Solution Manual for International Economics, 13th Edition

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International Economics – 13th Edition Instructor’s Manual
(Front_Matter.doc) FM-1 Dominick Salvatore
Instructor’s Manual to Accompany
International Economics
Thirteenth Edition
Dominick Salvatore

International Economics – 13th Edition Instructor’s Manual
(Front_Matter.doc) FM-2 Dominick Salvatore
TABLE OF CONTENTS
• Chapter 1: Introduction
Page 1-1
PART ONE: INTERNATIONAL TRADE THEORY
• Chapter 2: The Law of Comparative Advantage
Page 2-1
• Chapter 3: The Standard Theory of International Trade
Page 3-1
• Chapter 4: Demand and Supply, Offer Curves, and the Terms of Trade
Page 4-1
• Chapter 5: Factor Endowments and the Heckscher-Ohlin Theory
Page 5-1
• Chapter 6: Economies of Scale, Imperfect Competition, Growth and International Trade
Page 6-1
• Additional Essays and Problems for Part One
• Chapter 7: International Trade and Growth
Page 7-1
PART TWO: INTERNATIONAL TRADE POLICY
• Chapter 8: Trade Restrictions: Tariffs
Page 8-1
• Chapter 9: Nontariff Trade Barriers and the New Protectionism
Page 9-1
• Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
Page 10-1
• Chapter 11: International Trade and Economic Development
Page 11-1
• Chapter 12: International Resource Movements and Multinational Corporations
Page 12-1
• Additional Essays and Problems for Part Two

International Economics – 13th Edition Instructor’s Manual
(Front_Matter.doc) FM-3 Dominick Salvatore
PART THREE: THE BALANCE OF PAYMENTS, FOREIGN EXCHANGE MARKETS,
AND EXCHANGE RATES
• Chapter 13: The Balance of Payments
Page 13-1
• Chapter 14: Foreign Exchange Markets and Exchange Rates
Page 14-1
• Chapter 15: Exchange Rate Determination
Page 15-1
• Additional Essays and Problems for Part Three
PART FOUR:OPEN ECONOMY MACROECONOMICS AND THE INTERNATIONAL
MONETARY SYSTEM
• Chapter 16: The Price Adjustment Mechanisms with Flexible and Fixed Exchange
Rates
Page 16-1
• Chapter 17: The Income Adjustment Mechanism and Synthesis of Automatic
Adjustments
Page 17-1
• Chapter 18: Open Economy Macroeconomics: Adjustment Policies
Page 18-1
• Chapter 19: Prices and output in an Open Economy: Aggregate Demand and
Aggregate Supply
Page 19-1
• Chapter 20: Flexible versus Fixed Exchange Rates, The European Monetary System,
and Macroeconomic Policy Coordination
Page 20-1
• Chapter 21 International Monetary System: Past, Present, and Future
Page 21-1
• Additional Essays and Problems for Part Four

International Economics – 13th Edition Instructor’s Manual
(Front_Matter.doc) FM-4 Dominick Salvatore
INTRODUCTORY COMMENTS
Purpose of this Manual
The purpose of this manual is to facilitate the use of the text by the Instructor. It contains
the detailed outline of each chapter, lecture guides with suggestions on how best to present
the material in each chapter, the answer to the end-of-chapter problems, and a set of 12 to 18
multiple-choice questions with answers for each chapter.
Course Outlines
The text includes more material than can be covered in a one-semester undergraduate course
in international economics, thus providing the Instructor with a great deal of flexibility as to
what to include.
The core chapters for a one-semester undergraduate course in international economics are:
Chapters 1-6, 8, 13-18, 21. I would cover each of these 14 chapters in one week (except for
doubling up in one week) of the semester. I would skip the appendices, or make some of
them optional. I would give the midterm after Chapter 8 and the final on all chapters
covered at the end of the semester. Some Instructors, of course, may want to follow a
different format.
In an undergraduate course in international trade, I would cover Chapters 1-12, and 21.
In a one-semester undergraduate course in international finance, I would cover Chapters 1,
13-21.
In a graduate course in International Trade in the MA, MBA, International Affairs, and
International Political Economy, I would cover Chapters 1-12, and 21. I would also cover
all the appendices at the end of each chapter and on the WEB, and assign readings from the
selected bibliography at the end of each chapter.
In a graduate course in International Finance in the MA, MBA, International Affairs, and
International Political Economy, I would cover Chapters 1, 12, and 13-21. I would also
cover all the appendices at the end of each chapter and on the Web, and assign readings
from the selected bibliography.
In a graduate course in International Economics, I would cover all 21 chapters, with or
without the appendices at the end of each chapter and on the Web, and assign readings from
the selected bibliography.

