Deck 6: Gains From Trade in Neoclassical Theory

Question 1

(a) Using the neoclassical production-possibilities frontier/indifference curve approach, build the case that free trade is preferable to autarky for a country. Then explain how an economist could still say that trade can be beneficial to the country even if trade causes the community indifference curve map to change such that the country appears to lose welfare on the basis of the original autarky income distribution.
(b) It has often been pointed out in this course that, within a country, a movement to freer trade, while helping some people, can hurt other people. Thinking over various parts of this course, indicate two groups of people within a country who can have their well-being reduced because of the opening of the country to trade and very briefly explain why their welfare can be reduced.

Answer 1

not answered

Question 2

The text has demonstrated that, even if a country's production does not change with the opening of the country to trade, a gain (the "consumption gain") can still occur even though there is no "production gain." Is the reverse situation possible - that is, can there be a "production gain" without there being a "consumption gain" for the country? Why or why not?

Answer 2

not answered

Question 3

Given the diagram below, which shows country A in its autarky position at point E [where the price line labeled p₀ is tangent to both country A's production-possibilities frontier (PPF) and country A's indifference curve S₀]:

If country A now is opened to international trade in a situation where the price of bread relative to the price of meat is lower on the world market than it is in A's autarky position, then __________; with international trade, country A will be __________.

A) country A will face a steeper price line than p₀ and will change production to a point On the PPF that is downward and to the right from point E; exporting meat and Importing bread
B) country A will face a steeper price line than p₀ and will change production to a point On the PPF that is downward and to the right from point E; exporting bread and Importing meat
C) country A will face a flatter price line than p₀ and will change production to a point on The PPF that is upward and to the left from point E; exporting meat and importing Bread
D) country A will face a flatter price line than p₀ and will change production to a point on The PPF that is upward and to the left from point E; exporting bread and Importing meat

Answer 3

country A will face a flatter price line than p₀ and will change production to a point on The PPF that is upward and to the left from point E; exporting meat and importing Bread

Question 4

Given the following diagram showing a fixed-quantity production-possibilities frontier, a Community indifference curve, and the associated autarky price line, if this country is Opened to trade through exposure to different relative prices, the country can attain

A) both a "production gain" ("gains from specialization") and a "consumption gain" ("gains from exchange").
B) neither a "production gain" ("gains from specialization") nor a "consumption gain" ("gains from exchange").
C) a "consumption gain" ("gains from exchange") but not a "production gain" ("gains From specialization").
D) a "production gain" ("gains from specialization") but not a "consumption gain" ("gains from exchange").

Question 5

If two countries with increasing opportunity costs have identical PPFs but different tastes,

A) the countries will have identical relative commodity prices under autarky, and therefore there is no incentive to trade.
B) the countries will have different relative commodity prices under autarky, but there will still be no incentive for them to trade.
C) the countries will have different relative commodity prices under autarky, and each country can gain by exporting the good for which its consumers have the higher relative preference.
D) the countries will have different relative commodity prices under autarky, and each country can gain by exporting the good for which its consumers have the lower relative preference.

Question 6

In the equilibrium trading position in a two-country model of trade, why must the trade triangles of the two countries be congruent (identical)? What role does the slope of the world price line play in making the triangles congruent?

Question 7

In the diagram in Question #16 above, suppose that this country is opened to trade from This initial situation where the dashed line indicates autarky prices [(P_X/P_Y)_autarky]. With This opening to trade,

A) the country can gain from trade if P_X/P_Y on the world market is less than (P_X/P_Y)_autarky But cannot gain from trade if P_X/P_Y on the world market is greater than (P_X/P_Y)_autarky.
B) the country can gain from trade if P_X/P_Y on the world market is greater than (P_X/P_Y)_autarky but cannot gain from trade if P_X/P_Y on the world market is less than (P_X/P_Y)_autarky.
C) the country can gain from trade if P_X/P_Y on the world market is less than (P_X/P_Y)_autarky And also can gain from trade if P_X/P_Y on the world market is greater than
(P_X/P_Y)_autarky.
D) the country cannot gain from trade if P_X/P_Y on the world market is less than (P_X/P_Y)_autarky and also cannot gain from trade if _X/P_Y on the world market is Greater than (P_X/P_Y)_autarky.

