Chapter 3

questions 1,2,3,4 : questions 5,6,7,8 questions 9,10,11,12 problems 1,2,3 problems 4,5,6; problems 7,8,9 problems 10,11,12,13

Part I.

A Brief Summary( Importance& Difficulties)

This chapter extended our simple trade model to the more realistic case of increasing opportunity costs. It also introduced demand preferences in the form of community indifference curves. We then went on to examine how the interaction of these forces of demand and supply determines each nations comparative advantages and sets the stage for specialization in the production and mutually beneficial trade. In this chapter, it mainly tell us what are increasing opportunity costs, marginal rate of transformation and marginal rate of substitution, community price indifference in isolation curve, and

equilibrium-relative

commodity

equilibrium-relative commodity price with trade, incomplete specialization, gains from exchange and gains from

specialization, deindustrialization and so on. Firstly, it introduced the production frontier with increasing costs for us. This part includes what is increasing cost and the illustration of increasing costs, MRT, and reasons for increasing costs and different production frontiers. Secondly, it told us something about community indifference curve. In this part, we learnt the meaning of community indifference curve and the illustration of community indifference curve, the MRS, and then
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we knew the difficulties with community indifference curves. For example, a community indifference curve shows the various combinations of two commodities that yield equal satisfaction to the community or nation. Higher curves refers to greater satisfaction, lower curves to less satisfaction. Next, it gave us some information of equilibrium in isolation. Fourth, it introduced us the basis for and the gains form trade with increasing costs in details. This part mainly contains

illustrations of the basis for and the gains form trade with increasing costs, incomplete specialization, gains from exchange and gains from specialization. For example, the increase in consumption from point A (in autarky) to point T represents the gains from exchange alone. (Page 72 in the textbook). Finally, we learned trade based on differences in tastes. And illustration of trade based on differences in tastes is included. From this, we can reach a conclusion that mutually beneficial trade can be based exclusively on a difference in tastes between two nations and only if the production frontier and the indifference curves are identical in both nations will the pretrade-relative commodity prices be equal in both nations, ruling out the possibility of mutually beneficial trade.

Part II.Key Terms

Increasing opportunity cost:the nation must give up more and more of one commodity to release just enough resources to produce each additional unit of another commodity. Marginal rate of transformation(MRT):or opportunity cost, the MRT of X for Y refers to the amount of Y that a nation must give up to produce each additional unit of X. Community Indifference Curves(CIC):the various combinations of two commodities that yield equal satisfaction to the community or nation. Marginal Rate Of Substitution(MRS):the MRS of X for Y in consumption refers to the amount of Y that a nation could give up for one extra unit of X and still remain on the same indifference curve. Autarky: economic independence as a national policy Equilibrium-relative commodity price in isolation: the slope of the common tangent to the nations production frontier and indifference curve at the autarky point of production and consumption. Equilibrium-relative commodity price with trade:the common relative price in both nations at which trade is balanced. Revealed comparative advantage:the excess in the percentage
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of total exports over the percentage of total imports in each major commodity group for each country or region. Incomplete specialization:Under increasing opportunity costs, while one nation produces more of the commodity of its comparative advantage(X) with trade, it continues to produce another commodity(Y). Gains From Exchange:The welfare increased by exchanged at

quilibrium-relative commodity price with trade and produced at

the original rate of marginal transformation. Gains From Specialization:The welfare increased by exchanged at equilibrium-relative

commodity price with trade and

produced according to specialization. Deindustrialization:the employment. declining share of manufacturing

Comparative

advantage:

the

comparison

among

producers of a good according to their opportunity cost.

