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1、Instructors Manualto accompanyKrugman&ObstfeldInternational Economics:Theory and PolicySixth EditionCHAPTER 1INTRODUCTIONChapter OrganizationWhat is International Economics About?The Gains from TradeThe Pattern of TradeProtectionismThe Balance of PaymentsExchange-Rate DeterminationInternational Poli
2、cy CoordinationThe International Capital MarketInternational Economics:Trade and MoneyCHAPTER OVERVIEWThe intent of this chapter is to provide both an overview of the subject matter of internationaleconomics and to provide a guide to the organization of the text.It is relatively easy for aninstructo
3、r to motivate the study of international trade and finance.The front pages ofnewspapers,the covers of magazines,and the lead reports of television news broadcastsherald the interdependence of the U.S.economy with the rest of the world.Thisinterdependence may also be recognized by students through th
4、eir purchases of imports of allsorts of goods,their personal observations of the effects of dislocations due to internationalcompetition,and their experience through travel abroad.The study of the theory of international economics generates an understanding of many keyevents that shape our domestic
5、and international environment.In recent history,these eventsinclude the causes and consequences of the large current account deficits of the United States;the dramatic appreciation of the dollar during the first half of the 1980s followed by its rapiddepreciation in the second half of the 1980s;the
6、Latin American debt crisis of the 1980s andthe Mexico crisis in late 1994;and the increased pressures for industry protection againstforeign competition broadly voiced in the late 1980s and more vocally espoused in the firsthalf of the 1990s.Most recently,the financial crisis that began in East Asia
7、 in 1997 andspread to many countries around the globe and the Economic and Monetary Union in Europehave highlighted the way in which various national economies are linked and how importantit is for us to understand these connections.At the same time,protests at global economicmeetings have highlight
8、ed opposition to globalization.The text material will enable studentsto understand the economic context in which such events occur.Chapter 1 of the text presents data demonstrating the growth in trade and increasingimportance of international economics.This chapter also highlights and briefly discus
9、sesseven themes which arise throughout the book.These themes include:1)the gains from trade;2)the pattern of trade;3)protectionism;4),the balance of payments;5)exchange ratedetermination;6)international policy coordination;and 7)the international capital market.Students will recognize that many of t
10、he central policy debates occurring today come underthe rubric of one of these themes.Indeed,it is often a fruitful heuristic to use current eventsto illustrate the force of the key themes and arguments which are presented throughout thetext.CHAPTER 2LABOR PRODUCTIVITY AND COMPARATIVE ADVANTAGE:THER
11、ICARDIAN MODELChapter OrganizationThe Concept of Comparative AdvantageA One-Factor EconomyProduction PossibilitiesRelative Prices and SupplyTrade in a One-Factor WorldBox:Comparative Advantage in Practice:The Case of Babe RuthDetermining the Relative Price After TradeThe Gains from TradeA Numerical
12、ExampleBox:The Losses from Non-TradeRelative WagesMisconceptions About Comparative AdvantageProductivity and CompetitivenessThe Pauper Labor ArgumentExploitationBox:Do Wages Reflect Productivity?Comparative Advantage with Many GoodsSetting Up the ModelRelative Wages and SpecializationDetermining the
13、 Relative Wage with a Multigood ModelAdding Transport Costs and Non-Traded GoodsEmpirical Evidence on the Ricardian ModelSummaryCHAPTER OVERVIEWThe Ricardian model provides an introduction to international trade theory.This most basicmodel of trade involves two countries,two goods,and one factor of
14、production,labor.Differences in relative labor productivity across countries give rise to international trade.This Ricardian model,simple as it is,generates important insights concerning comparativeadvantage and the gains from trade.These insights are necessary foundations for the morecomplex models
15、 presented in later chapters.The text exposition begins with the examination of the production possibility frontier and therelative prices of goods for one country.The production possibility frontier is linearbecause of the assumption of constant returns to scale for labor,the sole factor of product
16、ion.The opportunity cost of one good in terms of the other equals the price ratio since pricesequal costs,costs equal unit labor requirements times wages,and wages are equal in eachindustry.After defining these concepts for a single country,a second country is introduced which hasdifferent relative
17、unit labor requirements.General equilibrium relative supply and demandcurves are developed.This analysis demonstrates that at least one country will specialize inproduction.The gains from trade are then demonstrated with a graph and a numericalexample.The intuition of indirect production,that is pro
