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I. Structure
This long chapter will be quite difficult for students who are not well versed in principles of microeconomics. It will
take more than a week to adequately cover the entire chapter.
The first section covers the principle of comparative advantage using a simple Ricardian model with two countries, two
goods, and one factor of production. Both countries are shown to benefit from trade. Factors influencing the
distribution of those gains between countries are discussed.
The second section (Comparative Opportunity Cost) generalizes the analysis by introducing an additional factor of
production. The pattern of comparative advantage is analyzed using figures on per unit production costs rather than
productivity data.
The third section (Absolute Advantage and Wage Rates) shows that absolute advantage determines relative wage rates
between nations. Section four (Summary of Policy Implications) reminds us that trade raises the real income of a
community by improving the efficiency of resource utilization. Any interference with free trade generally results in an
inefficient pattern of resource use and a loss of income to the community. The fifth and final section (Dynamic Gains
from Trade) emphasizes how trade can raise an economy's growth path by providing additional productive resources,
introducing new technologies, generating positive externalities, and enabling firms to achieve economies of scale.
Students should come away from this chapter with an understanding of the gains from trade, sources of trade gains, the
commodity composition of trade, behavior of prices and outputs with trade, and why they should seek employment in
comparative advantage activities and avoid import-competing sectors.
IV. Summary
2. Within the limits to mutually beneficial trade, the actual exchange ratio (terms of trade) is determined by the
intensity of each country’s demand for the other country’s product.
3. Trade leads to complete specialization in the Ricardian example due to the assumption that production costs
per unit of output remain constant as output expands or contracts. The existence of one homogeneous factor
of production (labor) gives rise to constant cost conditions.
5. Relative wages and, hence, living standards of countries are determined by absolute, not comparative
advantage.
6. Trade raises real income of a community by encouraging a more efficient allocation of productive resources
across sectors.
1. The U.S. opportunity cost of one bushel of wheat is 1/3 yard of textiles, while that for the U.K. is 1 yard of
textiles. Wheat is cheaper in terms of textiles in the U.S. The U.S. will produce and export wheat. The U.S.
opportunity cost of one yard of textiles is 3 bushels of wheat, while that for the U.K. is 1 bushel of wheat.
Textiles are cheaper in terms of wheat in the U.K. The U.K. will produce and export textiles.
The U.S. would be unwilling to trade 3 bushels of wheat for anything less than 1 yard of textiles because it
can do better at home. It would be willing to trade 3 bushels of wheat for more than 1 yard of textiles. The
U.K. would trade if it could obtain more than 1 bushel of wheat per yard of textiles. Limits to mutually
beneficial trade vary between 3 bushels of wheat for the U.S. to 1 bushel of wheat for the U.K. per 1 yard of
textiles.
Limits to a sustainable exchange rate are determined by assigning each commodity the price it commands in
the country in which it is produced, in terms of the currency of that country. One yard of textiles will cost £1,
while a bushel of wheat costs $1. Limits to the sustainable exchange rate are determined by these cost ratios.
The pound can be as strong as $3 or as weak as $1.
2. a. Consider Figure 2.2. The domestic cost ratios define limits of mutually beneficial trade. Within the
region of mutually beneficial trade the actual exchange rate will be determined by the relative
intensity of each country's demand for the other country's product. A full analysis requires an
understanding of reciprocal demand curves, but the following general principle might help
heuristically. If the British are more eager to buy U.S. wheat than the Americans are eager for
British textiles, the exchange ratio falls close to the U.K. domestic cost ratio and the U.S. can be
viewed as capturing a greater share of the gains from trade.
b. Since the real world does not conform to the convenient two-country, two-good assumptions, the
simple theoretical model is not immediately applicable. However, we can generalize the model to
many goods and many nations. The fundamental truth remains. Countries export those goods in
which their relative production costs are lower and import those goods for which the relative costs
are higher.
c. While trade tends to raise the prices of exportables in the domestic economy, the effect of trade is to
lower the average price level of all goods. Trade gives consumers an opportunity to consume at
lower world prices. Many goods will be cheaper when purchased from foreign supply sources.