Part III. Questions For Review

1(1). See Figure 1

y3

B A

y1

y2

x3

x1

x2

The opportunity costs by producing more X (point C) is y2-y1. And the opportunity costs by producing more Y (point B) is x1-x3. (2) the slope of production frontier will became incliner as the nation produces more of X. The situation of producing more Y is oppose to the situation above. The slope is refer to the mount of Y that a nation must give up to produce each additional unit of X. 2. See the figure above. (1) The community indifference curves downward, or negatively, sloped because as a nation consumes more of X, it must consume less of Y if the nation is to have the same level of satisfaction. (2) the slope means the marginal rate of substitution(MRS) of X for Y in consumption refers to the amount of Y that a nation could give up for one extra unit of X and still remain on the same
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indifference curve. The decline in MRS or absolute slope of an indifference curve is a reflection of the fact that the more of X and the less of Y a nation consumes, the more valuable to the nation is a unit of Y at the margin compared with a unit of X. therefore, the nation can give up less and less of Y for each additional unit of X it wants (3) all of community indifference curves A and B are show a greater level of satisfaction to the left of the point of intersection. As we know, the community indifference curves will not cross to each other ordinarily except some special case. If it premises the two community indifference curves cross to each, to will work out the different answer.
Y

A B

3. a. See Figure 3.1. b. Nation 1 has a comparative advantage in X and Nation 2 in Y c. If the relative commodity price line has equal slope in both nations.
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Y Nation 1

A I

PA 0 X

Y PA Nation 2

A I 0 X

4. a. See Figure 3.2. b. Nation 1 gains by the amount by which point E is to the right and above point A and Nation 2 by the excess of E over A. Nation 1 gains more from trade because the relative price with trade differs more from its pretrade price than for Nation 2.
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Nation 1 E II B

PB 0 X

Nation 2

E II A 0 X PB=PB

5 .See Figure 1

120

QS

70 60 40

QD

1/4

1/2

1.5

Figure 1

(1) as we can see from Figure 1 that the equilibrium-relative commodity price of X with trade is PX/PY=1 . (2) if PX/PY=1.5 , QSX=70 , QDX=40 , so the trade can not be balanced . (3) if PX/PY=1/2 , QSX=40 , QDX=120 , so the trade can not be balanced as well . 6 .from the figure I sketched for Problem 5 and the results I obtained in Problem 5 and Figure 3.4 in the text , we can conclude that the conclusion result from Problem 5 is similar to the conclusion of Figure 3.4 . In Problem 5 , when PX/PY=1 , the export of X is equal to its import , the trade is balanced ; but to figure 3.4 , when PX/PY=1 ,
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the export of X of Nation A is equal to the import of Y , and in Nation B , the export of Y is equal to the import of X , then the trade between Nation A and Nation B is balanced , both can gain from the international trade . 7. See Figure 2 The small nation will move from A to B in production and will export X in exchange for Y so as to reach point E>A .
Y PW E
A 111

1 PA B

Figure 2

8. (1) In the increasing costs case , we find incomplete specialization even in the small nation , and the reason is that as Nation 1 specializes in the production of X ,it incurs increasing opportunity costs in producing X . Suppose that the equilibrium-relative price of X on the world market is 1(Pw=1),and it is not affected by trade with
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Nation 1 . Since in the absence of trade , the relative price of Nation 1 (PA=1/4) is lower than the world market price , Nation 1 has a comparative advantage in X .With the opening of trade ,Nation 1 specializes in the production of X until it reaches point B on its production frontier , where PB=1=PW , Even though Nation 1 is now considered to be a small nation , it still does not specialize completely in the production of X(as would be the case under constant costs). (2)There is one basic difference between our trade model under increasing costs and the constant opportunity costs case . Under constant costs , both nations specialize completely in production of the commodity of their comparative advantage . In contrast, under increasing opportunity costs , there is incompletely specialization in production in both nations . For example , while nation 1 produces more of X (the commodity of its comparative advantage)with trade , it continues to produce some Y . Similarly , Nation 2 continues to produces some X with trade . 9.The reason is that as one nation specializes in the production of X,it incurs increasing opportunity cost in producing X.Similarly, as another nation produces more Y,it incurs increasing opportunity costs in Y(which means declining
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opportunity costs of X).

