=44andQ2=90.

Supposethattherelativepriceofgood2fallsto1.Repeat<a>and<b>.

Therelativedeclineinthepriceofgood2causedlabortobereallocated:laborisdrawnoutofproductionofgood2andentersproductionofgood1<Ｌ1=62,L2=38>.Thisalsoleadstoanoutputadjustment,thatis,productionofgood2fallsto68unitsandproductionofgood1risesto76units.Andthewagerateisapproximatelyequalto0.74.

Q1

Q2

L1

L2

PPF

Calculatetheeffectsofthepricechangeontheincomeofthespecificfactorsinsectors1and2.

WiththerelativepricechangefromP2/P1=2toP2/P1=1,thepriceofgood2hasfallenby50percent,whilethepriceofgood1hasstayedthesame.Wageshavefallentoo,butbylessthanthefallinP2<wagesfellapproximately25percent>.Thus,therealwagerelativetoP2actuallyriseswhilerealwagerelativetoP1falls.Hence,todeterminethewelfareconsequenceforworkers,theinformationabouttheirconsumptionsharesofgood1andgood2isneeded.

Inthetextweexaminedtheimpactsofincreasesinthesupplyofcapitalandland.Butwhatifthemobilefactor,labor,increasesinsupply?

Analyzethequalitativeeffectsofanincreaseinthesupplyoflaborinthespecificfactorsmodel,holdingthepriceofbothgoodsconstant.

Foraneconomyproducingtwogoods,XanY,withlabordemandsreflectedbytheirmarginalrevenueproductcurves,thereisaninitialwageofw1andaninitiallaborallocationofLx=OxAandLy=OyA.Whenthesupplyoflaborincreases,therightboundaryofthediagramillustratedbelowpushedouttoOy’.ThedemandforlaborinsectorYispulledrightwardwiththeboundary.Thenewintersectionofthelabordemandcurvesshowsthatlaborexpandsinbothsectors,andthereforeoutputofbothXandYalsoexpand.Therelativeexpansionofoutputisambiguous.Wagespaidtoworkersfall.

W

Graphtheeffectontheequilibriumforthenumericalexampleinproblems2and3,givenarelativepriceof1,whenthelaborforceexpandsfrom100to140.

Withthelawofdiminishingreturns,thenewproductionpossibilityfrontierismoreconcaveandsteeper<flatter>attheendswhentotallaborsupplyincreases.

L1increaseto90from62andL2increasesto50from38.Wagesdeclinefrom0.74to0.60.ThisnewallocationoflaborleadstoanewoutputmixofapproximatelyQ1=85andQ2=77.

Q1

Q2

L1

L2

PPF

Chapter4

IntheUnitedStateswherelandischeap,theratiooflandtolaborusedincattlerisingishigherthanthatoflandusedinwheatgrowing.Butinmorecrowdedcountries,wherelandisexpensiveandlaborischeap,itiscommontoraisecowsbyusinglesslandandmorelaborthanAmericansusetogrowwheat.Canwestillsaythatraisingcattleislandintensivecomparedwithfarmingwheat?Whyorwhynot?

Thedefinitionofcattlegrowingaslandintensivedependsontheratiooflandtolaborusedinproduction,notontheratiooflandorlabortooutput.TheratiooflandtolaborincattleexceedstheratioinwheatintheUnitedStates,implyingcattleislandintensiveintheUnitedStates.Cattleislandintensiveinothercountriestooiftheratiooflandtolaborincattleproductionexceedstheratioinwheatproductioninthatcountry.ThecomparisonbetweenanothercountryandtheUnitedStatesislessrelevantforansweringthequestion.

Supposethatatcurrentfactorpricesclothisproducedusing20hoursoflaborforeachacreofland,andfoodisproducedusingonly5hoursoflaborperacreofland.

Supposethattheeconomy’stotalresourcesare600hoursoflaborand60acresofland.Usingadiagramdeterminetheallocationofresources.

WecansolvethisalgebraicallysinceL=LC+LF=600andT=TC+TF=60.

ThesolutionisLC=400,TC=20,LF=200andTF=40.

Labor

Land

Cloth

Food

Nowsupposethatthelaborsupplyincreasefirstto800,then1000,then1200hours.UsingadiagramlikeFigure4-6,traceoutthechangingallocationofresources.

Labor

Land

Cloth

Food

0l800

0l1000

0l1200

Whatwouldhappenifthelaborsupplyweretoincreaseevenfurther?

Atconstantfactorprices,somelaborwouldbeunused,sofactorpriceswouldhavetochange,ortherewouldbeunemployment.

"Theworld’spoorestcountriescannotfindanythingtoexport.Thereisnoresourcethatisabundant—certainlynotcapitalorland,andinsmallpoornationsnotevenlaborisabundant."Discuss.

