International Economics 12Th Edition Salvatore Solutions Manual Full Chapter PDF

International Economics 12th Edition
Salvatore Solutions Manual

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International Economics – 12th Edition Instructor’s Manual
CHAPTER 6
ECONOMIES OF SCALE, IMPERFECT COMPETITION,

AND INTERNATIONAL TRADE
OUTLINE
*6.1 Introduction
6.2 The Heckscher-Ohlin Model and New Trade Theories
*6.3 Economies of Scale and International Trade

Case Study 6-1: The New International economies of Scale
Case Study 6-2 Job Loss Rates in U.S. Industries and Globalization
*6.4 Imperfect Competition and International Trade

6.4A Trade Based on Product Differentiation
Case Study 6-3: U.S. Intra-Industry Trade in Automotive Products
Case Study 6-4: Variety Gains from International Trade
6.4B Relationship between Intra-Industry Trade and H-O Models
6.4C Measuring Intra-Industry Trade
Case Study 6-5: Growth of Intra-Industry Trade
Case Study 6-6: Intra-Industry Trade Indexes for G-20 Countries
Case Study 6-7: Index of Intra-Industry Trade for Some U.S. Industries
6.4D Formal Model of Intra-Industry Trade
6.4E Another Version of the Intra-Industry Trade Model
6.5 Trade Based on Dynamic Technological Differences and Synthesis of Trade Theories
6.5A The Technological Gap and Product Cycle Models
6.5B Illustration of the Product Cycle Model
Case Study 6-8: The United States as the Most Competitive Economy
6.6 Transportation Costs, Environmental Standards, and International Trade

6.6A Transportation Costs and Nontraded Commodities
6.6B Transportation Costs and the Location of Industry
6.6C Environmental Standards, Industry Location, and International Trade
Case Study 6-9: Environmental Sustainability Index
Appendix: A6.1 External Economies and the Pattern of Trade

A6.2 Dynamic External Economies and Specialization
ch06.doc) 6-1 Dominick Salvatore

KEY TERMS
Differentiated products International economies of scale Offshoring
Dynamic external economies Intra-industry trade Oligopoly
Environmental standards Intra-industry trade index (T) Outsourcing
External economies Learning curve Partial equilibrium analysis
Footloose industries Market-oriented industries Product cycle model
General equilibrium analysis Monopolistic competition Resource-oriented industries
Increasing returns to scale Monopoly Technological gap model
Infant industry argument Nontraded goods and services Transport or logistics costs
Lecture Guide:
1. Sections 6.3, 6.4 and 6.5 are important ones because they present some of the most recent
developments in international trade theory.
2. I would cover sections 1, 2, and 3 in lecture 1. The material is not difficult but very
important. I would also assign problems 1-3.
3. I would cover section 4 in lecture 2. This is the most important section in the chapter. I
would pay very close attention to Figures 6-2 and 6-3. These require reviewing from
principles of economics, the meaning of differentiated products, monopolistic competition,
economies of scale, and the determination of profit maximization by the firm. I would also
assign problems 4 to 9 and go over in class problems 6-9.
Answer to Problems:
1. See Figure 1.
2. See Figure 2.
3. See Figure 3.


4. a) T = 1 - /1000-1000/ = 1 - 0 = 1.
1000+1000 2000
b) T = 1 - /1000-750/ = 1 - 250 = 0.86.

1000+750 1750
c) T = 1 - /1000-500/ = 1 - 500 = 0.67.

1000+500 1500
d) T = 1 - /1000-250/ = 1 - 750 = 0.4.

1000+250 1250
e) T = 1 - /1000-0/ = 1 - 1000 = 0.
1000+0 1000
5. a) T = 1 - /1000-1000/ = 1 - 0 = 1.
1000+1000 2000
b) T = 1 - /750-1000/ = 1 - 250 = 0.86.

750+1000 1750
c) T = 1 - /500-1000/ = 1 - 500 = 0.67.

500+1000 1500
d) T = 1 - /250-1000/ = 1 - 750 = 0.4.

250+1000 1250
e) T = 1 - /0-1000/ = 1 - 1000 = 0.
0+1000 1000
Note that the results are identical to those in Problem 4 because we take the absolute
value of exports minus imports or imports minus exports.
6. See Figure 4.
The AC and the MC curves in Figure 4 are the same as in Figure 6-2. However, D and the
corresponding MR curve are higher on the assumption that other firms have not yet imitated
this firm's product, reduced its market share, or competed this firm's profits away. In Figure
4, MR=MC at point E, so that the best level of output of the firm is 5 units and price is
$4.50. Since at Q=5, AC=$3.00, the firm earns a profit of AB=$2.00 per unit and $10.00
in total.