18、ducing a good by producing thegood for which a country enjoys a comparative advantage and then trading for the other good,is an appealing concept to emphasize when presenting the gains from trade argument.Students are able to apply the Ricardian theory of comparative advantage to analyze threemiscon
19、ceptions about the advantages of free trade.Each of the three myths represents acommon argument against free trade and the flaws of each can be demonstrated in thecontext of examples already developed in the chapter.While the initial intuitions are developed in the context of a two good model,it iss
20、traightforward to extend the model to describe trade patterns when there are N goods.Thisanalysis can be used to explain why a small country specializes in the production of a fewgoods while a large country specializes in the production of many goods.The chapter endsby discussing the role that trans
21、port costs play in making some goods non-traded.The appendix presents a Ricardian model with a continuum of goods.The effect ofproductivity growth in a foreign country on home country welfare can be investigated withthis model.The common argument that foreign productivity advances worsen the welfare
22、of the domestic economy is shown to be fallacious in the context of this model.ANSWERS TO TEXTBOOK PROBLEMS1.a.The production possibility curve is a straight line that intercepts the apple axis at 400(1200/3)and the banana axis at 600(1200/2).b.The opportunity cost of apples in terms of bananas is 3
23、/2.It takes three units of labor toharvest an apple but only two units of labor to harvest a banana.If one foregoesharvesting an apple,this frees up three units of labor.These 3 units of labor couldthen be used to harvest 1.5 bananas.c.Labor mobility ensures a common wage in each sector and competit
24、ion ensures theprice of goods equals their cost of production.Thus,the relative price equals therelative costs,which equals the wage times the unit labor requirement for applesdivided by the wage times the unit labor requirement for bananas.Since wages areequal across sectors,the price ratio equals
25、the ratio of the unit labor requirement,whichis 3 apples per 2 bananas.2.a.The production possibility curve is linear,with the intercept on the apple axis equal to160(800/5)and the intercept on the banana axis equal to 800(800/1).b.The world relative supply curve is constructed by determining the su
26、pply of applesrelative to the supply of bananas at each relative price.The lowest relative price atwhich apples are harvested is 3 apples per 2 bananas.The relative supply curve isflat at this price.The maximum number of apples supplied at the price of 3/2 is 400supplied by Home while,at this price,
27、Foreign harvests 800 bananas and no apples,giving a maximum relative supply at this price of 1/2.This relative supply holds forany price between 3/2 and 5.At the price of 5,both countries would harvest apples.The relative supply curve is again flat at 5.Thus,the relative supply curve is stepshaped,f
28、lat at the price 3/2 from the relative supply of 0 to 1/2,vertical at the relativequantity 1/2 rising from 3/2 to 5,and then flat again from 1/2 to infinity.3.a.The relative demand curve includes the points(1/5,5),(1/2,2),(1,1),(2,1/2).b.The equilibrium relative price of apples is found at the inter
29、section of the relativedemand and relative supply curves.This is the point(1/2,2),where the relativedemand curve intersects the vertical section of the relative supply curve.Thus theequilibrium relative price is 2.c.Home produces only apples,Foreign produces only bananas,and each country tradessome
30、of its product for the product of the other country.d.In the absence of trade,Home could gain three bananas by foregoing two apples,andForeign could gain by one apple foregoing five bananas.Trade allows each countryto trade two bananas for one apple.Home could then gain four bananas by foregoingtwo
31、apples while Foreign could gain one apple by foregoing only two bananas.Eachcountry is better off with trade.4.The increase in the number of workers at Home shifts out the relative supply schedulesuch that the corner points are at(1,3/2)and(1,5)instead of(1/2,3/2)and(1/2,5).The intersection of the r
32、elative demand and relative supply curves is now in the lowerhorizontal section,at the point(2/3,3/2).In this case,Foreign still gains from tradebut the opportunity cost of bananas in terms of apples for Home is the same whether ornot there is trade,so Home neither gains nor loses from trade.5.This
33、answer is identical to that in 3.The amount of effective labor,has not changedsince the doubling of the labor force is accompanied by a halving of the productivity oflabor.6.This statement is just an example of the pauper labor argument discussed in the chapter.The point is that relative wage rates