Question 8

In the neoclassical model of trade, the movement of a country from autarky to free trade Generally results in __________ specialization in production, __________ the situation in the Classical model.

A) complete; unlike
B) complete; as was also
C) partial; unlike
D) partial; as was also

Question 9

Illustrate and explain, for each statement below, why the statement is either TRUE or False. Assume a two-commodity world in each case.
(a) "If a country has an absolutely fixed production pattern, i.e., resources used
in each industry are completely specific to their respective industry, then this
country cannot experience any welfare gain when moving from autarky to free
trade."
(b) "It is possible that, even if two countries have identical production-
possibilities frontiers, trade between the countries can enhance the well-being
of each country, in comparison with well-being under autarky."

Question 10

Explain, using the PPF-indifference curve diagram, how a change in tastes can cause a country to shift from being an exporter of a good to being an importer of that same good. (Assume that world prices are constant.)

Question 11

"In a situation of increasing opportunity costs, trade can be beneficial to bothcountries if they have identical PPFs or if they have identical tastes. However, trade cannot be beneficial to either country if the countries have identical PPFs and identical tastes." Is this statement correct or incorrect? Illustrate and explain.

Question 12

(a) Using the neoclassical model, build the case why it is beneficial for a country to movefrom a situation of autarky to a situation of free trade.
(b) Briefly, why can the neoclassical model of trade be regarded as "better" in some respects than the Classical model of trade?

Question 13

In the following graph showing indifference curves for country A (a₁) and for country B (b₁) in a situation where both countries have the same production-possibilities frontier, in Autarky, P_X/P_Y in country A is __________ P_X/P_Y in country B, and, if trade begins, ountry A will export good __________.

A) less than; X
B) less than; Y
C) greater than; X
D) greater than; Y

Question 14

(This question pertains to material in the appendix.) Explain the economist's distinction, in discussion of the compensation principle, between "potential" gains from trade and "actual" gains from trade. Why are the gains only "potential" when that word is used?

Question 15

Suppose that the trade pattern of a country is that it exports foodstuffs and imports fancy sports equipment. Can you make a case that trade acts like a regressive tax in its impact on the distribution of real income and welfare within the country? Explain.

Question 16

If two countries have identical production-possibilities frontiers but different tastes, it is possible for each country to gain from trade with the other country

A) in the Classical model but not in the neoclassical model.
B) in the neoclassical model but not in the Classical model.
C) in both the Classical model and the neoclassical model.
D) in neither the Classical model nor the neoclassical model.

Question 17

Given the production-possibilities-frontier/community-indifference-curve diagram below,Where P is the autarky production point, C is the free trade consumption point, P₁ Represents autarky prices, and P₂ represents free-trade prices, the free-trade production Point is __________ and the autarky consumption point is __________.

A) R; G
B) R; P
C) P; G
D) G; P

Question 18

Given the following graph showing production-possibilities frontiers for country A and country B in a situation where both countries are on the same community indifference curve S₁ in autarky:

Prior to trade, P_X/P_Y in country A is __________ P_X/P_Y in country B, and, when trade begins, country A will import good __________.

A) greater than; X
B) greater than; Y
C) less than; X
D) less than; Y

Question 19

Which of the following does not contribute to a basis for trade between two countries?