Figure 4
Figure 6
Figure 5 Figure 6

7. a) Monopolistic competition resembles monopoly because under both forms of market

organization the firm produces a product that is unique (i.e., no other firm produces an
identical product).
b) Monopolistic competition is different from monopoly because under monopolistic

competition there are many other firms that produce a similar product. On the other
hand, there is no close substitute for the product sold by a monopolist.
Furthermore, under monopolistic competition, entry into the industry is easy. As a

result, attracted by this firm's profits, more firms enter the industry to produce similar
products. This reduces the monopolistically competitive firm's market share (i.e., its
demand and corresponding MR curves shift down) until we get to the situation
depicted by Figure 6-2 in the text, where P=AC and our firm breaks even. On the other
hand, under monopoly, entry into the industry is blocked, so that the monopolist can
continue to earn profits in the long run.
c) The difference between monopoly and monopolistic competition is important for

consumer welfare because consumers get a greater variety of the commodity at a lower
price with monopolistic competition than with monopoly.
8. A perfectly competitive firm faces an infinitely elastic or horizontal demand curve. This
means that the firm is a price taker and can sell any quantity of the homogenous product at
the price determined at the intersection of the market demand and supply curves for the
commodity.
Both the demand curves faced by the monopolistic competitive firm and the monopolist are
downward sloping, indicating that each can sell more units of the commodity by
lowering its price. However, the demand curve facing the monopolistically competitive firm
generally has a smaller inclination (i.e., it is more elastic) than the demand curve facing
the monopolist because the former sells a commodity for which many good substitute are
available.
9. If the C curve had shifted down only half as much as curve C' in Figure 6-3, the new
equilibrium point would be at P=AC=$2.50 and N=350.
10. See Figure 5 on the previous page.

11. The increased pirating or production and sale of counterfeit American goods without paying
royalties by foreign producers shorten the U.S. product cycle or the time during which the
U.S. firm can reap the benefits from the new product or technology it introduced and thus
reduces the ability of U.S. firms to engage in research and development (R & D) new
product cycles.
12. See Figure 7 on the next page (disregard Figure 6).
With transportation costs specialization would proceed to point C in Nation 1 and point C’
in Nation 2. Pc in nation 1 (the nation exporting commodity X) is smaller than Pc' in Nation
2 (the country importing commodity X) by the relative cost of transporting each unit of
commodity X from Nation 1 to Nation 2. Trade does not seem to be in
equilibrium because transportation costs are expressed in terms of commodity X.
13. See Figure 8 on the next page.
P2 exceeds P1 by the relative cost of transporting one unit of commodity X from Nation 1
to Nation 2.
14. See Figure 9.
App. 1. See Figure 10.
The firm's AC=AF without and BC with external economies. Thus, at a given level of
output of the firm, the firm's AC are lower (i.e., the firm's AC curve shifts down) as
cumulative industry output expands.
App. 2. Parameter "a" refers to the starting AC (i.e., the AC when output or Q is zero).
Parameter "b" refers to the rate of decline in AC as cumulative industry output increases.
Thus, "b" should be negative. Furthermore, the larger the absolute value of b, the more
rapid is the decline in AC as cumulative industry expands over time.

Figure 7
Figure 7
Figure 8
Figure 9 Figure 10

Multiple-Choice Questions:
1. Relaxing the assumptions on which the Heckscher-Ohlin theory rests:
a. leads to rejection of the theory

b. leaves the theory unaffected
*c. requires complementary trade theories
d. any of the above.
2. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed, leave
the theory unaffected?
a. Two nations, two commodities, and two factors

b. both nations use the same technology
c. the same commodity is L-intensive in both nations
*d. all of the above
3. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed,

require new trade theories?
*a. Economies of scale

b. incomplete specialization
c. similar tastes in both nations
d. the existence of transportation costs
4. International trade can be based on economies of scale even if both nations have identical:
a. factor endowments
b. tastes
c. technology
5. A great deal of international trade:
a. is intra-industry trade
b. involves differentiated products
c. is based on monopolistic competition

6. The Heckscher-Ohlin and new trade theories explains most of the trade:
a. among industrial countries

b. between developed and developing countries
c. in industrial goods
7.
8. The theory that a nation exports those products for which a large domestic market exists
was advanced by:
*a. Linder
b. Vernon
c. Leontief
d. Ohlin
8. Intra-industry trade takes place:
a. because products are homogeneous

