ECON 34O EXAM 2

Which of the following is NOT a problem created in the home country by multinational corporations? A) loss of unskilled and semiskilled production jobs B) reduced return to capital C) loss of tax revenue and tax base D) undermining the effectiveness of government's monetary policy

reduced return to capital

When a small country experiences an upward shift in the demand curve, a given import tariff would result in ___ and ___. A) higher domestic price, more imports B) higher domestic price, same imports C) same domestic price, more imports D) same domestic price, same imports

same domestic price, more imports

If Japan ____, then Japan is guilty of dumping cars into the US market. A) sells cars in the US for a price above production costs B) sells cars in the US for a price below production costs C) produces cars at a lower cost than the US can produce them D) produces cars at a higher cost than the US can produce them

sells cars in the US for a price below production costs

According to Table 13.2, US has an export surplus in _________. A) Automobile B) Chemicals C) Medical products D) Semiconductors

Chemicals

In 2017, US ran the largest trade deficit against ______. A) Japan B) China C) Germany D) Mexico

China

Which of the following countries was NOT cited as one of the most unfair traders under the Omnibus Trade and Competitiveness Act of 1988? A) China B) Japan C) India D) Brazil

China

According to Table 11.6, in which region had low and middle income countries enjoyed the highest rate of economic growth over the period 1990-2017? A) East Asia and Pacific B) South Asia C) Middle East and North Africa D) Latin America and Caribbean

East Asia and Pacific

If less than full employment is present, then foreign investments tend to ________ the level of employment in the investing country and __________ the level of employment in the host country. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase

decrease; increase

Any purchase of ________ of the voting stock in a firm is considered as a direct investment by the US government. A) 40% or more B) 30% or more C) 20% or more D) 10% or more

10% or more

When did the US net international investment position become negative for the first time? A) 1986 B) 1999 C) 2008 D) 2016

1986

Today, multinational corporations account for ____ of the world output. A) 5% B) 15% C) 25% D) 50%

25%

Which of the following is NOT a primary reason for a firm to make foreign direct investment? A) To preserve unique production knowledge or managerial skill B) A safe and secure return on its investment C) Obtain control of a key raw material D) To bypass tariff and other restrictions that foreign nations impose on imports

A safe and secure return on its investment

Problem Set (6 points) The following table gives the terms of trade of the G-7 countries. A. (4 points) Compute the terms of trade shock for each country over the period 1990-2009. Note that TOT shock is measured as the percentage change in the terms of trade. B. (2 points) Identify the country with the largest improvement in the terms of trade and the country with the largest deterioration over the period 1990-2009.

A. TOT shock US (98.8-101.1)/{(98.8+101.1)/2} = -2.30% Canada (114.8-97.2)/{(114.8+97.2)/2} = 16.60% Japan (74.2-83.9)/{(74.2+83.9)/2} = -12.27% Germany (105.8-109.3)/{(105.8+109.3)/2} = -3.25% France (103.9-100.1)/{(103.9+100.1)/2} = 3.73% UK (104.5-101.1)/{(104.5+101.1)/2} = 3.31% Italy (103.3-94)/{(103.3+94)/2} = 9.43% B. Canada experienced the largest improvement in TOT during this period as Canada had the largest positive TOT shock. Japan experienced the largest deterioration in TOT as Japan had the largest negative TOT shock.

Problem set (16 points) Import Quota Suppose that nation A is a small nation with demand and supply of commodity X given by Qd = 120 - 20P and Qs = 20P, respectively. Assume that the free trade price of commodity X is $1, and nation A imposes an import quota of 20X. Draw a figure similar to Figure 9.1 in Salvatore and compute the following: A. (2 points) nation A's price, production, consumption and imports of commodity X under free trade B. (4 points) nation A's price, production, consumption and imports of commodity X under the import quota C. (2 points) consumption, production and trade effects of the import quota D. (4 points) dollar value of the consumer surplus and producer surplus before and after the imposition of the import quota E. (2 points) dollar value of the deadweight loss of the import quota, assuming that import licenses are distributed to selected domestic importers free of charge F. (2 points) the maximum price government can charge for the import licenses, and the subsequent dollar value of the deadweight loss of the import quota Compare your answers to this question to your answers to PS #1 in Chapter 8. Do the import tariff and import quota achieve the same objective in terms of trade restriction. Which policy is less costly?

