Chapter Ten Exercises
1. Compare and contrast the types of trade policy actions taken by governments that pursue import substitution policies versus those that pursue outward looking strategies.
2. Many Latin American countries have followed import substitution policies. Many of these same countries have also experienced long periods of high inflation. Explain some of the possible linkages between import substitution policies and high inflation.
3. According to Table 10.1, many developing countries have begun to replace quotas with tariffs as they adopt more outward looking strategies. Discuss some possible motives for these changes.
4. Describe how import substitution policies can encourage the escalation of tariffs by stages of processing.
5. Explain carefully how international trade can affect the rate of growth of an economy.
6. (This problem is assigned as extra credit -- I suggest you read my hints below.) Suppose that in country A the income elasticity of demand for good S is less than one and the income elasticity of demand for T is greater than one. Suppose also that A exports good S and imports good T, that S is relatively capital intensive in its production, and that A is relatively capital abundant. What would happen to A's trade pattern if, alternatively,
i) A were to experience equi-proportionate growth in K and L
ii) A were to experience a relative increase in K vs. L
iii) A were to experience a relative increase in L vs. K
Hint: This is a situation where the capital abundant country exports the capital intensive good, with the added twist that as its income increases, it tends to like the labor intensive good (which it imports) more than the good it exports. This last part means that CR, the "consumption ray" (Income-Consumption line) in Figures 10.2 and 10.3 won't be a straight line but rather will curve towards the ____ axis. It also means that any increase in income will be _____-trade biased.
7. Compare the costs of a MNC operating in a foreign country with the cost of domestic firms operating in that country. Explain how a MNC can compete under these circumstances.
8. Suppose that A is a small open economy that takes world prices as given. What would be the effect on wages and rents in A if it were to experience an inflow of foreign capital. Use a diagram to explain your answer. Which groups would favor this capital inflow? Who would oppose it? Explain.
9. What is immizerizing growth? Do you think it is likely to occur in the real world? Explain.
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