Name:___Solution Key____
SSII 2008, 160A Midterm Professor Farshid
Mojaver
I. General Questions on International Trade Theory [3 points each, 15 points total]
1) [3 pts] Why Adam Smith supports the act of Navigation despite his own admission that
that the act reduces trade and the opulence of all countries including Grate Britain?
Because “defense” is “much more important that opulence”.”.
3) How can international trade improve producer efficiency?
International trade allows countries to increase production because of better
allocation of resources. Better allocation of resources is the source of producer
efficiency in IT.
4) How can a developed country compete against low foreign wage countries?
While it is true that in developed economies wage rates are higher but labor
requirement is lower due to higher overall productivity in those economies. In the
sectors in which the productivity advantage outweighs the wage disadvantage the
high wage economy can complete against a low wage economy.
5) Make an argument to show that a domestic firm may lose out in international
competition even if it is the most productive producer in the world.
A domestic firm that has the highest productivity in the world may lose out in
international trade because there might be firms with even higher productivity in that
country that drive the average wages higher (i.e, US might have the most productive
apparel industry in the world but even higher productivity in wheat production drives
the wages high so that it is not cost effective produce apparel in US).
7) Why in the Ricardian model unlike the HO model international trade leads to complete
specialization?
Because by assumption the opportunity cost production is constant (PPF is a straight line) in the
Ricardian model whereas in HO the opportunity cost is increasing.