A. Under free trade, price of commodity X in nation A is P = $1 Nation A's production is Qs = 20P = 20*1 = 20X (AC in the graph) Nation A's consumption is Qd = 120 - 20P = 120- 20*1 = 100X (AB in the graph) The level of imports are given by the "excess demand" Imports = Qd - Qs = 100X - 20X = 80X (CB in the graph) B. With an import quota of 20X, the equilibrium is achieved when Excess demand = Quota That is, Qd - Qs = 20 Therefore, the price of commodity X in nation A must satisfy (120 - 20P) - 20P = 20 => P = $2.5 Nation A's production is Qs = 20P = 20*2.5 = 50X (GJ in the graph) Nation A's consumption is Qd = 120 - 20P = 120- 20*2.5 = 70X (GH in the graph) The level of imports is fixed by the quota Imports = 20X (JH in the graph) C. Consumption effect = 70X - 100X = -30X (NB in the graph) Production effect = 50X - 20X = 30X (CM in the graph) Trade effect = 20X - 80X = -60X (CM+NB in the graph) That is, with an import quota of 20X, nation A's consumption decreases by 30X, production increases by 30X, and imports decrease by 60X. D. Without the quota, i.e., under free trade, Consumer surplus = ARB = $250 Producer surplus = OAC = $10 With the quota, Consumer surplus = GRH = $122.5 Producer surplus = OGJ = $62.5 E. When import licenses are distributed to selected domestic importers free of charge, government collects no revenue. Therefore, Deadweight loss = decrease in consumer surplus (AGHB in the graph) - increase in producer surplus (AGJC in the graph) That is, Deadweight loss = $127.5 - $52.5 = $75 (CJHB in the graph) F. The maximum price government can charge for the import licenses equals the difference between domestic price and world price of commodity X. That is, Maximum price for the import licenses = $2.5 - $1 = $1.5 In this case, Government revenue from import license distribution = 20*$1.5 = $30 Deadweight loss = decrease in consumer surplus (AGHB in the graph) - increase in producer surplus (AGJC in the graph) - government revenue from important license distribution (MJHN in the graph) That is, Deadweight loss = $127.5 - $52.5 - $30 = $45 (CJM+BHN in the graph) Compared to PS#1 in Chapter 8, we can see that a 150% import tariff and an import quota of 20X achieve the same objective in terms of trade restriction (i.e., imports go down from 80X to 20X). However, import tariff is less costly because it incurs a smaller deadweight loss unless import licenses are distributed in a competitive market

Problem set (16 points) Export Subsidy Suppose that nation A is a small nation with demand and supply of commodity X given by Qd = 120 - 20P and Qs = 20P, respectively. Assume that the free trade price of commodity X is $4, and nation A provides a $1 subsidy on each unit of commodity X exported. Draw a figure similar to Figure 9.3 in Salvatore and compute the following: A. (2 points) nation A's price, production, consumption and exports of commodity X under free trade B. (4 points) nation A's price, production, consumption and exports of commodity X with the export subsidy C. (2 points) consumption, production, trade and revenue effects of the export subsidy D. (4 points) dollar value of the consumer surplus and producer surplus without and with the export subsidy E. (4 points) dollar value of the deadweight loss of the export subsidy

A. Under free trade, the price of commodity X in nation A is P = $4 Nation A's production is Qs = 20P = 20*4 = 80X (AC in the graph) Nation A's consumption is Qd = 120 - 20P = 120- 20*4 = 40X (AB in the graph) The level of exports is given by the "excess supply" Exports = Qs - Qd = 80X - 40X = 40X (BC in the graph) B. With a $1 export subsidy, the price of commodity X in nation A becomes P = $4 + $1 = $5 Nation A's production is Qs = 20P = 20*5 = 100X (GJ in the graph) Nation A's consumption is Qd = 120 - 20P = 120- 20*5 = 20X (GH in the graph) The level of exports is Exports = Qs - Qd = 100X - 20X = 80X (HJ in the graph) C. Consumption effect = 20X - 40X = -20X (NB in the graph) Production effect = 100X - 80X = 20X (CM in the graph) Trade effect = 80X - 40X = 40X (CM+NB in the graph) Revenue effect = 80*$1 = $80 (NHJM in the graph) That is, with a $1 export subsidy, nation A's consumption decreases by 20X, production increases by 20X, exports increases by 40X, and government spends $80 on the export subsidy. D. Without the export subsidy, i.e., under free trade, Consumer surplus = ARB = $40 Producer surplus = OAC = $160 With the export subsidy, Consumer surplus = GRH = $10 Producer surplus = OGJ = $250 E. Deadweight loss = decrease in consumer surplus (AGHB in the graph) - increase in producer surplus (AGJC in the graph) + government expenditure on export subsidy (NHJM in the graph) That is, Deadweight loss = $30 - $90 + $80 = $20 (NHB+CJM in the graph)