*b. in order to take advantage of economies of scale
c. because perfect competition is the prevalent form of market organization
d. all of the above
9. If a nation exports twice as much of a differentiated product that it imports, its intra-
industry (T) index is equal to:
a. 1.00
b. 0.75
*c. 0.50
d. 0.25
10. Trade based on technological gaps is closely related to:
a. the H-O theory

*b. the product-cycle theory
c. Linder's theory
d. all of the above
11. Which of the following statements is true with regard to the product-cycle theory?
a. It depends on differences in technological changes over time among countries

b. it depends on the opening and the closing of technological gaps among countries
c. it postulates that industrial countries export more advanced products to less advanced countries

12. Transport costs:
a. increase the price in the importing country

b. reduces the price in the exporting country
*c. both of the above
d. neither a nor b.
13. Transport costs can be analyzed:
a. with demand and supply curves

b. production frontiers
c. offer curves
14. The share of transport costs will fall less heavily on the nation:
*a. with the more elastic demand and supply of the traded commodity
b. with the less elastic demand and supply of the traded commodity
c. exporting agricultural products
d. with the largest domestic market
15. A footloose industry is one in which the product:

a. gains weight in processing
b. loses weight in processing
c. both of the above
*d. neither a nor b.

ADDITIONAL ESSAYS AND PROBLEMS FOR PART ONE
1. Assume that both the United States and Germany produce beef and computer chips with the
following costs:
United States Germany
(dollars) (marks)
Unit cost of beef (B) 2 8

Unit cost of computer chips (C) 1 2
a. What is the opportunity cost of beef (B) and computer chips (C) in each country?
b. In which commodity does the United States have a comparative cost advantage?
What about Germany?
c. What is the range for mutually beneficial trade between the United States and Germany
for each computer chip traded?
d. How much would the United States and Germany gain if 1 unit of beef is exchanged
for 3 chips?
Answer
a. In the United States:

the opportunity cost of one unit of beef is 2 chips;
the opportunity cost of one chip is 1/2 unit of beef.
In Germany:
the opportunity cost of one unit of beef is 4 chips;
the opportunity cost of one chip is 1/4 unit of beef.
b. The United States has a comparative cost advantage in beef with respect to
Germany, while Germany has a comparative cost advantage in computer chips.
c. The range for mutually beneficial trade between the United States and Germany for
each unit of beef that the United States exports is
2C < 1B < 4C
d. Both the United States and Germany would gain 1 chip for each unit of beef traded.

2. Given: (1) two nations (1 and 2) which have the same technology but different factor
endowments and tastes, (2) two commodities (X and Y) produced under increasing costs
conditions, and (3) no transportation costs, tariffs, or other obstructions to trade. Prove
geometrically that mutually advantageous trade between the two nations is possible.
Note: Your answer should show the autarky (no-trade) and free-trade points of
production and consumption for each nation, the gains from trade of each nation, and
express the equilibrium condition that should prevail when trade stops expanding.)
Ans.: See Figure 1.
Nations 1 and 2 have different production possibilities curves and different community
indifference maps. With these, they will usually end up with different relative commodity
prices in autarky, thus making mutually beneficial trade possible.
In the figure, Nation 1 produces and consumes at point A and Px/Py=PA in autarky, while
Nation 2 produces and consumes at point A' and Px/Py=PA'. Since PA < PA', Nation 1 has a
comparative advantage in X and Nation 2 in Y. Specialization in production proceeds until
point B in Nation 1 and point B' in Nation 2, at which PB=PB' and the quantity supplied for
export of each commodity exactly equals the quantity demanded for import. Thus, Nation 1
starts at point A in production and consumption in autarky, moves to point B in production,
and by exchanging BC of X for CE of Y reaches point E in consumption. E > A since it
involves more of both X and Y and lies on a higher community indifference curve. Nation 2
starts at A' in production and consumption in autarky, moves to point B' in production, and by
exchanging B'C' of Y for C'E' of X reaches point E' in consumption (which exceeds A').
At Px/Py=PB=PB', Nation 1 wants to export BC of X for CE of Y, while Nation 2 wants to

export B'C' (=CE) of Y for C'E' (=BC) of X. Thus, PB=PB' is the equilibrium relative
commodity price because it clears both (the X and Y) markets.
3. Draw a figure showing: (1) in Panel A a nation's demand and supply curve for A traded
commodity and the nation's excess supply of the commodity, (2) in Panel C the trade partner's
demand and supply curve for the same traded commodity and its excess demand for the
commodity, and (3) in Panel B the supply and demand for the quantity traded of the ommodity,
its equilibrium price, and why a price above or below the equilibrium price will not persist. At
any other price, QD  QS, and P will change to P2.
Ans. See Figure 2.
The equilibrium relative commodity price for commodity X (the traded commodity exported
by Nation 1 and imported by Nation 2) is P2 and the equilibrium quantity of commodity X
traded is Q2.