The results under increasing costs will

lead to incomplete specialization in both nations,while the fixed costs results in complete specialization. 10.As the figure shows below: The gains from exchange: for some reason ,nation 1 could not specialization in the production of X with the opening of trade but continued to produce at point A,and trades at the prevailing world relative price of P=1 and ends up consuming at point T on indifference curve,the movement from point A to point T in consumption measures the gains from exchange. The gains from specializationi :nation 1 specializad in the production of X and produced at point B , it could trade with

the rest of world and consume at point E on indifference curve(thereby gaining even more),the movement from T to E in consumptioin measures thea gains from specialization in production.
Y T

A B Pw=1 PB=PW=1

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11.With increasing costs ,even if two nations have identical production possibility frontiers(which is unlikely), there will still be a basis for mutually beneficial trade if tastes,or demand preferences, in the two nations differ.The nation with the relatively smaller demand or preference for a commodity will have a lower autarky relative price for,and a comparative advantage in that commodity. In general case ,the community indifference curves and production frontier will be different between two nations ,the common slope of the two curves at the tangency point gives the internal equilibrium-relative commodity price in the nation and reflects the nations comparative advantage .The difference in relative commodity prices between two nations is a reflection of their comparative advantage and forms the basis for mutually beneficial trade. 12.Specialization in production and mutually beneficial trade is based exclusively on a difference in factor endowments and / or technology between two nations,this will happen in the Heckscher Ohlin theory.

Part IV. Problems

1. (a)See Figure 1.
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Y C B A B C

0 Figure 1

(b) The slope of the production frontier increases as the nation produces more of X and decreases as the nation produces more of Y. These changes reflect increasing opportunity costs as the nation produces more of X or Y. Y

A 0 2. See Figure 2 Figure 2 X

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(a) The community indifference curve is downward or negatively sloped because as a nation consumes more of X it will have to give up some of Y to remain on the same indifference curve. (b) The slope measures how much of Y the nation can give up by consuming one more unit of X and still remain at the same level of satisfaction. The slope declines because the nation consumes the more of X and the less of Y ,the less satisfaction it receives from additional units of X and the more satisfaction it receives from each retained unit of Y. (c) > to the right of the intersection ,while> to the left. This is inconsistent because an indifference curve should show a given level of satisfaction. Thus indifference curves can not cross. 3.(a) See Figure 3. Y
Nation 1

Nation 2

A A

PA
0 X

X Figure 3
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(b) For nation 1,P =14.For nation 2,P

=4.Since the relative

price of X is lower in Nation 1 than in Nation 2 ,Nation 1 has a comparative advantage in commodity X and Nation 2 in commodity Y. (c)If the pretrade-relative price had been the same in both nations ,there would be no comparative advantage or

disadvantage to speak of in either nation ,and no specialization in production or mutually beneficial trade would take place. 4.(a)
X Nation 1

E A B PB O Y

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X Nation 2

E A

PB=PB Y

(b)Nation 1 gains by the amount by which point E is to the right and above point A and Nation 2 by the excess of Eover A.Nation 1 gains more from trade because the relative price of X with trade differs more from its pretrade price than for Nation 2. 5.(a)
PX/PY
Excess Supply

1.5

R E

1
0.5 0.25 40 60

H
Excess Demand

H
120

Export Of Commodity X

S refers to Nation 1s supply curve of export of commodity X, D refers to Nation 2s demand of emport of commodity X . Curve S
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and D intersect at point E, which determines the equilibrium PB=PX/PY=1 and the equilibrium quantity of export of 60 X. (b)At PX/PY=1.5 there is an excess supply of exports of RR=30X and PX/PY falls toward equilibrium PX/PY=1. (c)At PX/PY=0.5, there is an excess demand of exports of HH=80X and PX/PY rises toward PX/PY=1. 6.The figure in Problem 5 is consistent with Figure3-4 in the text. From the left panel of Figure 3-4, we see that Nation 1 supplyies no exports of commodity X at PX/PY=0.25(point A).This corresponds with the vertical or price intercept of Nation 1s supply curve of exports of commodity X(point A). The left panel of Figure 3-4 also shows that at PX/PY=1, Nation 1 is willing to export 60X(point E).The same is shown by Nation 1s supply curve of exports of commodity X.The other points on Nation1s supply curve of exports in the figure of Problem 5 can also be derived from the left panel of Figure 3-4, but this is shown in Chapter 4 with offer curves.Nation 2s demand curve for Nation 1s exports of commodity X could be derived from the right panel of Figure 3-4,as shown in Chapter4. What is important is that we can use the D and S figure in Problem 5 to explain why the equilibrium relative commodity price with trade is PX/PY=1 and why the equilibrium quantity traded of commodity
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X is 60 units in figure 3-4. 7.

