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CHAPTER 6
GAINS FROM TRADE IN NEOCLASSICAL THEORY
A. Essay Questions
1. 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?
Answer: In a two-country model of trade, the trade triangles of the two countries must be
congruent since one country’s exports are the other’s imports. The slope of the price line
determines each country’s post-trade production and consumption bundles and hence its
exports and imports.
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
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: It is possible if the indifference curves are shaped in a more angular fashion.
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
Answer: If the countries have identical PPFs and identical tastes, then their autarky price rations
will be the same and there will be no basis for trade.
Difficulty: 01 Easy
1
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
4. (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?
Answer: “Potential” means that the winners could (but actually do not) compensate the losers and
still be better off.
Difficulty: 02 Medium
Topic: Some Important Assumptions in the Analysis
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-04
5. 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.
Answer: The price of foodstuffs rises after trade commences, and this increase disproportionately
harms those who spend the majority of their income on food.
Difficulty: 01 Easy
Topic: Some Important Assumptions in the Analysis
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-04
6. 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.)
Answer: The community indifference curve map needs to be repositioned in the diagram.
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
7. (a) Using the neoclassical model, build the case why it is beneficial for a country to move
from 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
2
respects than the Classical model of trade?
Answer: (a) A country unambiguously gains from trade if its autarkic price ratio differs from the
international TOT. (b) The neoclassical model incorporates demand considerations into
the analysis.
Difficulty: 02 Medium
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-03
8. 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.”
Answer: (a) False – it can still experience a consumption gain from trade. (b) True – If tastes are
different between the two countries, then the autarkic price ratios will be different, and
trade can thus be mutually beneficial.
Difficulty: 02 Medium
Topic: Introduction of International Trade
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
Learning Objective: 06-03
(b) Suppose that two countries, in a situation where they each have an increasing-
3
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?
Answer: (a) If tastes are different between the two countries, then the autarkic price ratios will be
different, and trade can thus be mutually beneficial. (b) If the PPFs are different, then as
long as tastes are different, the autarkic price ratios will be different, and trade can thus be
mutually beneficial.
Difficulty: 02 Medium
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-03
(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: (a) An economist could still say that trade can be beneficial based on the compensation
principle. We say that potential gains from trade exist in the sense that, within the country,
the people who gain from trade can compensate the losers and still be better off.
Difficulty: 03 Hard
Topic: Some Important Assumptions in the Analysis
AACSB: Analytical Thinking
Blooms: Analyze
Learning Objective: 06-04
B. Multiple-Choice Questions
11. Which of the following does not contribute to a basis for trade between two countries?
4
Answer: d
Difficulty: 01 Easy
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
12. If country A’s (PX/PY) in autarky is greater than the (PX/PY) 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 __________.
Answer: b
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
13. 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, PX/PY in country A is __________ PX/PY 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
Answer: a
Difficulty: 01 Easy
Topic: Minimum Conditions for Trade
5
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
a. R; G
b. R; P
c. P; G
d. G; P
Answer: b
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
15. In the diagram in Question #14 above, as the country moves from autarky to free trade,
the difference between the S0 and S1 satisfaction levels is called the
Answer: a
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
16. In the following graph showing indifference curves for country A (a1) and for country B
6
(b1) in a situation where both countries have the same production-possibilities frontier, in
autarky, PX/PY in country A is __________ PX/PY in country B, and, if trade begins,
country A will export good __________.
a. less than; X
b. less than; Y
c. greater than; X
d. greater than; Y
Answer: a
Difficulty: 01 Easy
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
Answer: c
Difficulty: 02 Medium
7
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
18. In the diagram in Question #17 above, suppose that this country is opened to trade from
this initial situation where the dashed line indicates autarky prices [(PX/PY)autarky]. With
this opening to trade,
a. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
but cannot gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
b. the country can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky but cannot gain from trade if PX/PY on the world market is less than
(PX/PY)autarky.
c. the country can gain from trade if PX/PY on the world market is less than (PX/PY)autarky
and also can gain from trade if PX/PY on the world market is greater than
(PX/PY)autarky.
d. the country cannot gain from trade if PX/PY on the world market is less than
(PX/PY)autarky and also cannot gain from trade if PX/PY on the world market is
greater than (PX/PY)autarky.
