TEST BANK
All Chapters Included
, CHAPTER 1:
TRADE IN THE ECONOMY
1. Figures 1-2 and 1-7 rely on data from the year 2006, and Figure 1-6 relies on data
from 2005, to map worldwide trade, migration, and foreign direct investment. Up-
dated data for migration and foreign direct investment were not available at the time
of writing this chapter, but are available for worldwide trade. In this question you are
asked to update the numbers for world trade shown in Table 1-1.
a. Go to the World Trade Organization website at www. wto. org and look for their
trade data under “Resources” and “Statistics.”1 Look for the most recent edition of
their International Trade Statistics publication, then go to “Trade by Region” and find
the Excel spreadsheet with “Intra- and Inter-regional Merchandise Trade.” Print out
this table. If you cannot find the website or spreadsheet, use the 2005 table for “In-
tra- and Inter-regional Merchandise Trade,” which is printed below:
Intra- and Inter-regional Merchandise Trade, 2008 (Billions of U.S. Dollars)
Destination
North South & Middle
Origin America Central America Europe CIS* Africa East Asia World
Value
World $2,708 $583 $6,736 $517 $458 $618 $3,903 $15,717
North America 1,015 165 369 16 34 60 376 2,036
South & Central
America 169 159 121 9 17 12 101 600
Europe 475 96 4,695 240 186 189 487 6,447
Commonwealth
of Independent
States (CIS) 36 10 406 135 11 25 77 703
Africa 122 19 218 2 53 14 114 558
Middle East 117 7 126 7 37 122 569 1,021
Asia 775 128 801 108 121 196 2,181 4,353
Source: WTO, International Trade Statistices 2009
b. From this table, what is the total amount of trade within Europe? What percent-
age is this of total world trade?
Answer: $4,695 billion, which is 29. 9% of the world total
c. What is the total amount of trade (in either direction) between Europe and
North America? Add that to the total trade within Europe, and calculate the per-
centage of this to the world total.
Answer: $(369 + 475) = $844 billion. Adding that to intra-European trade, we
obtain 35. 2% of the world total.
d. What is the total amount of trade within the Americas (i. e. , between North
America, Central America, South America, and within each of these regions)?
What percentage is this of total world trade?
Answer: $(1,015 + 165 + 169 + 159) = $1,508 billion, or 9. 6% of the world
total
e. What is the total value of exports from Europe and the Americas and what per-
centage is this of the world total?
Answer: $(2,036 + 600 + 6,447) = $8,983 billion, or 57. 8% of the world total
f. What is the total value of exports from Asia, and what percentage is this of the
world total?
Answer: $4,353 billion, which is 27. 7% of the world total
,S-4 SOLUTIONS ■ CHAPTERg.1 What isINthe
TRADE THEtotal valueEof
GLOBAL exports from the Middle East and the Commonwealth
CONOMY
of Independent States2 and what percentage is this of the world total?
Answer: $(1,021 + 703) = $1,724 billion, which is 11% of the world total
h. What is the total value of exports from Africa, and what percentage is this of the
world total?
Answer: $298 billion, which is 3. 5% of the world total
i. How do your answers to (b) through (h) compare with the shares of worldwide
trade shown in Table 1-1?
Answer: The shares computed in (b) through (h) are quite similar to Table 1. 1.
Both are within one percentage point of Table 1-1.
2. The quotation from Federal Reserve Chairman Ben Bernanke at the beginning of
the chapter is from a speech that he presented in Jackson Hole,Wyoming, on August
25, 2006, entitled “Global Economic Integration: What’s New and What’s Not?”
The full transcript of the speech is available at http://www/federalreserve. gov/
newsevents/speech/bernanke20060825a. htm. Read this speech and answer the fol-
lowing questions:
a. List three ways in which international trade today is not that different from the
trade that occurred before World War I.
Answer:
i) Physical distance is the same.
ii) New transportation methods allow for more trade.
iii) Governments foster open trade, as well as financial flows.
iv) Some groups are opposed to free trade.
v) The range of goods that are tradable has broadened.
b. List three ways in which international trade today does differ from the trade that
occurred before World War I.
Answer:
i) Intra-industry trade has increased.
The Commonwealth of Independent States consists of: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan,
2
Moldova, Russia,Tajikistan,Turkmenistan, Uzbekistan, and Ukraine.