Trade also conveys procompetitive effects, stimulates the adoption of new technologies, and allows
firms to achieve efficient scale production levels. Thus, trade is anti-inflationary.
d. The reunification of the German economy in 1990 was undertaken on the basis that a unit of the
deutschmark, the West German currency, should be equal in value to a unit of the ostmark, the East
German currency. At this exchange rate, goods produced in East Germany were almost universally
more expensive to produce than their counterparts in the West. Labor productivity in East German
manufacturing was found to be about 35% of the West German level. Under these conditions the
East German manufacturing sector collapsed. Investors were reluctant to purchase East German
factories and large scale closures and dismissals resulted.
3. The U.S. wage must be between 2 and 3 times greater than the U.K. wage. If the U.S. wage goes any higher
relative to the U.K. wage, then the U.K. will be the low cost supplier of both commodities. If the U.S. wage is
less than double the U.K. wage, the U.S. can produce both commodities more cheaply.
4. a. If a country possesses absolute advantage over another country in all commodities we can infer that
its labor is more productive, and that wage rates and standards of living will be higher.
b. Nothing. We need to know the structure of comparative advantage before we can determine the
direction of trade.
c. A country will export that good in which it has a comparative advantage and import that good in
which it has a comparative disadvantage.
5. a. The U.S. enjoys a comparative advantage in grains. It also produces oil, but will gain by specializing
in grain production and using proceeds of exported agricultural products to purchase oil from nations
that produce oil relatively more efficiently. Russia is relatively more efficient in the production of
oil and will gain by purchasing grain from the U.S. in exchange for oil.
b. The popular press asserts that by exporting grain from the U.S. (say to the former USSR) we are
lowering the domestic supply of grain and raising the domestic U.S. price of grain. Since grain is an
important ingredient in many food products, grain exports are believed to increase the price of those
products. However, the price of grain is determined in world markets. U.S. exports alone cannot
permanently raise the domestic U.S. price. If the domestic U.S. grain price rose above the world
price, the U.S. would be a net importer of grains and the domestic price would fall.
6. We can infer that unit labor costs in steel rose relative to manufacturing because wages in steel advanced more
quickly than those in other industries while productivity moved at the same rate. In Japan, because both
wages and productivity rose at the same rate as the rest of manufacturing, relative unit labor costs between
steel and manufacturing remained constant. Consequently, the U.S. lost comparative advantage in steel
production.
7. Table 2-2 presents data on unit labor costs in certain sectors relative to that of all manufactures. Iron and steel
and motor vehicle sectors in the U.S. have high unit labor costs relative to that of all manufactures. When
compared with corresponding figures for Japan and Germany, we can conclude the U.S. has a comparative
disadvantage in these activities. The reverse holds for high-tech sectors in the U.S.
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“Yes,” she returned; “I have a swelled face.”
“How sorry I am!” said the soldier sympathetically, “for I came this
afternoon in the hope of hearing you sing.”
“And so you shall,” returned the girl kindly. “You shall not go away
disappointed.” And, taking the bandage from her face, she sang
song after song to the fascinated General.
The progress of the courtship was swift, and the marriage was
celebrated with great magnificence in the palatial abode of Queen
Maria Cristina in Paris, with the attendance of representatives of the
most distinguished families of France and Spain.
When General Narvaez returned to Madrid he became Prime
Minister of Spain.
Unfortunately, the marriage did not prove a happy one, and,
indeed, it would have been difficult for anyone to live peacefully with
the irascible Spaniard. This irascibility was seen at the funeral of
General Manso de Zuñiga, who had died in the expedition against
Prim, in the mountains of Toledo. General Narvaez was chief
mourner on the occasion, as the deceased officer had been husband
of Doña Valentina Bouligni, a lady of great importance at this epoch,
with whom he was connected; and the Bishop of Pharsalia was
master of the ceremonies.
At a certain point in the function the order was given to kneel.
But, probably absorbed in some knotty State question, the Duke of
Valencia still stood. Upon this the Bishop quickly approached the
grandee, and said:
“Kneel down, kneel down!”
“But I don’t want to kneel,” returned the General petulantly, and
so he remained standing for the rest of the service.