A) different tastes and preferences
B) different technologies
C) different relative factor endowments
D) different absolute factor endowments, but the same relative endowments

Question 20

(a) Suppose that two countries have identical increasing-opportunity-costs production-possibilities frontiers (PPFs). Illustrate and carefully explain why, under certain conditions, the two countries can have an incentive to trade with each other. In addition, illustrate and explain how they can therefore both gain from trade.
(b) Suppose that two countries, in a situation where they each have an increasing-opportunity-costs production-possibilities frontier (PPF), have identical tastes and preferences (demands). Illustrate and carefully explain why, under certain conditions, the two countries can have an incentive to trade with each other. Why can they gain from trade?

Question 21

If country A's (P_X/P_Y) in autarky is greater than the (P_X/P_Y) on the world market, then, as the country moves from autarky to trade, the relative price of good X facing A's producers will __________, and A's producers will hence want to shift their production toward producing __________.

A) decrease; more of good X and less of good Y
B) decrease; more of good Y and less of good X
C) increase; more of good X and less of good Y
D) increase; more of good Y and less of good X

Question 22

As a country moves from autarky to trade, the relative price of the country's export good Will __________ for home consumers, and the relative price of the country's import good __________ for home consumers.

A) fall; will rise
B) fall; also will fall
C) rise; also will rise
D) rise; will fall

Question 23

In the following graph, at point W (and ignoring the negative signs), the marginal rate of transformation (MRT) in production __________ the marginal rate of substitution (MRS) in consumption.

A) is greater than
B) is equal to
C) is less than
D) has no determinate relationship to

Question 24

Suppose that a country's factors of production are "completely specific" to the industries In which they are located (i.e., factors in the X industry would contribute nothing to Y Output if they were employed in the Y industry and factors in the Y industry would Contribute nothing to X output if they were employed in the X industry). In addition, Suppose that the country has an autarky P_X/P_Y that is greater than the world P_X/P_Y. In this
Situation, if the country is opened to international trade, it will

A) export good X and will obtain "gains from specialization" (a "production gain") but not "gains from exchange" (a "consumption gain").
B) export good X and will obtain "gains from exchange" (a "consumption gain") but not "gains from specialization" (a "production gain").
C) export good Y and will obtain "gains from specialization" (a "production gain") but not "gains from exchange" (a "consumption gain").
D) export good Y and will obtain "gains from exchange" (a "consumption gain") but not "gains from specialization" (a "production gain").

Question 25

In the neoclassical (or modern) theory, two countries with identical production-possibilities frontiers (PPFs)

A) can gain from trade with each other if demand conditions (tastes) differ in the two Countries and the identical PPFs demonstrate increasing opportunity costs.
B) can gain from trade with each other if demand conditions (tastes) differ in the two Countries and the identical PPFs demonstrate constant opportunity costs.
C) can gain from trade with each other even if demand conditions (tastes) are identical in The two countries as long as the identical PPFs demonstrate constant opportunity Costs.
D) cannot gain from trade with each other under any circumstances.

Question 26

Given the diagram below, in which country A is producing at point P and consuming at point C:

Country A is __________, and the ratio of the price of food relative to the price of books [i.e., (P_food/P_books)] reflected by price line P₀ is __________ than the (P_food/P_books) ratio that existed when country A was in autarky.

A) exporting food and importing books; lower
B) exporting food and importing books; higher
C) exporting books and importing food; lower
D) exporting books and importing food; higher

Question 27

If a country's P_X/P_Y in autarky is less than the P_X/P_Y on the world market, then, as the Country moves from autarky to trade, the relative price of good Y will __________ for Home consumers. Thus, consumers with a strong relative preference for good __________ would tend to oppose the movement to trade.

A) increase; Y
B) increase; X
C) decrease; Y
D) decrease; X

Question 28

If a country's P_X/P_Y in autarky is less than the P_X/P_Y on the world market, then this country has a comparative advantage in the __________ good, and, if the country now engages in international trade and moves along its production-possibilities frontier, its
Production of the X good will __________.

A) Y; increase
B) Y; decrease
C) X; decrease
D) X; increase