Thegainsfromtradedependoncomparativeratherthanabsoluteadvantage.Astopoorcountries,whatmattersisnottheabsoluteabundanceoffactors,buttheirrelativeabundance.Poorcountrieshaveanabundanceoflaborrelativetocapitalwhencomparedtomoredevelopedcountries.

TheU.S.labormovement—whichmostlyrepresentsblue-collarworkersratherthanprofessionalsandhighlyeducatedworkers—hastraditionallyfavoredlimitsonimportsformless-affluentcountries.Isthisashortsightedpolicyofarationaloneinviewoftheinterestsofunionmembers?Howdoestheanswerdependonthemodeloftrade?

IntheRicardo’smodel,laborgainsfromtradethroughanincreaseinitspurchasingpower.Thisresultdoesnotsupportlaboruniondemandsforlimitsonimportsfromlessaffluentcountries.

IntheImmobileFactorsmodellabormaygainorlosefromtrade.Purchasingpowerintermsofonegoodwillrise,butintermsoftheothergooditwilldecline.

TheHeckscher-Ohlinmodeldirectlydiscussesdistributionbyconsideringtheeffectsoftradeontheownersoffactorsofproduction.Inthecontextofthismodel,unskilledU.S.laborlosesfromtradesincethisgrouprepresentstherelativelyscarcefactorsinthiscountry.TheresultsfromtheHeckscher-Ohlinmodelsupportlaboruniondemandsforimportlimits.

ThereissubstantialinequalityofwagelevelsbetweenregionswithintheUnitedStates.Forexample,wagesofmanufacturingworkersinequivalentjobsareabout20percentlowerintheSoutheastthantheyareintheFarWest.Whichoftheexplanationsoffailureoffactorpriceequalizationmightaccountforthis?HowisthiscasedifferentfromthedivergenceofwagesbetweentheUnitedStatesandMexico<whichisgeographicallyclosertoboththeU.S.SoutheastandtheFarWestthantheSoutheastandFarWestaretoeachother>?

Whenweemployfactorpriceequalization,weshouldpayattentiontoitsconditions:bothcountries/regionsproducebothgoods;bothcountrieshavethesametechnologyofproduction,andtheabsenceofbarrierstotrade.InequalityofwagelevelsbetweenregionswithintheUnitedStatesmaycausedbysomeorallofthesereasons.

Actually,thebarrierstotradealwaysexistintherealworldduetotransportationcosts.AndthetradebetweenU.S.andMexico,bycontrast,issubjecttolegallimits;togetherwithculturaldifferencesthatinhibittheflowoftechnology,thismayexplainwhythedifferenceinwageratesissomuchlarger.

ExplainwhytheLeontiefparadoxandthemorerecentBowen,Leamer,andSveikauskasresultsreportedinthetextcontradictthefactor-proportionstheory.

Thefactorproportionstheorystatesthatcountriesexportthosegoodswhoseproductionisintensiveinfactorswithwhichtheyareabundantlyendowed.OnewouldexpecttheUnitedStates,whichhasahighcapital/laborratiorelativetotherestoftheworld,toexportcapital-intensivegoodsiftheHeckscher-Ohlintheoryholds.LeontieffoundthattheUnitedStatesexportedlabor-intensivegoods.Bowen,LeamerandSveikauskasfoundthatthecorrelationbetweenfactorendowmentandtradepatternsisweakfortheworldasawhole.Thedatadonotsupportthepredictionsofthetheorythatcountries'exportsandimportsreflecttherelativeendowmentsoffactors.

InthediscussionofempiricalresultsontheHeckscher-Ohlinmodel,wenotedthatrecentworksuggeststhattheefficiencyoffactorsofproductionseemstodifferinternationally.Explainhowthiswouldaffecttheconceptoffactorpriceequalization.

Iftheefficiencyofthefactorsofproductiondiffersinternationally,thelessonsoftheHeckscher-Ohlintheorywouldbeappliedto"effectivefactors"whichadjustforthedifferencesintechnologyorworkerskillsorlandquality<forexample>.Theadjustedmodelhasbeenfoundtobemoresuccessfulthantheunadjustedmodelatexplainingthepatternoftradebetweencountries.Factor-priceequalizationconceptswouldapplytotheeffectivefactors.Aworkerwithmoreskillsorinacountrywithbettertechnologycouldbeconsideredtobeequaltotwoworkersinanothercountry.Thus,thesinglepersonwouldbetwoeffectiveunitsoflabor.Thus,theonehigh-skilledworkercouldearntwicewhatlowerskilledworkersdoandthepriceofoneeffectiveunitoflaborwouldstillbeequalized.