G E N E R A L N A RVA E Z
When she came to Madrid as the wife of the great General, the
Duchess of Valencia was appointed Lady-in-Waiting to Queen
Isabella, and she never failed in her loyalty to the dynasty which was
in power when she came to the country of her adoption by marriage.
Many years later she was in an hotel in Switzerland, where she
purposed making a long stay, when Don Carlos happened to come
to the same hotel, accompanied by his secretary. As the Duchess of
Valencia was unacquainted with the Pretender to the throne of
Spain, she wondered who the imperious-looking new arrival could
be, who was greeted so respectfully by everybody. Her curiosity was
soon satisfied, for the gentleman’s secretary presented himself
before her to say that the Duke of Madrid begged the honour to pay
his respects to her.
The message filled the Duchess with dismay, for, although she
held the Princes of the blood in great respect, she had no intention of
receiving one who disputed the throne with the reigning Queen.
So, summoning all her dignity to her aid, she said, in a tone of icy
politeness:
“Tell the Duke of Madrid that I am very sorry not to have the
honour of receiving his visit, but to-morrow I leave for Paris.”
And in effect the lady left the hotel on the morrow, and thus the
meeting of one of the oldest and most valued Ladies-in-Waiting with
Don Carlos was avoided.
Isabella certainly never expected that she would be dethroned,
for a few weeks before the revolution of September, 1868, the
celebrated General Tacon, Duke of the Union of Cuba, announced
the forthcoming marriage of his daughter Carolina with the Marquis
Villadarías, of the première noblesse, and a perfect type of a
Spanish grandee, and she said: “I congratulate her sincerely on her
engagement; but,” she added sadly, “for myself I am sorry, as I shall
see her no more at Court.” The Queen here referred to the well-
known Carlist opinions of the Marquis Villadarías, which would have
made it impossible to receive the Marchioness at the palace if she
had remained there.
So Isabella II. was dethroned in 1868, and she can truly be said
to have been the victim of circumstances. From the moment King
Ferdinand died his daughter had been the object of intrigue and
ambition. Whilst our Queen Victoria was carefully educated and
drilled in high principles, Isabella was the prey of those who wished
to rise to power by her favour. Ministers made love to the Sovereign
instead of discussing the welfare of the nation; flowery speeches on
patriotism meant merely the gratification of the orator’s vanity to be
remarked by Her Majesty. Personal advancement was the end and
aim of those in the Government, and thus poor Isabella’s
susceptibilities were worked upon to an awful extent.
It is well known that General Serrano, who might have been
thought to have the welfare of his country at heart, gained an undue
influence over the Queen by means of her affections, and fomented
to a great extent the matrimonial differences between her and her
husband. Generous to a degree, Isabella paid the debts of this
courtier twice, and yet it was this same General who was the first to
have her hurled from the royal palace.
When the great Canning visited Madrid, Bulwer Lytton showed
him at a Court ball the many women who were the favourites of the
Ministers, and there was, indeed, hardly a statesman who would not
sacrifice principles to the pleas of his mistress. It was at this Court,
steeped in immorality, that Isabella was brought up with little or no
knowledge of right and wrong, and even in her marriage she was a
victim to the intrigues and ambitions of other Courts of Europe as
well as those of her own. She was, in fact, a scapegoat of the nation.
Harassed and in desperation at being pressed on to a miserable
marriage destitute of all that could justify it, Isabella, after one of
those long and fruitless discussions with her mother, once addressed
a letter to our Queen Victoria; but in a pure Court like that of England
little idea could be formed of the stagnant atmosphere of the Spanish
palace from which the poor young Queen sent forth her plaint.
Beyond the Court raged the stormy discontent of the country, which
had been thwarted for more than thirty years of the fulfilment of its
constitutional rights promised by Ferdinand VII. as the condition of
his return to the throne of Spain.
Whilst Queen Victoria was daily increasing in the knowledge of
constitutional rights which are the base of a Sovereign’s power, poor
Isabella’s Prime Ministers resigned at any moment in pique or
jealousy of some other politician, and the people grew daily more
discontented at finding the Parliament was a farce, and it meant
neither the progress of the land nor the protection of the people.