International Economics – 13th Edition Instructor’s Manual
(Front_Matter.doc) FM-5 Dominick Salvatore
Content of this Manual
The lecture guide given in this manual is specifically designed for a one-semester
undergraduate course in international economics.
The questions for review at the end of each chapter involve only recall of what is clearly
explained in the text. Their function is simply to emphasize those concepts and theories that
the student needs to learn and remember. I would encourage the student to go over them on
his own and check his answers in the text.
I would assign the problems at the end of each chapter. These are challenging but not tricky
or very time consuming. They are intended to enlist the active participation of students so as
to make international economics truly come alive.
The multiple-choice questions included can be used for quizzes or to be part of the midterm
and final examinations. These questions are available separately under the test bank
resource and a computerized Respondus test bank is also available. The Instructor who feels
that more questions and problems would be useful can consult my small and popular
paperback Theory and Problems of International Economics (4th ed., 1996) in the Schaum's
Outline Series, which includes a wealth of additional multiple-choice questions and solved
problems and to the Study Guide prepared for this text by Professor Arthur Raymond of
Muhlenberg College. At the end of each of the four parts of this Manual, there are also
additional essays and problems with answers that can be used for class exams.
A Personal Note to You, the Instructor
I welcome any comment, suggestion, or opinion that you may have on the use of the text.
You can correspond by e-mail directly with me or through John Wiley, and I will personally
acknowledge your letter and comment on your suggestions. I will, of course, consider your
comments for the next Edition of the text and would gratefully acknowledge any such
contribution.
Dominick Salvatore
salvatore@fordham.edu

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International Economics – 13th Edition Instructor’s Manual
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CHAPTER 1
*(Core Chapter)
INTRODUCTION
OUTLINE
1.1 The Globalization of the World Economy
1.1A We Live in a Global Economy
Case Study 1-1: The Dell PCs, iPhones and iPads Sold in the U.S. Are
Anything But American!
Case Study 1-2: What Is an "American" Car?
1.1B The Globalization Challenge
Case Study 1-3: Is India’s Globalization Harming the United States?
1.2 International Trade and The Nation's Standard of Living
Case Study 1-4: Rising Importance of International Trade to the United States
1.3 The International Flow of Goods, Services, Labor and Capital
1.3A The International Flow of Goods and Services: The Gravity Model
Case Study 1-5: The Gravity Model at Work
1.3B The International Flow of Labor and Capital
Case Study 1-6: Major Net Exporters and Importers of Capital
1.3C Globalization Before and After the Global Financial Crisis
1.4 International Economic Theories and Policies
1.4A Purpose of International Economic Theories and Policies
1.4B The Subject Matter of International Economics
1.5 Current International Economic Problems
1.6 Organization and Methodology of the Book
1.6A Organization of the Text
1.6B Methodology of the Text
Appendix: A1.1 Basic International Trade Data
A1.2 Sources of Additional International Data and Information
Key Terms
Globalization Foreign exchange markets
Anti-globalization movement Balance of payments
Interdependence Adjustment in the balance of payments
Gravity model Microeconomics
International trade theory Macroeconomics
International trade policy Open economy macroeconomics
New protectionism International finance

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Lecture Guide
1. As the first chapter of the book, the general aim here is to define the field of
study of international economics and its importance in today's interdependent
world.
The material in this chapter can be covered in two classes. I would utilize one
class to cover Sections 1 to 3 and the second class to cover Sections 4 to 6.
I would spend most of the second class on Section 3 on the major current
international economic problems facing the United States and the world today
and to show how international economics can suggest ways to solve them. This
should greatly enhance students' motivation.
Answer to Problems
1. a) International economic problems reported in our daily newspapers are likely to
include:
• Slow growth and high unemployment in most advanced economies;
• trade controversies between the United States, China, Europe, and Japan;
• excessive volatility of exchange rates;
• huge and unsustainable trade deficits of the United States;
• structural unemployment in advanced economies and insufficient
restructuring in transition economies;
• deep poverty in many developing nations;
• resource scarcity, environmental degradation and climate changes
b) The effect of each of the above problems on the U.S. economy are:
● stagnant earnings;
● increased protectionism and the danger of trade wars;
• discourages foreign trade and investments;
• can result in trade protectionism and/or deep dollar depreciation;
• reduces advanced countries' imports of goods and services from the rest
of the world;
• can lead to political instability abroad that would adversely affect the U.S.;
• endangers future standard of living in the U.S. and abroad.
c) The effect of each of the current international economic problems can affect
each of us, as follows:
● Can lose job and suffer financial losses;
● pay higher prices for imported products;