Chapter6

Foreachofthefollowingexamples,explainwhetherthisisacaseofexternalorinternaleconomiesofscale:

MostmusicalwindinstrumentsintheUnitedStatesareproducedbymorethanadozenfactoriesinElkhart,Indiana.

AllHondassoldintheUnitedStatesareeitherimportedorproducedinMarysville,Ohio.

AllairframesforAirbus,Europe’sonlyproduceroflargeaircraft,areassembledinToulouse,France.

Hartford,ConnecticutistheinsurancecapitalofthenortheasternUnitedStates.

Externaleconomiesofscale:Casesaandd.Theproductionsofthesetwoindustriesconcentrateinafewlocationsandsuccessfullyreduceeachindustry'scostsevenwhenthescaleofoperationofindividualfirmsremainssmall.Externaleconomiesneednotleadtoimperfectcompetition.Thebenefitsofgeographicalconcentrationmayincludeagreatervarietyofspecializedservicestosupportindustryoperationsandlargerlabormarketsorthickerinputmarkets.

Internaleconomiesofscale:Casesbandc.Bothofthemoccurattheleveloftheindividualfirm.Thelargertheoutputofaproductbyaparticularfirm,theloweritsaveragecosts.Thisleadstoimperfectcompetitionasinpetrochemicals,aircraft,andautos.

Inperfectcompetition,firmsetpriceequaltomarginalcost.Whyisn’tthispossiblewhenthereareinternaleconomiesofscale?

Unlikethecaseofperfectlycompetitivemarkets,undermonopolymarginalrevenueisnotequaltoprice.Theprofitmaximizingoutputlevelofamonopolistoccurswheremarginalrevenueequalsmarginalcost.Marginalrevenueisalwayslessthanpriceunderimperfectlycompetitivemarketsbecausetosellanextraunitofoutputthefirmmustlowerthepriceofallunits,notjustthemarginalone.

Itisoftenarguedthattheexistenceofincreasingreturnsisasourceofconflictbetweencountries,sinceeachcountryisbetteroffifitcanincreaseitsproductioninthoseindustriescharacterizedbyeconomiesofscale.Evaluatethisviewintermsofboththemonopolisticcompetitionandtheexternaleconomymodels.

Bothinternaleconomiesofscale<whichmayleadtomonopolisticcompetition>andexternaleconomiesofscalecouldleadtoincreasingreturns.

Byconcentratingtheproductionofeachgoodwitheconomiesofscaleinonecountryratherthanspreadingtheproductionoverseveralcountries,theworldeconomywillusethesameamountoflabortoproducemoreoutput.

Inthemonopolisticcompetitionmodel,theconcentrationoflaborbenefitsthehostcountry.Thehostcountrycancapturesomemonopolyrents.Buttherestoftheworldmayhurtandhavetofacehigherpricesonitsconsumptiongoods.

Intheexternaleconomiescase,suchmonopolisticpricingbehaviorislesslikelysinceimperfectlycompetitivemarketsarelesslikely.

Supposethetwocountriesweconsideredinthenumericalexampleonpages132-135weretointegratetheirautomobilemarkerwithathirdcountrywithanannualmarketfor3.75millionautomobiles.Findthenumberoffirms,theoutputperfirm,andthepriceperautomobileinthenewintegratedmarketaftertrade.

However,sinceyouwillneversee0.8firms,therewillbe15firmsthatenterthemarket,not16firmssincethelastfirmknowsthatitcannotmakepositiveprofits.Therestofthesolutionisstraight-forward.UsingX=S/n,outputperfirmis41,666units.Usingthepriceequation,andthefactthatc=5,000,yieldsanequilibriumpriceof$7,000.

Evaluatetherelativeimportanceofeconomiesofscaleandcomparativeadvantageincausingthefollowing:

Mostoftheworld’saluminumissmeltedinNorwayorCanada.

Halfoftheworld’slargejetaircraftareassembledinSeattle.

MostsemiconductorsaremanufacturedineithertheUnitedStatesorJapan.

MostScotchwhiskeycomesfromScotland.

Muchoftheworld’sbestwinecomesfromFrance.

a.Therelativelyfewlocationsforproductionsuggestexternaleconomiesofscaleinproduction.Iftheseoperationsarelarge,theremayalsobelargeinternaleconomiesofscaleinproduction.

b.Sinceeconomiesofscalearesignificantinairplaneproduction,ittendstobedonebyasmallnumberof<imperfectlycompetitive>firmsatalimitednumberoflocations.OnesuchlocationisSeattle,whereBoeingproduces.

c.Sinceexternaleconomiesofscalearesignificantinsemiconductorproduction,semiconductorindustriestendtobeconcentratedincertaingeographiclocations.If,forsomehistoricalreason,asemiconductorisestablishedinaspecificlocation,theexportofsemiconductorsbythatcountryisduetoeconomiesofscaleandnotcomparativeadvantage.

d."True"scotchwhiskeycanonlycomefromScotland.Theproductionofscotchwhiskeyrequiresatechniqueknowntoskilleddistillerswhoareconcentratedintheregion.Also,soilandclimacticconditionsarefavorableforgrainsusedinlocalscotchproduction.Thisreflectscomparativeadvantage.

e.Francehasaparticularblendofclimacticconditionsandlandthatisdifficulttoreproduceelsewhere.Thisgeneratesacomparativeadvantageinwineproduction.