4. a) Identify the conditions that may give rise to trade between two nations.
b) What are some of the assumptions on which the Heckscher-Ohlin theory is based?
c) What does this theory say about the pattern of trade and effect of trade on factor prices?
Answer:
a) Trade can be based on a difference in factor endowments, technology, or tastes between two
nations. A difference either in factor endowments or technology results in a different production
possibilities frontier for each nation, which, unless neutralized by a difference in tastes, leads to a
difference in relative commodity price and mutually beneficial trade. If two nations face
increasing costs and have identical production possibilities frontiers but different tastes, there
will also be a difference in relative commodity prices and the basis for mutually beneficial trade
between the two nations. The difference in relative commodity prices is then translated into a
difference in absolute commodity prices between the two nations, which is the immediate cause
of trade.
b) The Heckscher-Ohlin theory (sometimes referred to as the modern theory – as opposed to the
classical theory - of international trade) assumes that nations have the same tastes, use the same
technology, face constant returns to scale (i.e., a given percentage increase in all inputs increases
output by the same percentage) but differ widely in factor endowments. It also says that in the
face of identical tastes or demand conditions, this difference in factor endowments will result in a
difference in relative factor prices between nations, which in turn leads to a difference in relative
commodity prices and trade. Thus, in the Heckscher-Ohlin theory, the international difference in
supply conditions alone determines the pattern of trade. To be noted is that the two nations need
not be identical in other respects in order for international trade to be based primarily on the
difference in their factor endowments.
c) The Heckscher-Ohlin theorem postulates that each nation will export the commodity intensive in
its relatively abundant and cheap factor and import the commodity intensive in its relatively
scarce and expensive factor. As an important corollary, it adds that under highly restrictive
assumptions, trade will completely eliminate the pretrade relative and absolute differences in the
price of homogeneous factors among nations. Under less restrictive and more usual conditions,
however, trade will reduce, but not eliminate, the pretrade differences in relative and absolute
factor prices among nations. In any event, the Heckscher-Ohlin theory does say something very
useful on how trade affects factor prices and the distribution of income in each nation. Classical
economists were practically silent on this point.

5. Suppose that consumers demand more of commodity X (the L-intensive commodity) and less of
commodity Y (the K- intensive commodity). Suppose also that Nation 1 is India, commodity X
is textiles, and commodity Y is food. Starting from the no-trade equilibrium position and using
the Heckscher-Ohlin model, trace the effect of this change in tastes on India's
(a) relative commodity prices and demand for food and textiles,
(b) production of both commodities and factor prices, and
(c) comparative advantage and volume of trade.
(d) Do you expect international trade to lead to the complete equalization of relative commodity
and factor prices between India and the United States? Why?
Answer:
a) The change in tastes can be visualized by a shift toward the textile axis in India's indifference
map in such a way that an indifference curve is tangent to the steeper segment of India's
production frontier (because of increasing opportunity costs) after the increase in demand for
textiles. This will cause the pretrade relative commodity price of textiles to rise in India.
b) The increase in the relative price of textiles will lead domestic producers in India to shift labor
and capital from the production of food to the production of textiles. Since textiles are L-
intensive in relation to food, the demand for labor and therefore the wage rate will rise in
India. At the same time, as the demand for food falls, the demand for and thus the price of
capital will fall. With labor becoming relative more expensive, producers in India will
substitute capital for labor in the production of both textiles and food.
c) Even with the rise in relative wages and in the relative price of textiles, India still remains the
L-abundant and low-wage nation with respect to a nation such as the United States. However,
the pretrade difference in the relative price of textiles between India and the United States is
now somewhat smaller than before the change in tastes in India. As a result the volume
of trade required to equalize relative commodity prices and hence factor prices is smaller than
before. That is, India need now export a smaller quantity of textiles and import less food than
before for the relative price of textiles in India and the United States to be equalized.
Similarly, the gap between real wages and between India and the United States is now
smaller and can be more quickly and easily closed (i.e., with a smaller volume of trade).
d) Since many of the assumptions required for the complete equalization of relative commodity
and factor prices do not hold in the real world, great differences can be expected and do in fact
remain between real wages in India and the United States. Nevertheless, trade would tend to
reduce these differences, and the H-O model does identify the forces that must be considered to
analyze the effect of trade on the differences in the relative and absolute commodity and factor
prices between India and the United States.