PW E A

PA

Figure 7 The small nation will move from A to B in production and will export X in exchange for Y so as to reach point E > A. 8. (a) From the figure above, suppose that the

equilibrium-relative price of

XPB=1> PA=1/4, PA is the price

of X in the absence of trade. With the opening of trade, the small nation specializes in the production of X until it reaches point B on its production frontier, where PB=1=PW. Even though it is a small nation, it still does not specialize completely in the production of X because of the increasing opportunity costs. (b). When it is under constant costs, the small country specializes completely.
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9. (a)look at figure 9(a) (b).look at figure9(b)

Y Nation 1 Y Nation 2

PA

A PA

0 X

Figure 9(a)
Y

Nation 1

Nation 2

E A B PB 0 X 0 X B A E PB

Figure 9(b) 10 the two community indifference curves had been identical If in Problem 9, the relative commodity prices would also have been the same in both nations in the absence of trade and no mutually beneficial trade would be possible.
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Nation 1

Nation 2

PA

PA=PA

11. If the production frontiers are identical and the community indifference curves are different, but we have constant opportunity costs, there would be no mutually beneficial trade possible between the two nations.
Y Nation 1 Y Nation 2

A I A X 0 0 I X

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12.

Nation 2

140 120 100 80 60 40 20 0 20 40 60 80 100 120 A T II X

PB=PW=1

PW=1

E III

13. Its true that Mexicos wages are much lower than U.S. wages , but labor productivity is much higher in the United States and so labor costs are not necessarily higher than in Mexico. In any case, trade can still be based on comparative advantage.

Part V. Assessment Of Chapter Three

1.We think the emphasis should be the increasing opportunity costs and community indifference curves, for they are extremely relevant to the international trade as well as running a more and more important role in international trade among countries. And the difficulty we came across should be the basis for and the gains form trade with increasing costs, because it is
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hard for us to understand such a complicated and complex subject in a short time. 2. From the beginning,I don't know how to sketch a graph,which annoies me very much.Even I have no mood to continue such a task.However ,when I ask others to solve this problem ,I start to be interested in sketching figures.Having finished these figures, I have a sense with of these satisfaction question and

achievement.Then,faced

,frankly

speaking ,I dont understand them completely.So the way to the solution is discussing with classmates or reading the text attentively.Finally,I learn a lot after I fulfil my task.For example ,I know how to draw a graph in the computer ,which is really practical and useful in our daily life.Additionally,whatever you do ,you should be patient. 3.I think the most difficult thing I come across is the combination of the theory and the fact.When I did the problem 4, I dont know how to solve the problem by the knowledge we learnt in this chapter.As this chapter emphasizes the graphs, we must understand all the graphs fully so that we can solve the practical problem thoroughly.Whats more, I learnt how to make a brief conclusion by solving problem6. 5. It is so important to understand the knowledge before
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chapter 3. Just know the word is useless. We have to know the words, understand what the writer talking, and then we can use our own word to repeat it to other. After that, the entire point just meet will become more unforgettable in our mind. We can use the knowledge into our daily life, into practice. All the know we learn in the book are from the reality. We cant image that after what we learn, we can tell everybody what the economic crisis is without any suggestion to solve it.We learn the international economics in English, which decide that we have to similar the profession words and sentence. 6. with increasing costs, even if two nations have identical production frontiers, there will still be a basis for mutually beneficial trade if tastes, or demand preferences in the two nations differ. However, with the constant opportunity costs, even if two nations have identical production frontiers , but the community indifference curves are different, there would be no mutually beneficial trade possible between the two nations.

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