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(ch01.doc) 1-3 Dominick Salvatore
• great fluctuations in the price of imported products and cost of foreign travel;
• can lead you to support demands for trade protection;
• slower growth of wages and incomes;
• can lead to higher taxes to help poor countries;
• can result in higher taxes and price of fuel and other products.
2. a) Five industrial nations not mentioned are: United Kingdom, Spain, Sweden,
Austria, and Switzerland.
b) See Table 1A.
Note that, generally, smaller nations have higher percentages of imports and
exports to GDP.
Source: International Financial Statistics (Washington,
D.C., IMF, 2018).
3. a) Five developing nations not mentioned in the text are: India, Philippines,
South Africa, Chile and Croatia.
b) See Table 1B.
Note that, once again, the smaller the nation, the greater is its economic
interdependence. The only exception is Chile, which is large than Croatia
but much smaller than South Africa.
Table 1A
Economic Interdependence as Measured by Imports
and Exports as a Percentage of GDP, 2017
Nation
Exports as a
percent of GDP
Imports as a
percent of GDP
U.K 30.5 31.9
Spain 34.1 31.4
Sweden 45.3 41.1
Austria 53.9 50.8
Switzerland 65.0 53.9

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Table 1B
Economic Interdependence as Measured by Imports
and Exports as a Percentage of GDP, 2017*
Nation
Expts as a
percent of GDP
Imports as a
percent of GDP
India 19.2 20.6
Philippines 28.0 36.9
S. Africa 29.8 28.4
Chile 28.4 27.6
Croatia 51.3 49.1
* Values for India, Philippines and Chile are for 2016.
Source: IFS (Washington, D.C., IMF, July 2018).
4. Trade between the United States and Brazil is much larger than trade between the
United States and Argentina. Since Brazil is larger and closer than Argentina, this
trade does follow the predictions of the gravity model.
5. a) Mankiw’s Economics (8th., 2017) includes the following microeconomics topics:
• The market forces of demand and supply;
• elasticity and its application;
• the theory of consumer choice;
• consumers, producers, and the efficiency of markets;
• the costs of production;
• firms in competitive markets;
• monopoly;
• oligopoly;
• monopolistic competition;
• markets for the factors of production;
• the demand for resources;
b) Just as the microeconomics parts of your principles text deal with individual
consumers and firms, and with the price of individual commodities and factors of
production, so do Parts One and Two of this text deal with production and
consumption of individual nations with nations with and without trade, and with
the relative price of individual commodities and factors of production.

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c) Mankiw’s Economics (8th., 2017) includes the following microeconomics topics:
measuring a nation’s income and the cost of living;
• production and growth;
• savings investment and the financial system;
• unemployment and its natural rate;
• the monetary system, growth and inflation;
• money growth and inflation;
• open-economy macroeconomics: basic concepts;
• a macroeconomic theory of the open economy;
• aggregate demand and aggregate supply;
• the influence of monetary and fiscal policy on aggregate demand;
• the short-run trade off between inflation and unemployment
• five debates over macroeconomic policy.
d) Just as the macroeconomics parts of your principles text deal with the aggregate
level of savings, consumption, investment, and national income, the general price
level, and monetary and fiscal policies, so do Parts Three and Four of this text
deal with the aggregate amount of imports, exports, the total international flow of
resources, and the policies to affect these broad aggregates.
6. a) Consumer demand theory predicts than when the price of a commodity rises
(cet. par.), the quantity demanded of the commodity declines.
When the price of imports rises to domestic consumers, the quantity demanded of
imports can be expected to decline (if everything else remains constant).
7. a) A government can reduce a budget deficit by reducing government
expenditures and/or increasing taxes.
b) A nation can reduce or eliminate a balance of payments deficit by taxing
imports and/or subsidizing exports, by borrowing more abroad or lending less
to other nations, as well as by reducing the level of its national income.
8. a) Nations usually impose restrictions on the free international flow of goods,
services, and factors. Differences in language, customs, and laws also hamper
these international flows. In addition, international flows may involve receipts and
payments in different currencies, which may change in value in relation to one
another through time. This is to be contrasted with the interregional flow of
goods, services, and factors, which face no such restrictions as tariffs and are
conducted in terms of the same currency, usually in the same language, and under
basically the same set of customs and laws.