TherearesomeshopsinJapanthatsellJapanesegoodsimportedbackfromtheUnitedStatesatadiscountoverthepriceschargedbyotherJapaneseshops.Howisthispossible?

TheJapaneseproducersemploypricediscriminationacrossUnitedStatesandJapanesemarkets,sothatthegoodssoldintheUnitedStatesaremuchcheaperthanthosesoldinJapan.ItmaybeprofitableforotherJapanesetopurchasethesegoodsintheUnitedStates,incuranytariffsandtransportationcosts,andresellthegoodsinJapan.Clearly,thepricedifferentialacrossmarketsmayleadtosuchprofitablechance.

ConsiderasituationsimilartothatinFigure6-9,inwhichtwocountriesthatcanproduceagoodaresubjecttoforward-fallingsupplycurves.Inthiscase,however,supposethatthetwocountrieshavethesamecosts,sothattheirsupplycurvesareidentical.

Whatwouldyouexpecttobethepatternofinternationalspecializationandtrade?

Whatwoulddeterminewhoproducesthegood?

Q

P,C

D

AC

AC

ExternalEconomicsandSpecialization

Q

P,C

D

AC

AC

ExternalEconomicsandSpecialization

Supposetwocountriesthatcanproduceagoodaresubjecttoforward-fallingsupplycurvesandareidenticalcountrieswithidenticalcurves.Ifonecountrystartsoutasaproducerofagood,i.e.ithasaheadstartevenasamatterofhistoricalaccident,thenallproductionwilloccurinthatparticularcountryanditwillexporttotherestoftheworld.

Whatarethebenefitsofinternationaltradeinthiscase?Dotheyaccrueonlytothecountrythatgetstheindustry?

Consumersinbothcountrieswillpayalowerpriceforthisgoodwhenexternaleconomiesaremaximizedthroughtradeandallproductionislocatedinasinglemarket.Inthepresentexample,nosinglecountryhasanaturalcostadvantageorisworseoffthanitwouldbeunderautarky.

Itisfairlycommonforanindustrialclustertobreakupandforproductiontomovetolocationswithlowerwageswhenthetechnologyoftheindustryisnolongerrapidlyimproving—whenitisnolongeressentialtohavetheabsolutelymostmodernmachinery,whentheneedforhighlyskilledworkershasdeclined,andwhenbeingatthecuttingedgeofinnovationconveysonlyasmalladvantage.Explainthistendencyofindustrialclusterstobreakupintermsofthetheoryofexternaleconomies.

Externaleconomiesareimportantforfirmsastechnologychangesrapidlyandasthe"cuttingedge"movesquicklywithfrequentinnovations.Asthisprocessslows,manufacturingbecomesmorenormalandstandardandthereislessadvantagebroughtbyexternaleconomies.Instead,firmslookforlowcostproductionlocations.Sinceexternaleconomiesarenolongerimportant,firmsfindlittleadvantageinbeingclusteredanditislikelythatlow-wagelocationswillbechosen.

chapter7

1. ThemarginalproductoflaborinHomeis10andinForeignis18.WagesarehigherinForeign,soworkersmigratetheretothepointwherethemarginalproductinbothHomeandForeignisequated.Thisoccurswhenthereare7workersineachcountry,andthemarginalproductoflaborineachcountryis14.

2. Thereisnoincentivetomigratewhenthereisfactorpriceequalization.Thisoccurswhenbothcountriesproducebothgoodsandwhentherearenobarrierstotrade<theproblemassumestechnologyisthesameinthetwocountries>.AtariffbycountryAincreasestherelativepriceoftheprotectedgoodinthatcountryandlowersitsrelativepriceinthecountryB.Iftheprotectedgooduseslaborrelativelyintensively,thedemandforlaborincountryArises,asdoesthereturntolabor,andthereturntolaborinthecountryBfalls.TheseresultsfollowfromtheStolper-Samuelsontheory,whichstatesthatanincreaseinthepriceofagoodraisesthereturntothefactorusedintensivelyintheproductionofthatgoodbymorethanthepriceincrease.Theseinternationalwagedifferentialsind