SOLUTIONS ■ CHAPTER 1 TRADE IN THE GLOBAL ECONOMY S-5
ii) Information and communication technologies permit trade in services.
iii) Scale and pace of growth in trade is faster.
iv) Core-periphery pattern is no longer relevant.
v) Fragmentation of production processes has occurred.
vi) Capital markets are more mature, and gross flows are larger.
, Trade and Technology:
2
The Ricardian Model
1. At the beginning of the chapter there is a brief quotation from David Ricardo, and
here is a longer version of what Ricardo wrote:
England may be so circumstanced, that to produce the cloth may require the labour of
100 men for 1 year; and if she attempted to make the wine, it might require the labour of
120 men for the same time. To produce the wine in Portugal, might require only the
labour of 80 men for 1 year, and to produce the cloth in the same country, might require the
labour of 90 men for the same time. It would therefore be advantageous for her to export
wine in exchange for cloth. This exchange might even take place, notwithstanding that the
commodity imported by Portugal could be produced there with less labour than in England.
Suppose that the amount of labor he describes can produce 1,000 yards of cloth or
1,000 bottles of wine in either country. Then answer the following questions:
a. What is England’s marginal product of labor in cloth and in wine, and what is
Portugal’s marginal product of labor in cloth and in wine? Which country has
absolute advantage in cloth and in wine, and why?
Answer: In England, 100 men produce 1,000 yards of cloth, so MPLC =
= 10. 120 men produce 1,000 bottles of wine, so MPL W =
= 8. 3. In Portugal, 90 men produce 1,000 yards of cloth, so
MPLC* = = 11. 1. 80 men produce 1,000 bottles of wine, so
MPLW* = = 12. 5. So Portugal has an absolute advantage in both cloth
and wine, because it has higher marginal products of labor in both industries than
does England.
b. Use the formula PW / PC = MPLC / MPLW to compute the no-trade relative
price of wine in each country. Which country has comparative advantage in
wine, and why?
Answer: For England, PW / PC = MPLC / MPL W = . 3 = 1. 2, which is
the no-trade relative price of wine (equal to the opportunity cost of producing
wine). For Portugal, P* / P* = MPL* / MPL* = 11. . 5 = 0. 9, which is
W C C W
S-7
All Chapters Included
, CHAPTER 1:
TRADE IN THE ECONOMY
1. Figures 1-2 and 1-7 rely on data from the year 2006, and Figure 1-6 relies on data
from 2005, to map worldwide trade, migration, and foreign direct investment. Up-
dated data for migration and foreign direct investment were not available at the time
of writing this chapter, but are available for worldwide trade. In this question you are
asked to update the numbers for world trade shown in Table 1-1.
a. Go to the World Trade Organization website at www. wto. org and look for their
trade data under “Resources” and “Statistics.”1 Look for the most recent edition of
their International Trade Statistics publication, then go to “Trade by Region” and find
the Excel spreadsheet with “Intra- and Inter-regional Merchandise Trade.” Print out
this table. If you cannot find the website or spreadsheet, use the 2005 table for “In-
tra- and Inter-regional Merchandise Trade,” which is printed below:
Intra- and Inter-regional Merchandise Trade, 2008 (Billions of U.S. Dollars)
Destination
North South & Middle
Origin America Central America Europe CIS* Africa East Asia World
Value
World $2,708 $583 $6,736 $517 $458 $618 $3,903 $15,717
North America 1,015 165 369 16 34 60 376 2,036
South & Central
America 169 159 121 9 17 12 101 600
Europe 475 96 4,695 240 186 189 487 6,447
Commonwealth
of Independent
States (CIS) 36 10 406 135 11 25 77 703
Africa 122 19 218 2 53 14 114 558
Middle East 117 7 126 7 37 122 569 1,021
Asia 775 128 801 108 121 196 2,181 4,353
Source: WTO, International Trade Statistices 2009
b. From this table, what is the total amount of trade within Europe? What percent-
age is this of total world trade?
Answer: $4,695 billion, which is 29. 9% of the world total
c. What is the total amount of trade (in either direction) between Europe and
North America? Add that to the total trade within Europe, and calculate the per-
centage of this to the world total.
Answer: $(369 + 475) = $844 billion. Adding that to intra-European trade, we
obtain 35. 2% of the world total.
d. What is the total amount of trade within the Americas (i. e. , between North
America, Central America, South America, and within each of these regions)?