Answer: c
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
19. 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.
Answer: d
Difficulty: 01 Easy
8
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
20. If a country’s PX/PY in autarky is less than the PX/PY 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
Answer: d
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
21. 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
9
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: c
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
22. 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
Answer: c
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
23. If a country’s PX/PY in autarky is less than the PX/PY 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
10
c. decrease; Y
d. decrease; X
Answer: d
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
24. 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
Answer: b
Difficulty: 01 Easy
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
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.
Answer: a
Difficulty: 01 Easy
Topic: Minimum Conditions for Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-03
26. 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.
11
a. fall; will rise
b. fall; also will fall
c. rise; also will rise
d. rise; will fall
Answer: d
Difficulty: 001 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
27. 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
Answer: c
Difficulty: 01 Easy
Topic: Autarky Equilibrium
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-01
28. Given the diagram below, in which country A is producing at point P and consuming at
point C:
12
Country A is __________, and the ratio of the price of food relative to the price of books
[i.e., (Pfood/Pbooks)] reflected by price line P0 is __________ than the (Pfood/Pbooks) ratio that
existed when country A was in autarky.
Answer: b
Difficulty: 01 Easy
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 06-02
29. 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 PX/PY that is greater than the world PX/PY. 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”).
13
Answer: d
Difficulty: 02 Medium
Topic: Introduction of International Trade
AACSB: Reflective Thinking
Blooms: Understand
Learning Objective: 06-02
14
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The Project Gutenberg eBook of The works of the
Reverend George Whitefield, Vol. 3 (of 6)
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Language: English
Transcriber’s Notes
The cover image was provided by the transcriber and is placed
in the public domain.
This book was written in a period when many words had not
become standardized in their spelling. Words may have
multiple spelling variations or inconsistent hyphenation in
the text. These have been left unchanged unless indicated
with a Transcriber’s Note.
WORKS
OF THE REVEREND
WITH
VOLUME III.
LONDON:
Printed for Edward and Charles Dilly, in the Poultry;
and Messrs. Kincaid and Bell, at Edinburgh.
MDCCLXXI.
LETTERS.
LETTER DCCCCLXV.
To Mr. J―― B――.
G. W.
LETTER DCCCCLXVI.
To Lady H――n.
London, February 9, 1753.
Ever-honoured Madam,
G. W.
LETTER DCCCCLXVII.
To Mr. G――.
G. W.
LETTER DCCCCLXVIII.
To C―― W――.
My dear Friend,
I THANK you and your brother most heartily for the loan of the
chapel. Blessed be God, the work goes on well.—On Thursday
morning, the first brick of our new tabernacle was laid with awful
solemnity. I preached from Exodus the twentieth, and the latter part
of the twenty-fourth verse; “In all places where I record my name, I
will come unto thee and bless thee.” Afterwards we sung, and
prayed for God’s blessing in all places, where his glorious name is
recorded. The wall is now about a yard high. The building is to be
eighty feet square. It is upon the old spot. We have purchased the
house, and if we finish what we have begun, shall be rent-free for
forty-six years. We have above eleven hundred pounds in hands.
This I think is the best way to build. Mr. Steward’s death so affected
me, that when I met the workman that night to contract about the
building, I could scarce bear to think of building tabernacles.
Strange! that so many should be so soon discharged, and we
continued! Eighteen years have I been waiting for the coming of the
son of God; but I find we are immortal till our work is done. O that we
may never live to be ministered unto, but to minister! Mr. Steward
spoke for his Lord as long as he could speak at all. He had no
clouds nor darkness. I was with him, till a few minutes before he
slept in Jesus. I have good news from several parts; a door is
opening at Winchester. Surely the little leaven will ferment, till the
whole kingdom be leavened. Even so, Lord Jesus, Amen! Pray how
does our elect Lady? I hope to write to her Ladyship next post. Joint
love attends you and yours, and your brother and his houshold.—
That all may increase with all the increase of God, is still the earnest
prayer of, my dear Sir,
G. W.
LETTER ♦DCCCCLXIX.
To Mr. M――.
I AM glad you have had such good times. I was grieved that Mr.