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b) Both international and interregional economic relations involve the overcoming
of space or distance. Indeed, they both arise from the problems created by
distance. This distinguishes them from the rest of economics, which abstracts
from space and treats the economy as a single point in space, in which production,
exchange, and consumption take place.
9. We can deduce that nations benefit from voluntarily engaging in international
trade because if they did not gain or if they lost they could avoid those losses by
simply refusing to trade. Disagreement usually arises regarding the relative
distribution of the gains from specialization in production and trade, but this does
not mean that each nation does not gain from trade.
10. International trade results in lower prices for consumers but harms domestic
producers of products, which compete with imports. Often those domestic
producers that stand to lose a great deal from imports band together to pressure
the government to restrict imports. Since consumers are many and unorganized
and each individually stands to lose only very little from the import restrictions,
governments often give in to the demands of producers and impose some import
restrictions. These topics are discussed in detail in Chapter 8.
11. A nation can subsidize exports of the commodity to other nations until it drives
the competing nation's industry out of business, after which it can raise its price
and benefit from its newly acquired monopoly power.
Some economists and politicians in the United States have accused Japan of doing
just that (i.e., of engaging in strategic trade and industrial policy at the expense of
U.S. industries), but this is a very complex and controversial aspect of trade
policy and will be examined in detail in Chapter 9.
12. a) When the value of the U.S. dollar falls in relation to the currencies of other
nations, imports become more expensive for Americans and so they would
purchase a smaller quantity of imports.
b) When the value of the U.S. dollar falls in relation to the currencies of other
nations, U.S. exports become chapter for foreigners and so they would purchase a
greater quantity of U.S. exports.

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Multiple-Choice Questions
1. Which of the following products are not produced at all in the United States?
*a. Coffee, tea, cocoa
b. steel, copper, aluminum
c. petroleum, coal, natural gas
d. typewriters, computers, airplanes
2. International trade is most important to the standard of living of:
a. the United States
*b. Switzerland
c. Germany
d. England
3. Over time, the economic interdependence of nations has:
*a. grown
b. diminished
c. remained unchanged
d. cannot say
4. A rough measure of the degree of economic interdependence of a nation is given by:
a. the size of the nations' population
b. the percentage of its population to its GDP
*c. the percentage of a nation's imports and exports to its GDP
d. all of the above
5. Economic interdependence is greater for:
*a. small nations
b. large nations
c. developed nations
d. developing nations
6. The gravity model of international trade predicts that trade between two nations is
larger
a. the larger the two nations
b. the closer the nations
c. the more open are the two nations
*d. all of the above

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7. International economics deals with:
a. the flow of goods, services, and payments among nations
b. policies directed at regulating the flow of goods, services, and payments
c. the effects of policies on the welfare of the nation
*d. all of the above
8. International trade theory refers to:
*a. the microeconomic aspects of international trade
b. the macroeconomic aspects of international trade
c. open economy macroeconomics or international finance
d. all of the above
9. Which of the following is not the subject matter of international finance?
a. foreign exchange markets
b. the balance of payments
*c. the basis and the gains from trade
d. policies to adjust balance of payments disequilibria
10. Economic theory:
a. seeks to explain economic events
b. seeks to predict economic events
c. abstracts from the many detail that surrounds an economic event
*d. all of the above
11. Which of the following is not an assumption generally made in the study of
international economics?
a. two nations
b. two commodities
*c. perfect international mobility of factors
d. two factors of production
12. In the study of international economics:
a. international trade policies are examined before the bases for trade
b. adjustment policies are discussed before the balance of payments
c. the case of many nations is discussed before the two-nations case
*d. none of the above

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13. International trade is similar to interregional trade in that both must overcome:
*a. distance and space
b. trade restrictions
c. differences in currencies
d. differences in monetary systems
14. The opening or expansion of international trade usually affects all members of
society:
a. positively
b. negatively
*c. most positively but some negatively
d. most negatively but some positively
15. An increase in the dollar price of a foreign currency usually:
a. benefit U.S. importers
*b. benefits U.S. exporters
c. benefit both U.S. importers and U.S. exporters
d. harms both U.S. importers and U.S. exporters
16. Which of the following statements with regard to international economics is true?
a. It is a relatively new field
*b. it is a relatively old field
c. most of its contributors were not economists
d. none of the above