Dynamic benefits from industrial production include A) A more trained labor force B) More innovations C) Higher and more stable export prices D) All of the above

All of the above

Foreign investments in the US have the potential benefits of ______. A) Financing US budget deficits B) Creating jobs in the US C) Promoting more rapid economic growth in the US D) All of the above

All of the above

Foreign investments in the US have the potential harmful effects of _______. A) Imposing a burden on the future generations B) Triggering a financial crisis C) Worsening US current account balance in the future D) All of the above

All of the above

The sharp deterioration of US trade balance on goods since the 1970s was due in large part to which of the following? A) The sharp rise in the price of imported petroleum products during the 1970s B) The high international value of the dollar in the 1980s C) The more rapid growth of the US than Europe and Japan during the 1990s and 2000s D) All of the above

All of the above

Upon which of these principles was GATT founded? A) Unconditional acceptance of the most-favored-nation principle B) Elimination of nontariff trade restrictions (with a few exceptions) C) Consultation among nations in solving trade disputes within the GATT framework D) All of the above

All of the above

When a developing country faces a foreign debt crisis, as part of the debt renegotiation, it is often required by the IMF to A) Cut inflation B) Curb wage increases C) Cut imports D) All of the above

All of the above

Which of the following factors contribute to the inelastic and unstable demand of developing nations' primary exports? A) Households in developed nations spend only a small proportion of their income on agricultural commodities. B) There are few substitutes for minerals. C) Business cycle fluctuations in developed nations. D) All of the above

All of the above

Which of the following has benefited from the strategic trade and industry policy? A) Japanese steel industry in the 1950s B) Airbus since the 1970s C) Chinese high-speed trains since 2000s D) All of the above

All of the above

Which of the following is a basic type of international commodity agreements? A) Buffer stocks B) Export controls C) Purchase contracts D) All of the above

All of the above

Which of the following is a form of export subsidies? A) Tax relief to (potential) exporters B) Subsidized loans to (potential) exporters C) Low-interest loans to foreign buyers of the nation's exports D) All of the above

All of the above

Which of the following is a problem created in the host country by the multinational corporations? A) MNCs dominate the host country's economy B) Overexploitation of natural resources and environmental degradation C) Diverting R&D funds from host country to the home country D) All of the above

All of the above

Which of the following is one of the most serious problems facing developing countries today? A) Stark poverty B) Unsustainable foreign debt C) Rising trade protectionism in developed countries against imports from developing countries D) All of the above

All of the above

Which of the following protectionist measures was adopted by the US Congress during the 1950s? A) Peril-point provisions B) Escape clause C) National security clause D) All of the above

All of the above

Which of the following statements is true about the prices of primary commodities? A) Primary commodity prices tend to fluctuate dramatically over time. B) Primary commodity prices had gone up significantly in all categories from 1972 to 2017. C) Among all primary commodities, petroleum experienced the largest increase in price from 1972 to 2017. D) All of the above

All of the above

In 2017, US ran the largest trade surplus against ______. A) Brazil B) Canada C) Italy D) Korea

Brazil

The Smoot-Hawley Tariff Act of 1930 has often been associated with: A) Reduction in tariffs B) Reduction in non-tariff barriers C) Increasing volume of trade for the US D) Decreasing volume of trade for the US

Decreasing volume of trade for the US

1. _________ often takes the form of starting a subsidiary or taking control of another firm. A) Private investment B) Portfolio investment C) Direct investment D) All of the above

Direct investment

Which of the following countries spent the most on agricultural subsidies in 2017? A) U.S. B) Japan C) EU D) Korea

EU

Which of the following is not a characteristic of the HPAE? A) Low rates of inflation B) Export-oriented industrialization C) Competitive labor markets D) Excessive capital intensity and relative little labor absorption

Excessive capital intensity and relative little labor absorption

The Doha Round of trade negotiations failed in 2008 over disagreements over _________. A) Tariffs on industrial products B) Government subsidies to industrial products C) Tariffs on agricultural products D) Government subsidies to agricultural products

Government subsidies to agricultural products

According to the ________ model, without trade or international capital flows, returns on capital are higher in the nation having the _________overall relative capital-labor ratio. A) Heckscher-Ohlin; higher B) Heckscher-Ohlin; lower C) Stolper-Samuelson; higher D) Stolper-Samuelson; lower

Heckscher-Ohlin; lower

1. According to Table 12.5, which of the following economies is the SECOND largest recipient of FDI in 2017? A) China B) Brazil C) Hong Kong D) UK

Hong Kong

According to Table 1, which of the following statement is true for the U.S. income terms of trade (I)? A) I in 2000 is 160, which has improved from 1990. B) I in 2000 is 160, which has deteriorated from 1990. C) I in 2000 is 90, which has improved from 1990. D) I in 2000 is 90, which has deteriorated from 1990.