E―― was taken from London, because Mr. M―― was taken ill,
and a carnal preacher put up in his room. But God’s thoughts are
not as our thoughts. Let this consideration reconcile you to my not
preaching at Mr. B――’s. I went as far as Mrs. S――’s, but so many
things occurred, that I went no further. You may hear more when we
meet again. I have preached at Spitalfields chapel twice. Both the
Mr. W――s are agreed, as the younger brother writes me word, in
answer to my letter. Let brotherly love continue! I do not like writing
against any body, but I think, that wisdom which dwells with
prudence, should direct you not to fill Mr. W――s people (who
expect you will serve them) with needless jealousies. He that
believeth doth not make haste.—I therefore wait, being assured of
this, that every plant which our heavenly Father hath not planted
shall be rooted out. I hope to see the time, when you will talk less of
persons and things, and more of Him, who is the common head of
his whole mystical body. This, and this alone can make and keep
you steady in yourself, and extensively useful to others. I am glad
you know when persons are justified. It is a lesson I have not yet
learnt. There are so many stony-ground hearers that receive the
word with joy, that I have determined to suspend my judgment, till I
know the tree by its fruits. You will excuse this freedom. I love you
with a disinterested love, I only wish you may be happy in Jesus.
This will make you see things with new eyes, and give you such a
freedom of heart as is unspeakable, and full of glory. For the present
I must bid you adieu. That the Lord of all Lords may confirm,
strengthen, stablish, and settle you in his love, is the earnest prayer
of, my dear Mr. M――,
G. W.
LETTER DCCCCLXX.
To Mr. S――.
G. W.
LETTER DCCCCLXXI.
To Mr. G――.
I T hath given me concern, that your letter, with Mr. D――’s and
Miss A――’s, have lain by me so long unanswered. Business,
and not want of love, hath prevented my writing. Was it not sinful, I
could wish for a thousand hands, a thousand tongues, and a
thousand lives: all should be employed night and day, without
ceasing, in promoting the glory of the ever-lovely, ever-loving Jesus.
Thanks be to his great name for reviving his work in the midst of the
years. I trust that his people every where will be made to sing, “The
Winter is past, the rain is over and gone, the flowers appear on the
earth, and the voice of the turtle is heard in the land.” All things
promise well at London; and I hope you will yet see greater things
than ever in the North. Some time this Summer I hope to see you all
again. In the mean while, you must not fail to pray for me. I must now
begin to enter upon my Spring circuit. For these three days past, I
have been preaching here twice a-day. In the mornings we have
been quiet, but in the evenings the sons of Belial have been
somewhat rude. The place built here for public worship, is much
larger than yours at Newcastle; and, I believe, hundreds of truly
awakened souls attend. What cannot God do? What will the end of
this be? The destruction of Jericho.—The rams-horns must go
round, till her tow’ring walls fall down. Who would but be one of
these rams-horns? My dear Sir, let us not be ashamed of the cross
of Christ: it is lined with love, and will ere long be exchanged for a
crown. Jesus himself will put it on our heads. I am called away, and
therefore cannot enlarge. To-morrow, God willing, I return to London,
and hope soon to get time to answer my other Newcastle
correspondents. In the mean while, pray remember me to them and
all in the most cordial manner, and beg them never, never to cease
praying for, my dear Sir,
G. W.
LETTER DCCCCLXXII.
To Mr. R―― K――n.
G. W.
LETTER DCCCCLXXIII.
To Mr. D――.
Dear Sir,
G. W.
LETTER DCCCCLXXIV.
London, May 1, 1753.
My dear David,
Yours, &c.
G. W.
LETTER DCCCCLXXV.
To Mr. S――.
My dear Man,
T HOUGH my wife hath not sent me the letter, yet she writes me,
“That you have sent me a threatening one.” I thank you for it,
though unseen, and say unto thee, if thou art thus minded, “What
thou doest, do quickly.” Blessed be God, I am ready to receive the
most traiterous blow, and to confess before God and man, all my
weaknesses and failings, whether in public or private life. I laid my
account of such treatment, before I published my expostulatory
letter.—And your writing in such a manner, convinces me more and
more, that Moravianism leads us to break through the most sacred
ties of nature, friendship, and disinterested love. But my wife says