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CHAPTER 2
*(Core Chapter)
THE LAW OF COMPARATIVE ADVANTAGE
OUTLINE
2.1 Introduction
2.2 The Mercantilists' Views on Trade
Case Study 2-1: Munn's Mercantilistic Views on Trade
Case Study 2-2: Mercantilism Is Alive and Well in the Twenty-first Century
2.3 Trade Based on Absolute Advantage: Adam Smith
2.3A Absolute Advantage
2.3B Illustration of Absolute Advantage
2.4 Trade Based on Comparative Advantage: David Ricardo
2.4A The Law of Comparative Advantage
2.4B The Gains from Trade
2.4C Exception to the Law of Comparative Advantage
2.4D Comparative Advantage with Money
Case Study 2-3: The Petition of the Candlemaker
2.5 Comparative Advantage with Opportunity Costs
2.5A Comparative Advantage and the Labor Theory of Value
2.5B The Opportunity Cost Theory
2.5C The Production Possibility Frontier Under Constant Costs
2.5D Opportunity Costs and Relative Commodity Prices
2.6 The Basis and the Gains from Trade Under Constant Costs
2.6A Illustration of the Gains from Trade
2.6B Relative Commodity Prices with Trade
2.7 Empirical Tests of the Ricardian Model
Case Study 2-4: Other Empirical Tests of the Ricardian Trade Model
Appendix: A2.1 Comparative Advantage with More than Two Commodities
A2.2 Comparative Advantage with More than Two Nations

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Key Terms
Basis for trade Labor theory of value
Gains from trade Opportunity cost theory
Pattern of trade Production possibility frontier
Mercantilism Constant opportunity cost
Absolute advantage Relative commodity prices
Laissez-faire Complete specialization
Law of comparative advantage Small country case
Lecture Guide
1. This is a long and crucial core chapter and may require four classes to cover a
adequately. In the first lecture, I would present Sections 1, 2, and 3. These are short s
sections and set the stage for the crucial law of comparative advantage.
2. In the second lecture of Chapter 2, I would concentrate on Section 4 and carefully
explain the law of comparative advantage using simple numerical examples as in the
text. The crucial parts here are 4b (which explains the law) and 4d (which establishes
the link between trade theory and international finance). I find that the numerical
explanations before the graphical analysis really helps the student to truly understand
the law. The simple lawyer-secretary example should also render the law more
immediately relevant to the student. I would also assign Problems 1-6.
3. In the third lecture, I would cover Sections 2.5 and 2.6a. I would pay particular
attention to Sections 2.5c, 2.5d, and 2.6, which are the heart of the chapter.
4. In the fourth lecture, I would cover the remainder of the chapter. The crucial section
here is 2.6b and the most difficult concept to explain is the shape of the combined
supply curve for wheat and cloth. The appendixes could be made optional for the
more enterprising students in the class. I would also assign Problems 7-13.
Answer to Problems
1. In case A, the United States has an absolute advantage in wheat and the United
Kingdom in cloth.
In case B, the United States has an absolute advantage (so that the United Kingdom
has an absolute disadvantage) in both commodities.
In case C, the United States has an absolute advantage in wheat but has neither an
absolute advantage nor disadvantage in cloth.
In case D, the United States has an absolute advantage over the United Kingdom in
both commodities.

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2. In case A, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case B, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case C, the United States has a comparative advantage in wheat and the United
Kingdom in cloth.
In case D, the United States and the United Kingdom have a comparative advantage
in neither commodities.
3. In case A, trade is possible based on absolute advantage.
In case B, trade is possible based on comparative advantage.
In case C, trade is possible based on comparative advantage.
In case D, no trade is possible because the absolute advantage that the United States
has over the United Kingdom is the same in both commodities.
4. a) The United States gains 1C.
b) The United Kingdom gains 4C.
c) 3C < 4W < 8C.
d) The United States would gain 3C while the United Kingdom would gain 2C.
5) a) The cost in terms of labor content of producing wheat is 1/4 in the United States a
and 1 in the United Kingdom, while the cost in terms of labor content of
producing cloth is 1/3 in the United States and 1/2 in the United Kingdom.
b) In the United States, Pw=$1.50 and Pc=$2.00.
c) In the United Kingdom, Pw=£1.00 and Pc=£0.50.
6) a) With the exchange rate of £1=$2, Pw=2.00 and Pc=$1.00 in the United
Kingdom, so that the United States would be able to export wheat to the United
Kingdom and the United Kingdom would be able to export cloth to the United
States.
b) With the exchange rate of £1=$4, Pw=$4.00 and Pc=$2.00 in the United
Kingdom, so that the United States would be able to export wheat to the United
Kingdom, but the United Kingdom would be unable to export any cloth to the
United States.