I in 2000 is 90, which has improved from 1990.

Which of the following countries was the #1 initiator of antidumping investigations in the period of 2011-2017? A) China B) US C) EU D) India

India

Which of the following countries has followed an exported-oriented industrialization policy since the 1950s? A) India B) Korea C) China D) Argentina

Korea

Which of the following countries provided the largest agricultural subsidies as a percentage of its agricultural output in 2017? A) U.S. B) Japan C) EU D) Korea

Korea

The United States is the main supplier of foreign direct investments to what countries? A) India and Vietnam B) Former communist countries in Eastern Europe C) Latin America, the Philippines, and Saudi Arabia D) Taiwan and South Korea

Latin America, the Philippines, and Saudi Arabia

Which of the following is NOT a characteristic of a developing country? A) A high proportion of the labor force in agriculture B) A high illiteracy rate C) Low life expectancy D) Low population growth rate

Low population growth rate

Compared to the export-oriented industrialization, the import substitution industrialization policy has often resulted in a ___. A) Higher level of openness B) Lower price for domestic consumers C) Increase in export earnings for the traditional sectors D) Lower rate of economic growth in the long run

Lower rate of economic growth in the long run

According to Table 1, which of the following statement is true for the U.S. commodity terms of trade (N)? A) N in 2000 is 133.3, which has improved from 1990. B) N in 2000 is 133.3, which has deteriorated from 1990. C) N in 2000 is 75, which has improved from 1990. D) N in 2000 is 75, which has deteriorated from 1990.

N in 2000 is 75, which has deteriorated from 1990.

During the postwar period, A) Nontariff trade barriers (NTBs) and tariffs have both increased in importance and use. B) NTBs and tariffs have both decreased in importance and use. C) NTBs have increased and tariffs have decreased in importance and use. D) NTBs have decreased and tariffs have increased in importance and use.

NTBs have increased and tariffs have decreased in importance and use.

According to Figure 12.1, when nation 1 is in isolation, its interest rate is _____. If capital is free to move internationally, then nation 1 will see a capital ______ and its interest rate will be _____. A) ON; inflow; OC B) ON; outflow; OC C) OC; inflow; ON D) OC; outflow; ON

OC; outflow; ON

According to Figure 12.1, when nation 1 is in isolation, its capital income is ____. If capital is free to move internationally, then nation 1's capital income becomes ____. A) OCGA; ONEB B) OCGA; ONRA C) ONEB; OCGA D) ONRA; OCGA

OCGA; ONRA

According to Figure 12.1, if capital is free to move internationally, then nation 1's GNI is ____. A) OFEB B) OFGA C) OFEB + BERA D) OFEB + BEMA

OFEB + BERA

With which type of dumping do domestic consumers get better off in the short run but worse off in the long run? A) Persistent dumping B) Predatory dumping C) Sporadic dumping D) All of above

Predatory dumping

Which of the following is NOT an objective of the Millennium Development Goals? A) Achieving universal primary education B) Reducing child mortality C) Ensuring environmental sustainability D) Removing agricultural subsidies in developed nations

Removing agricultural subsidies in developed nations

According to Table 13.3, US deficits in the following accounts are the largest in the year 2006 EXCEPT _______? A) Goods trade B) Goods and services C) Secondary income D) Current account

Secondary income

The US government introduced the trigger-price mechanism in 1978 in response to dumping in what industry? A) Steel B) Cotton C) Automobiles D) Consumer Electronics

Steel

Which of the following is NOT recorded in the U.S. current account? A) US exports commodities to EU B) US residents receive wages from a Japanese construction company C) Chinese tourists pay for hotel service in Disney World in Orlando, Florida D) Subsidiaries of US multinationals produce and sell products in China

Subsidiaries of US multinationals produce and sell products in China

The Kennedy Round of trade negotiation succeeded in significantly reducing ________. A) Tariffs on industrial products B) Government subsidies to industrial products C) Tariffs on agricultural products D) Government subsidies to agricultural products

Tariffs on industrial products

When a multinational corporation controls the raw material used in the production of its final good through a vertical integration, which of the following is most likely to happen? A) The MNC will obtain an uninterrupted supply of the raw material at the lowest possible cost. B) Consumers will pay a higher price for the final good. C) The MNC will face anti-trust charges for owning firms that produce both the raw material and the final good. D) The MNC will get favorable tax treatment in the foreign country.