Bulwer Lytton was constantly sending despatches to England
about the shortcomings of Isabella II. as a woman, but he seemed to
lay no stress on the cause of her failure as a Queen. Under proper
conditions Isabella doubtless would have been a good woman and a
great Queen, but choked with the weeds of intrigue she was lost.
Undisciplined and uneducated, the poor Queen fell a victim to what,
if properly directed, would have been virtues instead of vices.
The marriage to which Isabella was forced by intrigue was, of
course, the greatest evil which could have befallen such an
impulsive, warm-hearted girl, who knew no more how to turn a deaf
ear to a claimant for her favour than to keep her purse shut to the
plea of an unfortunate beggar.
The Right Hon. Henry Lytton Bulwer wrote a little later from the
British Embassy at Madrid to the Court of St. James’s, saying that he
“looked at the Queen’s conduct as the moral result of the alliance
she had been more or less compelled to contract, and he regarded
her rather with interest and pity than blame or reproach.”
Isabel’s natural intuition of our Queen Victoria’s good heart
prompted her letters to her. They were sent by a private hand, and
who knows what evils might have been prevented in the Court of
Spain if the long journey, so formidable in those days, had not placed
the sister-Queens so far apart?
Espartero’s plea for Isabel to marry Don Enrique de Assisi, the
man of her heart, met no support in a Court torn with intrigue, and
the sad, bad story of Isabel doubtless had its source in the tragedy of
an unhappy marriage. At the plea of a persistent wooer, who knew
that the Queen had the right of dissolving a Ministry, a Government
would fall; and as the station of her favourites became lower and
lower, as time went on the ill-regulated Sovereign had a Government
as undependable as her friends.
Treachery was the keynote of the Court of Spain, and some of
the leaders of the revolution were those who had used the
Sovereign’s ignorance and foolhardiness to their own ends. In such
an atmosphere of untruth and treachery such men as Espartero,
Prim, etc., could play no enduring part. Hardly had Espartero swept
the Court clean of the Regency of Queen Maria Cristina than his fall
was encompassed by O’Donnell, his rival. The flagrant falsification of
the Parliamentary election returns—which is still the cankerworm of
the country—was the check to all progress. Count San Luis made a
primitive effort for the reform of the elections; he suggested that the
names of the candidates as deputies should be put in a bag, and
drawn out by a child blindfolded, for the law of chance seemed to
him better than the custom of deception.
Isabella’s acts of generosity are still quoted with admiration at the
royal palace of Madrid by those who served her as Queen.
Four hundred girls owed their marriage dots to Isabella, and it
was the fathers of these four hundred royally endowed brides who
treacherously worked for her expulsion.
One day, hearing the story of the penury of a clever man of
letters, Isabella commanded 20,000 francs to be sent to him. The
administrator of her finances, thinking the Queen could hardly know
how much money this sum represented, had twenty notes of 1,000
francs each changed into small money, and put out on a table by
which she had to pass.
“What is all this money for?” asked Isabella, when she saw it
spread out to view.
“It is the money for the man of letters, and this shows Your
Majesty how large is the sum of 20,000 francs.”
“So much the better,” was the prompt reply; and the courtier saw
it was not by proving the amount of the boon that he could check his
Sovereign in her generous actions.
A Court official at Madrid, who has been sixty years in office at
the palace, told me he often saw Isabella take off her bracelets, and
give them to the beggars who pressed upon her as she crossed the
courtyard of the royal domain.
“And who could help loving her?” said the old courtier, with tears
in his eyes; “I know I could not.”
Caught in the darkness of ignorance and intrigue, Isabella was
naturally enraged at the revolution. When her son Alfonso was
nearly made captive by the Carlists at Lucar, she said: “I would
rather my Alfonso be a prisoner of the Carlists than a captive of the
revolutionists.”
Isabella had a faithful friend in the Marquis of Grizalba, and he
said to Croze:[18]
“It is the loss of faith which causes our woes; the charm of death
has been destroyed with the hope of a hereafter. But Spain will die
like a gentleman.”
[18] The author of “La Vie intime d’Alfonse XIII.”
EMILIO CASTELAR
1873–1874