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c) With £1=$1, Pw=$1.00 and Pc=$0.50 in the United Kingdom, so that the United
Kingdom would be able to export both commodities to the United States.
d) $1.50 < £1.00 < $4.00.
7. a) See Figure 1.
b) In the United States Pw/Pc=3/4, while in the United Kingdom, Pw/Pc=2.
c) In the United States Pc/Pw=4/3, while in the United Kingdom Pc/Pw=1/2.
8. See Figure 2.
The autarky points are A and A' in the United States and the United Kingdom,
respectively. The points of production with trade are B and B' in the United States
and the United Kingdom, respectively. The points of consumption are E and E' in
the United States and the United Kingdom, respectively. The gains from trade are
shown by E > A for the U.S. and E' > A' for the U.K.
9. a) If DW(US+UK) shifted up in Figure 2.3, the equilibrium relative commodity price
of wheat would also rise by 1/3 to PW/PC=4/3. Since the higher DW(US+UK) would
still intersect the vertical portion of the SW(US+UK) curve, the United States would
continue to specialize completely in the production of wheat and produce 180W,
while the United kingdom would continue to specialize completely in the
production of cloth and produce 120C.
b) Since the equilibrium relative commodity price of cloth is the inverse of the
relative commodity price of wheat, if the latter rises to 4/3, then the former falls to
¾.. This means that DC(UK+US) shifts down by 1/3 in the right panel of Figure 2.3.

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10. If DW(US+UK) intersected SW(US+UK) at PW/PC=2/3 and 120W in the left panel of
Figure 2.3, this would mean that the United States would not be specializing
completely in the production of wheat.
The United Kingdom, on the other hand, would be specializing completely in the
production of cloth and exchanging 20C for 30W with the United States. Since the
United Kingdom trades at U.S. the pre-trade relative commodity price of
PW/PC=2/3 in the United States, the United Kingdom receives all of the gains from
trade.
11. See Figure 3 on page 15 and the discussion in the last paragraph of Section 2.6b in
the text.
12. a) The Ricardian model was tested empirically by showing the positive correlation
between relative productivities and the ratio of U.S.to U.K. exports to third
countries and by the negative correlation between relative unit labor costs and
relative exports
b) The Ricardian trade model was confirmed by the positive relationship found
between the relative labor productivity and the ratio of U.S. to U.K. exports to
third countries, as well as by the negative relationship between relative unit labor
costs and relative exports.
c) Even though the Ricardian model was more or less empirically confirmed we
still need other models because the former assumes rather than explains
comparative advantage (i.e, it does not explain the reason for the different labor
productivities in different nations) and cannot say much regarding the effect of
international trade on the earnings of factors of production.
d) The United States has a comparative disadvantage in the production of textiles.
Restricting textile imports would keep U.S. workers from eventually moving into
industries in which the United States has a comparative advantage and in which
wages are higher.

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Answer to Problem in Appendix 2
The numbers in the following table refer to the cost or price of commodities X, Y, and Z in
nations A, B, and C in terms of the same currency. Thus, nation A exports commodity X to
nations B and C; nation B exports commodity Y to nations A and C; nation C exports
commodity Z to nations A and B.
Nation
A B C
Commodity
X 1 2 3
Y 3 1.5 2
Z 4 3 2
Multiple-Choice Questions
1. The Mercantilists did not advocate:
*a.free trade
b. stimulating the nation's exports
c. restricting the nations' imports
d. the accumulation of gold by the nation
2. According to Adam Smith, international trade was based on:
*a. absolute advantage
b. comparative advantage
c. both absolute and comparative advantage
d. neither absolute nor comparative advantage
3. What proportion of international trade is based on absolute advantage?
a. All
b. most
*c. some
d. none

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International Economics – 13th Edition Instructor’s Manual
(ch02.doc) 2-8 Dominick Salvatore
4. The commodity in which the nation has the smallest absolute disadvantage is the
commodity of its:
a. absolute disadvantage
b. absolute advantage
c. comparative disadvantage
*d. comparative advantage
5. If in a two-nation (A and B), two-commodity (X and Y) world, it is established that
nation A has a comparative advantage in commodity X, then nation B must have:
a. an absolute advantage in commodity Y
b. an absolute disadvantage in commodity Y
c. a comparative disadvantage in commodity Y
*d. a comparative advantage in commodity Y
6. If with one hour of labor time nation A can produce either 3X or 3Y while nation B
can produce either 1X or 3Y (and labor is the only input):
a. nation A has a comparative disadvantage in commodity X
b. nation B has a comparative disadvantage in commodity Y
*c. nation A has a comparative advantage in commodity X
d. nation A has a comparative advantage in neither commodity
7. With reference to the statement in Question 6:
a Px/Py=1 in nation A
b. Px/Py=3 in nation B
c. Py/Px=1/3 in nation B
*d. all of the above
8. With reference to the statement in Question 6, if 3X is exchanged for 3Y:
a. nation A gains 2X
*b. nation B gains 6Y
c. nation A gains 3Y
d. nation B gains 3Y
9. With reference to the statement of Question 6, the range of mutually beneficial trade
between nation A and B is:
a 3Y < 3X < 5Y
b. 5Y < 3X < 9Y
*c 3Y < 3X < 9Y
d. 1Y < 3X < 3Y