34、do not come out of thin air;they are determined bycomparative productivity and the relative demand for goods.The box in the chapterprovides data which shows the strong connection between wages and productivity.Koreas low wage presumably reflects the fact that Korea is less productive than theUnited
35、States in most industries.As the test example illustrated,a highly productivecountry that trades with a less productive,low-wage country will raise,not lower,itsstandard of living.7.The problem with this argument is that it does not use all the information needed fordetermining comparative advantage
36、 in production:this calculation involves the fourunit labor requirements(for both the industry and service sectors,not just the two forthe service sector),It is not enough to compare only services unit labor requirements.If ajs H|s,Home labor is more efficient than foreign labor in services.While th
37、isdemonstrates that the United States has an absolute advantage in services,this is neithera necessary nor a sufficient condition for determining comparative advantage.For thisdetermination,the industry ratios are also required.The competitive advantage of anyindustry depends on both the relative pr
38、oductivities of the industries and the relativewages across industries.8.While Japanese workers may earn the equivalent wages of U.S.workers,the purchasingpower of their income is one-third less.This implies that although w=w (more or less),pvp*(since 3p=p).Since the United States is considerably mo
39、re productive inservices,service prices are relatively low.This benefits and enhances U.S.purchasingpower.However,many of these services cannot be transported and hence,are nottraded.This implies that the Japanese may not benefit from the lower U.S.servicescosts,and do not face an international pric
40、e which is lower than their domestic price.Likewise,the price of services in United States does not increase with the opening oftrade since these services are non-traded.Consequently,U.S.purchasing power ishigher than that of Japan due to its lower prices on non-traded goods.9.Gains from trade still
41、 exist in the presence of nontraded goods.The gains from tradedecline as the share of nontraded goods increases.In other words,the higher the portionof goods which do not enter international marketplace,the lower the potential gainsfrom trade.If transport costs were high enough so that no goods were
42、 traded then,obviously,there would be no gains from trade.10.The world relative supply curve in this case consists of a step function,with asmany steps(horizontal portions)as there are countries with different unit laborrequirement ratios.Any countries to the left of the intersection of the relative
43、 demandand relative supply curves export the good in which they have a comparative advantagerelative to any country to the right of the intersection.If the intersection occurs in ahorizontal portion then the country with that price ratio produces both goods.CHAPTER 3SPECIFIC FACTORS AND INCOME DISTR
44、IBUTIONChapter OrganizationThe Specific Factors ModelAssumptions of the ModelBox:What is a Specific Factor?Production PossibilitiesPrices,Wages,and Labor AllocationRelative Prices and the Distribution of IncomeInternational Trade in the Specific Factors ModelResources and Relative SupplyTrade and Re
45、lative PricesThe Pattern of TradeIncome Distribution and the Gains From TradeThe Political Economy of Trade:A Preliminary ViewOptimal Trade PolicyBox:Specific Factors and the Beginnings of Trade TheoryIncome Distribution and Trade PoliticsSummaryAppendix:Further Details on Specific FactorsMarginal a
46、nd Total ProductRelative Prices and the Distribution of IncomeCHAPTER OVERVIEWThe analysis presented in the previous chapter,demonstrating unambiguous gains from trade,may leave students wondering why free trade is such a politically charged issue and whyprotectionism is so heatedly discussed in the
47、 press.The reason for this is that the debatesconcerning free trade focus on its distributional rather than its efficiency effects.A formalexamination of these effects requires a model which has factors of production linked toproducing certain goods.Two models of this nature are presented in this ch
48、apter.The first model includes factors of production which are inexorably tied to producing oneand only one good.The particular example presented in the text involves winemakers andcheesemakers.The immobility of labor prevents equalization of wages.The productionpossibility frontier of this economy
49、is a rectangle and the relative supply curve is a verticalline.An equilibrium relative price can be determined when the relative demand curve isspecified.Consider the effect of introducing another country which can produce the same bundle ofgoods.The second economy shares the same production technol
50、ogy,but has different relativeamounts of each type of labor.Trade between these two economies benefits each in theaggregate since the possible consumption set of each country expands.However,distributional issues arise when trade is permitted since workers in particular sectors may notgain from trad