What percentage is this of total world trade?
Answer: $(1,015 + 165 + 169 + 159) = $1,508 billion, or 9. 6% of the world
total
e. What is the total value of exports from Europe and the Americas and what per-
centage is this of the world total?
Answer: $(2,036 + 600 + 6,447) = $8,983 billion, or 57. 8% of the world total
f. What is the total value of exports from Asia, and what percentage is this of the
world total?
Answer: $4,353 billion, which is 27. 7% of the world total
,S-4 SOLUTIONS ■ CHAPTERg.1 What isINthe
TRADE THEtotal valueEof
GLOBAL exports from the Middle East and the Commonwealth
CONOMY
of Independent States2 and what percentage is this of the world total?
Answer: $(1,021 + 703) = $1,724 billion, which is 11% of the world total
h. What is the total value of exports from Africa, and what percentage is this of the
world total?
Answer: $298 billion, which is 3. 5% of the world total
i. How do your answers to (b) through (h) compare with the shares of worldwide
trade shown in Table 1-1?
Answer: The shares computed in (b) through (h) are quite similar to Table 1. 1.
Both are within one percentage point of Table 1-1.
2. The quotation from Federal Reserve Chairman Ben Bernanke at the beginning of
the chapter is from a speech that he presented in Jackson Hole,Wyoming, on August
25, 2006, entitled “Global Economic Integration: What’s New and What’s Not?”
The full transcript of the speech is available at http://www/federalreserve. gov/
newsevents/speech/bernanke20060825a. htm. Read this speech and answer the fol-
lowing questions:
a. List three ways in which international trade today is not that different from the
trade that occurred before World War I.
Answer:
i) Physical distance is the same.
ii) New transportation methods allow for more trade.
iii) Governments foster open trade, as well as financial flows.
iv) Some groups are opposed to free trade.
v) The range of goods that are tradable has broadened.
b. List three ways in which international trade today does differ from the trade that
occurred before World War I.
Answer:
i) Intra-industry trade has increased.
The Commonwealth of Independent States consists of: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan,
2
Moldova, Russia,Tajikistan,Turkmenistan, Uzbekistan, and Ukraine.
SOLUTIONS ■ CHAPTER 1 TRADE IN THE GLOBAL ECONOMY S-5
ii) Information and communication technologies permit trade in services.
iii) Scale and pace of growth in trade is faster.
iv) Core-periphery pattern is no longer relevant.
v) Fragmentation of production processes has occurred.
vi) Capital markets are more mature, and gross flows are larger.
, Trade and Technology:
2
The Ricardian Model
1. At the beginning of the chapter there is a brief quotation from David Ricardo, and
here is a longer version of what Ricardo wrote:
England may be so circumstanced, that to produce the cloth may require the labour of
100 men for 1 year; and if she attempted to make the wine, it might require the labour of
120 men for the same time. To produce the wine in Portugal, might require only the
labour of 80 men for 1 year, and to produce the cloth in the same country, might require the
labour of 90 men for the same time. It would therefore be advantageous for her to export
wine in exchange for cloth. This exchange might even take place, notwithstanding that the
commodity imported by Portugal could be produced there with less labour than in England.
Suppose that the amount of labor he describes can produce 1,000 yards of cloth or
1,000 bottles of wine in either country. Then answer the following questions:
a. What is England’s marginal product of labor in cloth and in wine, and what is
Portugal’s marginal product of labor in cloth and in wine? Which country has
absolute advantage in cloth and in wine, and why?
Answer: In England, 100 men produce 1,000 yards of cloth, so MPLC =
= 10. 120 men produce 1,000 bottles of wine, so MPL W =
= 8. 3. In Portugal, 90 men produce 1,000 yards of cloth, so
MPLC* = = 11. 1. 80 men produce 1,000 bottles of wine, so
MPLW* = = 12. 5. So Portugal has an absolute advantage in both cloth
and wine, because it has higher marginal products of labor in both industries than
does England.
b. Use the formula PW / PC = MPLC / MPLW to compute the no-trade relative
price of wine in each country. Which country has comparative advantage in
wine, and why?
Answer: For England, PW / PC = MPLC / MPL W = . 3 = 1. 2, which is
the no-trade relative price of wine (equal to the opportunity cost of producing
wine). For Portugal, P* / P* = MPL* / MPL* = 11. . 5 = 0. 9, which is
W C C W
S-7