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International Economics – 13th Edition Instructor’s Manual
(ch02.doc) 2-9 Dominick Salvatore
10. If domestically 3X=3Y in nation A, while 1X=1Y domestically in nation B:
a. there will be no trade between the two nations
b. the relative price of X is the same in both nations
c. the relative price of Y is the same in both nations
*d. all of the above
11. Ricardo explained the law of comparative advantage on the basis of:
*a. the labor theory of value
b. the opportunity cost theory
c. the law of diminishing returns
d. all of the above
12. Which of the following statements is true?
a. The combined demand for each commodity by the two nations is negatively sloped
b. the combined supply for each commodity by the two nations is rising stepwise
c. the equilibrium relative commodity price for each commodity with trade is given
by the intersection of the demand and supply of each commodity by the two nations
*d. all of the above
13. A difference in relative commodity prices between two nations can be based upon a
difference in:
a. factor endowments
b. technology
c. tastes
*d. all of the above
14. In the trade between a small and a large nation:
a. the large nation is likely to receive all of the gains from trade
*b. the small nation is likely to receive all of the gains from trade
c. the gains from trade are likely to be equally shared
d. we cannot say
15. The Ricardian trade model has been empirically
*a. verified
b. rejected
c. not tested
d. tested but the results were inconclusive

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International Economics – 13 th Edition Instructor’s Manual
(ch03.doc) 3-1 Dominick Salvatore
*CHAPTER 3
(Core Chapter)
THE STANDARD THEORY OF INTERNATIONAL TRADE
OUTLINE
3.1 Introduction
3.2 The Production Frontier with Increasing Costs
3.2A Illustration of Increasing Costs
3.2B The Marginal Rate of Transformation
3.2C Reason for Increasing Opportunity Costs and Different Production Frontiers
3.3 Community Indifference Curves
3.3A Illustration of Community Indifference Curves
3.3B The Marginal Rate of Substitution
3.3C Some Difficulties with Community Indifference Curves
3.4 Equilibrium in Isolation
3.4A Illustration of Equilibrium in Isolation
3.4B Equilibrium Relative Commodity Prices and Comparative Advantage
Case Study 3-1 Comparative Advantage of the Largest Advanced
and Emerging Economies
3.5 The Basis for and the Gains from Trade with Increasing Costs
3.5A Illustration of the Basis for and the Gains from Trade with Increasing Costs
3.5B Equilibrium Relative Commodity Prices with Trade
3.5C Incomplete Specialization
Case Study 3-2: Specialization and Export Concentration in Selected Countries
3.5D Small Country Case with Increasing Costs
3.5E The Gains from Exchange and from Specialization
Case Study 3-3: Job Losses in High U.S. Import-Competing Industries
Case Study 3-4: International Trade and Deindustrialization in the United States,
the European Union, and Japan
3.6 Trade Based on Differences in Tastes
3.6A Illustration of Trade Based on Difference in Tastes
APPENDIX: A3.1 Production Functions, Isoquants, Isocosts and Equilibrium
A3.2 Production Theory with Two Nations, Two Commodities and Two Factors
A3.3 Derivation of the Edgeworth Box Diagram and Production Frontiers
A3.4 Some Important Conclusions

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International Economics – 13 th Edition Instructor’s Manual
(ch03.doc) 3-2 Dominick Salvatore
Key Terms
Increasing opportunity costs Equilibrium relative price with trade
Marginal rate of transformation (MRT) Incomplete specialization
Community indifference curves Gains from exchange
Marginal rate of substitution (MRS) Gains from specialization
Autarky Deindustrialization
Equilibrium relative commodity price in isolation
Lecture Guide
1. In the first lecture of Chapter 3, I would cover Sections 1, 2, and 3. Section 2 can be
covered quickly, except for 2b, which requires careful explanation because of its
subsequent importance. Careful explanation is also required for 3b. I would assign
Problems 1 and 2.
2. In the second lecture, I would cover Sections 4, 5a, and 5b. This is the basic trade
model and it is essential for the student to master it completely. To this end, I would
assign and grade Problems 3 and 4.
3. In the third lecture, I would cover the remainder of the chapter. The topics here
represent elaborations of the basic trade model. I would assign problems 5, 6, and 7
and go over problem 7 in class even though its answer is also in the back of the
book. I would make the Appendices optional for those students in the class who
have had intermediate micro theory.

