Econ 360 Exam 1 homework study guide
trade is about
improving living standards through a more efficient allocation of resources.
Free trade in goods is predicted to
increase competition for workers and firms. provide consumers with greater variety. provide consumers with lower prices.
Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans
increase soybean production, but still produce some avocados.
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the Heckscher−Ohlin Theorem, Chile should export goods that
intensively use natural resources.
The current process of increasing economic integration among national economies, better known as globalization,
is actually the world's second wave of such integration.
A country has a comparative advantage in the production of a good because
its endowments of production inputs determine the relative costs of products.
A country has a comparative advantage in producing a good if
its opportunity cost of producing that good is lower than elsewhere.
International capital markets
may have smaller capital flows (relative to the size of their GDP) today than around the late 19th/early 20th century and often have higher transaction costs than domestic capital markets.
The economic philosophy that favors strict limits on imports and strong support for exports is called
mercantilism.
Public goods differ from private goods in that the former are
nondiminishable often provided collectively. nonexcludable.
If a good or service does not get used up as it is consumed, then it is said to be
nonrival.
A typical measure or criteria for judging the degree of international economic integration is
people flows. similarity of prices. capital flows. trade flows.
Regional trade agreements (RTAs) or trade blocs are trading arrangements that allow __________________ treatment between members.
preferential
Mercantilism advocated that a country
promote exports over imports because it viewed trade as zero sum, believing that one nation's gain was another nation's loss.
The primary mission of the World Bank today is to
provide capital to underdeveloped countries.
The original mission of the World Bank was to
provide financial assistance for the reconstruction of war−damaged nations.
Suppose again that furniture production is more capital-intensive relative to clothing production, which is morelabor-intensive. If the relative price of furniture to clothing rises, this will
raise the income of capital owners.
The opposition to expanded trade comes from people who fear that it will
reduce the demand for their labor or capital and lead to a decline in income.
Suppose a country is abundant in capital and the relative price of the good that intensely uses capital for its production increases. The Stolper-Samuelson theorem predicts that it will:
see wage decreases for labor, because of the higher demand for the good that uses capital intensively.
Within each country that opens itself to international trade,
some factor owners gain, but other factor owners lose.
If a nation has no absolute advantage, then it
still gains from trade.
Wage inequality has been on the rise in virtually all high−income industrial economies since the 1970s. The causes are probably numerous, but the leading explanation for the greatest share of the increase in inequality is
technological change which increased the relative demand for skilled workers.
An important factor that increased international capital flows in the second half of the nineteenth century was
technological innovations
International Monetary Fund (IMF) "quotas" refer to
the IMF membership fee paid by countries.
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, then
the United States has a comparative advantage in corn production.
The international organization that serves as a forum for trade discussions and the development of trade rules is called
the WTO.
A nation gains from trade even though some individuals benefit while others are hurt because
the economic gains of the winners exceed the economic losses of the losers.
The Stolper−Samuelson Theorem predicts
the income distribution effects of trade.
Suppose a country has two factors, land and labor, and assume that wheat is a land-intense product. If the relative price of wheat increases by 10 percent, the "magnification effect" implies that
the income earned by land owners will increase by more than 10 percent.
A country possesses a comparative advantage in the production of a product if
the opportunity cost, in terms of the amount of other products that it gives up to produce this product, is lower than it is for its trading partners.
One important difference between the international economy of today and the economy of 100 years ago is
the presence of international bodies such as the IMF and World Bank.
Economists use the term opportunity cost to refer to
the value of the next best alternative occurring as a result of making a particular choice.
With trade, the slope of the Consumption Possibilities Curve (CPC) is equal to
the world price of the good on the horizontal axis.
The Tokyo Round of the GATT negotiations was notable because it was the first round
to begin establishing rules on subsidies.
Economic nationalists in developed countries worry that international trade is destroying the national economy. A common complaint is that trade agreements open the economy to increased trade with countries where workers are paid a fraction of what they earn at home. This argument is faulty since it fails to recognize that
wage differentials reflect productivity differences.
The Heckscher−Ohlin Theorem predicts
which goods will be exported.
If the world price for a good is above a nation's pre−trade equilibrium price, then the nation
will export the good.
In our simple trade model, having a comparative advantage in a product implies that a country will specialize completely in the product
with the lowest opportunity cost.
Suppose that strawberries are a labor-intensive good. An increase in the price of strawberries will ________ the demand for strawberries, which will ________ the demand for strawberry pickers.
increase, increase
The trade-to-GDP ratio is computed using
(Exports + Imports) / GDP
The trade−to−GDP ratio for a nation that had $600 million in exports, $400 million in imports, and GDP of $2,000 million would be
0.5.
Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, which of the following would NOT be a potential terms of trade?
1 corn for 1 auto
A high correlation of national savings and investment is:
A signal that countries may not be able to lend and borrow as freely as we thought.
