International Economics 12th Edition

Salvatore Solutions Manual

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International Economics – 12th Edition Instructor’s Manual

CHAPTER 7
ECONOMIC GROWTH AND INTERNATIONAL TRADE

OUTLINE

7.1 Introduction

7.2 Growth of Factors of Production

7.2A Labor Growth and Capital Accumulation Over Time
7.2B The Rybczynski Theorem

7.3 Technical Progress

7.3A Neutral, Labor-Saving, and Capital-Saving Technical Progress
7.3B Technical Progress and the Nation's Production Frontier
Case Study 7-1: Growth in the Capital Stock per Worker of Selected Countries

7.4 Growth and Trade: The Small Country Case

7.4A The Effects of Growth on Trade
7.3B Illustration of Factor Growth, Trade, and Welfare
7.3C Technical Progress, Trade, and Welfare
Case Study 7-2: Growth in Output per Worker from Capital Deepening,
Technological Change, and Improvements in Efficiency

7.5 Growth and Trade: The Large-Country Case

7.5A Growth and the Nation's Terms of Trade and Welfare
7.5B Immiserizing Growth
7.5C Illustration of Beneficial Growth and Trade
Case Study 7-3: Growth and the Emergence of New Economic Giants

20.6 Growth, Change in Tastes, and Trade in Both Nations

7.6A Growth and Trade in Both Nations
7.6B Change in Tastes and Trade in Both Nations
Case Study 7-4: Growth, Trade, and Welfare in the Leading Industrial Nations

Appendix: A7.1 Formal Proof of Rybczynski Theorem

A7.2 Growth with Factor Immobility
A7.3 Graphical Analysis of Hicksian Technical Progress

Key Terms
Comparative statics Antitrade production and consumption
Dynamic analysis Neutral production and consumption
Balanced growth Normal goods
Rybczynski theorem Inferior goods
Labor-saving technical progress Terms-of-trade effect
Capital-saving technical progress Wealth effect
Protrade production and consumption Immiserizing growth

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

Lecture Guide

1. This is not a core chapter and it is one of the most challenging chapters in international
trade theory. It is included for more advanced students and for completeness.

2. If I were to cover this chapter, I would present two sections in each of three lectures.
Time permitting, I would, otherwise cover Sections 1 and 2, paying special attention
to the Rybczynski theorem.

Answer to Problems

1. a) See Figure 1.

b) See Figure 2

c) See Figure 3.

2. See Figure 4.

3. a) See Figure 5.

b) See Figure 6.

c) See Figure 7.

4. Compare Figure 5 to Figure 1.

Compare Figure 6 to Figure 3. Note that the two production frontiers have the same
vertical or Y intercept in Figure 6 but a different vertical or Y intercept in Figure 3.
Compare Figure 7 to Figure 2. Note that the two production frontiers have the same
horizontal or X intercept in Figure 7 but a different horizontal or X intercept in
Figure 2.

5. See Figure 8.
6. See Figure 9.
7. See Figure 10.
8. See Figure 11.
9. See Figure 12.
10. See Figure 13.
11. See Figure 14.
12. See Figure 15.

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

13. The United States has become the most competitive economy in the world since
the early 1990’s, while the data in Table 20.2 refers to the 1965-1990 period.

App. A20.1a. See Figure 16.

1b. For production and consumption to actually occur at the new equilibrium
point after the doubling of K in Nation 2, we must assume either than
commodity X is inferior or that Nation 2 is too small to affect the relative
commodity prices at which it trades.

1c. Px/Py must rise (i.e., Py/Px must fall) as a result of growth only.
Px/Py will fall even more with trade.

A20.2. If the supply of capital increases in Nation 1 in the production of commodity

Y only, the VMPLy curve shifts up, and w rises in both industries. Some
labor shifts to the production of Y, the output of Y rises and the output of X
falls, r falls, and Px/Py is likely to rise.

A20.3. Capital investments tend to increase real wages because they raise the
K/L ratio and the productivity of labor. Technical progress tends to
increase K/L and real wages if it is L-saving and to reduce K/L and real
wages if it is K-saving.

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

Multiple-Choice Questions

1. Dynamic factors in trade theory refer to changes in:

a. factor endowments
b. technology
c. tastes
*d. all of the above

2. Doubling the amount of L and K under constant returns to scale:

a. doubles the output of the L-intensive commodity

b. doubles the output of the K-intensive commodity
c. leaves the shape of the production frontier unchanged
*d. all of the above.

3. Doubling only the amount of L available under constant returns to scale:

a. less than doubles the output of the L-intensive commodity
*b. more than doubles the output of the L-intensive commodity
c. doubles the output of the K-intensive commodity
d. leaves the output of the K-intensive commodity unchanged

4. The Rybczynski theorem postulates that doubling L at constant relative commodity

prices:

a. doubles the output of the L-intensive commodity

*b. reduces the output of the K-intensive commodity
c. increases the output of both commodities
d. any of the above

5. Doubling L is likely to:

a. increases the relative price of the L-intensive commodity

b. reduces the relative price of the K-intensive commodity
*c. reduces the relative price of the L-intensive commodity
d. any of the above

6. Technical progress that increases the productivity of L proportionately more than the
productivity of K is called:

*a. capital saving

b. labor saving
c. neutral
d. any of the above

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

7. A 50 percent productivity increase in the production of commodity Y:

a. increases the output of commodity Y by 50 percent

b. does not affect the output of X
c. shifts the production frontier in the Y direction only
*d. any of the above

8. Doubling L with trade in a small L-abundant nation:

*a. reduces the nation's social welfare

b. reduces the nation's terms of trade
c. reduces the volume of trade
d. all of the above

9. Doubling L with trade in a large L-abundant nation:

a. reduces the nation's social welfare

b. reduces the nation's terms of trade
c. reduces the volume of trade
*d. all of the above

10. If, at unchanged terms of trade, a nation wants to trade more after growth, then the
nation's terms of trade can be expected to:

*a. deteriorate
b. improve
c. remain unchanged
d. any of the above

11. A proportionately greater increase in the nation's supply of labor than of capital is likely
to result in a deterioration in the nation's terms of trade if the nation exports:

a. the K-intensive commodity

*b. the L-intensive commodity
c. either commodity
d. both commodities

12. Technical progress in the nation's export commodity:

*a. may reduce the nation's welfare

b. will reduce the nation's welfare
c. will increase the nation's welfare
d. leaves the nation's welfare unchanged

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore

International Economics – 12th Edition Instructor’s Manual

13. Doubling K with trade in a large L-abundant nation:

a. increases the nation's welfare

b. improves the nation's terms of trade
c. reduces the volume of trade
*d. all of the above

14. An increase in tastes for the import commodity in both nations:

a. reduces the volume of trade

*b. increases the volume of trade
c. leaves the volume of trade unchanged
d. any of the above

15. An increase in tastes of the import commodity of Nation A and export in B:

*a. will reduce the terms of trade of Nation A

b. will increase the terms of trade of Nation A
c. will reduce the terms of trade of Nation B
d. any of the above

(Ch. 7 Salvatore 12e.doc)) 7-1 Dominick Salvatore