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International Economics – 13 th Edition Instructor’s Manual
(ch03.doc) 3-3 Dominick Salvatore
Answer to Problems
1. a) See Figure 1.
b) The slope of the transformation curve increases as the nation produces more of
X and decreases as the nation produces more of Y. These reflect increasing
opportunity costs as the nation produces more of X or Y.
2. a) See Figure 2.
We have drawn community indifference curves as downward or negatively
sloped because as the community consumes more of X it will have to give up
some of Y to remain on the same indifference curve.
b) The slope measures how much of Y the nation can give up by consuming one more
unit of X and still remain at the same level of satisfaction; the slope declines
because the more of X and the less of Y the nation is left with, the less satisfaction
it receives from additional units of X and the more satisfaction it receives from
each retained unit of Y.
c) III > II to the right of the intersection, while II > III to the left.
This is inconsistent because an indifference curve should show a given level
of satisfaction. Thus, indifference curves cannot cross.
3. a) See Figure 3.
b) Nation 1 has a comparative advantage in X and Nation 2 in Y.
c) If the relative commodity price line has equal slope in both nations.

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International Economics – 13 th Edition Instructor’s Manual
(ch03.doc) 3-5 Dominick Salvatore
4. a) See Figure 4.
b) Nation 1 gains by the amount by which point E is to the right and above point A
and Nation 2 by the excess of E' over A'. Nation 1 gains more from trade
because the relative price of X with trade differs more from its pretrade price
than for Nation 2.
5. a) See Figure 5. In Figure 5, S refers to Nation 1's supply curve of exports of
commodity X, while D refers to Nation 2's demand curve for Nation 1's exports
of commodity X. D and S intersect at point E, determining the equilibrium
PB=Px/Py=1 and the equilibrium quantity of exports of 60X.
b) At Px/Py=1 1/2 there is an excess supply of exports of R'R=30X and Px/Py falls
toward equilibrium Px/Py=1.
c) At Px/Py=1/2, there is an excess demand of exports of HH'=80X and Px/Py rises
toward Px/Py=1.
6. The Figure in Problem 5 is consistent with Figure 3-4 in the text. From the left panel of
Figure 3-4, we see that Nation 1 supplies no exports of commodity X at Px/Py=1/4
(point A). This corresponds with the vertical or price intercept of Nation 1's supply
curve of exports of commodity X (point A).
The left panel of Figure 3-4 also shows that at Px/Py=1, Nation 1 is willing to export
60X (point E). The same is shown by Nation 1's supply curve of exports of commodity
X.
The other points on Nation 1's supply curve of exports in the figure of Problem 5 can
also be derived from the left panel of Figure 3-4, but this is shown in Chapter 4 with
offer curves.
Nation 2's demand curve for Nation 1's exports of commodity X could be derived
from the right panel of Figure 3-4, as shown in Chapter 4. What is important is that
we can use the D and S figure in Problem 5 to explain why the equilibrium relative
commodity price with trade is Px/Py=1 and why the equilibrium quantity traded of
commodity X is 60 units in Figure 3-4.

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International Economics – 13 th Edition Instructor’s Manual
(ch03.doc) 3-7 Dominick Salvatore
7. See Figure 6 on the previous page.
The small nation will move from A to B in production, exports X in exchange for Y
so as to reach point E > A.
Nation 2's demand curve for Nation 1's exports of commodity X could be derived
from the right panel of Figure 3-4, as shown in Chapter 4. What is important is that
we can use the D and S figure in Problem 5 to explain why the equilibrium relative
commodity price with trade is Px/Py=1 and why the equilibrium quantity traded of
commodity X is 60 units in Figure 3-4.
8. a) The small nation specializes in the production of commodity X only until its
opportunity cost and relative price of X equals PW. This usually occurs before
the small nation has become completely specialized in production.
b) Under constant costs, specialization is always complete for the small nation.
9. a) See Figure 7.
b) See Figure 8.
10. If the two community indifference curves had also been identical in Problem 9 the
relative commodity prices would also have been the same in both nations in the
absence of trade and no mutually beneficial trade would be possible. See Fig. 9.
11. If production frontiers are identical and the community indifference curves different
in the two nations, but we have constant opportunity costs, there would be no
mutually beneficial trade possible between the two nations. See Figure 10.
12. See Figure 11

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