6. (a) Explain why the Heckscher-Ohlin trade model needs to be extended.

(b) Indicate in what important ways the Heckscher-Ohlin trade model can be extended.
(c) Explain what is meant by differentiated products and intra-industry trade.
Anwer:
a) The Heckscher-Ohlin trade model needs to be extended because, while generally correct, it fails
to explain a significant portion of international trade, particularly the trade in manufactured
products among industrial nations.
b) The international trade left unexplained by the basic Heckscher-Ohlin trade model can be
explained by
(1) economies of scale,
(2) intra-industry trade, and
(3) trade based on imitation gaps and product differentiation.
c) Differentiated products refer to similar, but not identical, products (such as cars, typewriters,
cigarettes, soaps, and so on) produced by the same industry or broad product group.
Intra-industry trade refers to the international trade in differentiated products.

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International Economics 12Th Edition Salvatore Solutions Manual Full Chapter PDF

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International Economics 12th Edition

Salvatore Solutions Manual

ECONOMIES OF SCALE, IMPERFECT COMPETITION,

6.2 The Heckscher-Ohlin Model and New Trade Theories

*6.3 Economies of Scale and International Trade

*6.4 Imperfect Competition and International Trade

6.6 Transportation Costs, Environmental Standards, and International Trade

Appendix: A6.1 External Economies and the Pattern of Trade

ch06.doc) 6-1 Dominick Salvatore

ch06.doc) 6-2 Dominick Salvatore

ch06.doc) 6-3 Dominick Salvatore

b) T = 1 - /1000-750/ = 1 - 250 = 0.86.

c) T = 1 - /1000-500/ = 1 - 500 = 0.67.

d) T = 1 - /1000-250/ = 1 - 750 = 0.4.

b) T = 1 - /750-1000/ = 1 - 250 = 0.86.

c) T = 1 - /500-1000/ = 1 - 500 = 0.67.

d) T = 1 - /250-1000/ = 1 - 750 = 0.4.

ch06.doc) 6-4 Dominick Salvatore

ch06.doc) 6-5 Dominick Salvatore

7. a) Monopolistic competition resembles monopoly because under both forms of market

b) Monopolistic competition is different from monopoly because under monopolistic

Furthermore, under monopolistic competition, entry into the industry is easy. As a

c) The difference between monopoly and monopolistic competition is important for

10. See Figure 5 on the previous page.

ch06.doc) 6-6 Dominick Salvatore

12. See Figure 7 on the next page (disregard Figure 6).

13. See Figure 8 on the next page.

14. See Figure 9.

App. 1. See Figure 10.

ch06.doc) 6-7 Dominick Salvatore

ch06.doc) 6-8 Dominick Salvatore

1. Relaxing the assumptions on which the Heckscher-Ohlin theory rests:

a. leads to rejection of the theory

a. Two nations, two commodities, and two factors

3. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed,

*a. Economies of scale

5. A great deal of international trade:

ch06.doc) 6-9 Dominick Salvatore

a. among industrial countries

8. Intra-industry trade takes place:

a. because products are homogeneous

10. Trade based on technological gaps is closely related to:

a. the H-O theory

a. It depends on differences in technological changes over time among countries

ch06.doc) 6-10 Dominick Salvatore

12. Transport costs:

a. increase the price in the importing country

13. Transport costs can be analyzed:

a. with demand and supply curves

15. A footloose industry is one in which the product:

ch06.doc) 6-11 Dominick Salvatore

ADDITIONAL ESSAYS AND PROBLEMS FOR PART ONE

Unit cost of beef (B) 2 8

a. In the United States:

ch06.doc) 6-12 Dominick Salvatore

Ans.: See Figure 1.

At Px/Py=PB=PB', Nation 1 wants to export BC of X for CE of Y, while Nation 2 wants to

Ans. See Figure 2.

ch06.doc) 6-13 Dominick Salvatore

ch06.doc) 6-14 Dominick Salvatore

ch06.doc) 6-15 Dominick Salvatore

ch06.doc) 6-16 Dominick Salvatore

6. (a) Explain why the Heckscher-Ohlin trade model needs to be extended.