The MNC will obtain an uninterrupted supply of the raw material at the lowest possible cost.

_____ raised average import duty in the U.S. to the all-time high. A) The Smoot-Hawley Tariff Act of 1930 B) The U.S. Tariff Assignment Act of 1954 C) The Trade Agreements Act of 1934 D) The Sarbanes-Oxley Act

The Smoot-Hawley Tariff Act of 1930

The rapid growth of US direct investment in Europe from 1980 to 2017 was due to _____. A) The US desire to join the European Union. B) The US desire to avoid the common external tariff imposed by the EU. C) The relatively slow growth of the European Union. D) To retaliate against European exports to the United States.

The US desire to avoid the common external tariff imposed by the EU.

According to Case Study 9-5, in which country are nontariff trade barriers most pervasive? A) US B) EU C) Japan D) Canada

US

According to Case Study 9-2, ______ got worse off as a result of the voluntary export restraints on the Japanese automobile exports to the US negotiated in 1981. A) US automobile manufactures B) US consumers C) Japanese automobile manufactures D) Labor in the US automobile industry

US consumers

Which of the following are recorded in the U.S. financial account? A) US residents purchase stocks in a Chinese company B) US residents receive dividends from investments in Korea C) US residents remit money to family members in Fiji D) All of the above

US residents purchase stocks in a Chinese company

At which international trade gathering was there a successful reduction in trade restrictions and protectionism, averting a revival of inward-looking policies in developing countries? A) Kennedy Round B) Tokyo Round C) Uruguay Round D) Doha Round

Uruguay Round

The World Trade Organization (WTO) was established by the _____ of multilateral trade negotiations. A) Kennedy Round B) Tokyo Round C) Uruguay Round D) Doha Round

Uruguay Round

Which of the following statements is true about the voluntary export restraints (VERs)? A) WTO members are not allowed to impose new VERs. B) Government of the importing country captures the revenue effect of VERs. C) VERs were mostly negotiated by developing countries to curb exports from industrial nations. D) All of the above

WTO members are not allowed to impose new VERs.

1. International capital flows lead to ________. A) decreased total return to labor in the capital abundant nation B) increased world output C) increased income in both nations D) all of the above

all of the above

Foreign direct investments are undertaken usually by multinational corporations engaged in all of the following activities EXCEPT _______. A) manufacturing B) resource extraction C) services D) basic agriculture

basic agriculture

It has been found that firms with a strong international orientation tend to A) be more profitable than purely domestic firms. B) have greater variability in profits than purely domestic firms. C) pay more taxes than purely domestic firms. D) all of the above

be more profitable than purely domestic firms.

Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain over domestic producers because of foreign: A) tariffs B) export subsidies C) quotas D) voluntary export agreements

export subsidies

Strategic trade and industrial policy is advanced for industrial nations to acquire a comparative advantage in the _____. A) agricultural sector B) manufacturing sector C) high-tech sector D) energy sector

high-tech sector

When a small country experiences an upward shift in the demand curve, a given import quota would result in ___ and ___. A) higher domestic price, more imports B) higher domestic price, same imports C) same domestic price, more imports D) same domestic price, same imports

higher domestic price, same imports

US direct investment in Latin America was lower in 1985 than in 1980 because of ______. A) civil wars in the Latin American countries B) a trade war between the US and the Latin American countries C) international debt problems in the Latin American countries D) a recession in the US

international debt problems in the Latin American countries

Two-way international portfolio investments are often explained by A) higher returns in foreign countries. B) portfolio theory and risk diversification. C) comparative advantage and specialization in production. D) economies of scale.

portfolio theory and risk diversification

In large developed nations, which sector is most protected by nontariff trade barriers? A) food, beverage and tobacco B) textile and apparel C) wood and wood products D) basic metal industries

textile and apparel

The basic motive for international portfolio investments is A) to earn higher returns abroad. B) to secure the supply of raw materials. C) to avoid tariffs and non-tariff trade barriers. D) to retain direct control of the firm's technology.

to earn higher returns abroad.

IBM does not want to license foreign producers because it wants to retain complete control over its ____________ and to ensure consistence in quality and services. A) workforce B) accounting process C) trade secrets and patents D) marketing strategies

trade secrets and patents

Direct foreign investments have been greatly facilitated by the rapid advancements in _______________ since the end of World War II. A) manufacturing technology B) transportation and communication C) accounting practices D) anti-trust legislation

transportation and communication