Until the Uruguay Round of trade negotiations, which of the following sectors were NOT included in the rules for international trade?
Agriculture and apparel
If two countries agree to specialize and trade based on comparative advantage, which of the following is most likely to be TRUE?
Both of the countries will consume outside their respective production possibilities curves.
A counter-example to the Stolper-Samuelson theorem has firms using more skilled labor as it becomes moreexpensive, and less unskilled labor as it become less expensive, even if the firms have time to adjust their labor mix. How can this possibly be?
Broader technology applications require more skilled labor and less unskilled labor.
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then
Chile will produce more timber after trade begins with Brazil.
If the case studies are correct in their analysis of factor abundance,
Chinese unskilled labor should see their income rise as trade increases.
International trade is the major cause of rising income inequality in the United States.
FALSE
A nation must have an absolute advantage in order to have a comparative advantage in producing a good or service.
False
The gains from trade rely on overall productivity (absolute advantage).
False
Which list places regional trade agreements in an order moving from the least provisions to the most?
Free-trade Area, Common market, Economic Union.
From the late 1940s until the creation of the WTO, the organization that was primarily responsible for conducting rounds of trade negotiations was the
GATT.
Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can produce 6 units of timber or 2 units of grain. Which of the following is CORRECT?
Mexico has a comparative advantage in grain production.
How does the Heckscher-Ohlin (HO) model differ from the specific factors (SF) model?
SF allows a third factor that is used in each of two goods, while HO does not.
Ensures that nations follow a set of rules governing fair trade.
The General Agreement on Tariffs and Trade
Keeps markets for goods as open as possible.
The General Agreement on Tariffs and Trade
Acts as a lender of last resort in case of debt crisis or foreign exchange
The International Monetary Fund
Assists national governments with necessary but difficult reorganizations.
The International Monetary Fund
Certain kinds of tropical fruits are impossible to grow outdoors in the United States. Suppose, however, that in order to create jobs in Wyoming, the U.S. government offered extensive subsidies to firms to produce bananas. With thesubsidies, firms could build greenhouses and offer the fruit at world prices.
The United States is competitive, but does not have a comparative advantage.
Assists developing nations through the provision of loans and advice.
The World Bank
Economists do not, generally, stress the income redistribution effects of international trade. Which of the following is NOT a reason why economists tend to de-emphasize the impact of international trade on the distribution of income?
Those that lose from trade tend to be marginally impacted by trade, poorly organized, and largely devoid of political influence.
Why was the IMF created?
To manage the system of fixed exchange rates after World War II.
Many of the important international governmental institutions that deal with the global economy have their roots in the Bretton Woods conference at the end of World War II.
True
Mercantilists perceived trade as a zero sum game.
True
Which of the following was NOT a creation of the Bretton Woods conference?
WTO
What is the relationship between GATT and WTO?
WTO continues and expands the efforts of GATT.
When are regional trade agreements (RTAs) welfare-improving?
When they lead to net trade creation.
If one nation is able to produce a good at a lower opportunity cost than another, it has
a comparative advantage in that good.
Gains from trade can only be achieved if:
a country has a comparative productivity advantage.
A free trade agreement plus a common set of tariffs toward non−members is called
a customs union.
Institutions are
a set of rules governing behavior, whether written or not.
In general, which of the following does not tend to promote the probability of trade volumes between two countries:
ability to produce more than another country.
The United States is an example of
an economic union.
The GATT was
an international treaty governing trade.
Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive,
avocado prices in the United States will fall once trade begins.
An important insight of international trade theory is that when countries exchange goods and services one with theother, it
benefits both countries, and is usually not equally beneficial to both countries.
Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the Stolper−Samuelson Theorem, the incomes of the owners of __________ are likely to rise in Brazil after trade with Chile begins.
capital
IMF conditionality refers to the
changes a country must make in order to receive IMF financial assistance.
Suppose furniture production is more capital-intensive relative to clothing production. If the U.S. is capital abundant compared with Thailand, the Heckscher-Ohlin model implies that the U.S. should import
clothing.
The basis for free trade is the concept of
comparative advantage.
The elimination or reduction of trade barriers caused by non-trade-related domestic policies is referred to as
deep integration.
It is often costly for developing countries to adjust to trade agreements because
developing countries often have limited social safety nets to provide support to workers in transition.
The potential for gains from the rearrangement of production among countries is due to
differing opportunity costs.
The Ricardian trade model put forth by British economist David Ricardo nearly two centuries ago is one that
expounds principles still valid in today's world.
To judge the degree of international integration, economists turn to information on
flows of goods. the similarity of prices in different markets. flows of capital and people.
One reason markets may fail to provide the optimal quantity of public goods is the problem of
free riders.
Labor mobility was
greater in 1900 than in 2010.
If a country has lower overall productivity levels than its trading partners, then it will
have a lower standard of living than its trading partners.
For each hour worked, a U.S. worker can produce 4 loaves of bread, or 2 tons of steel. Canadian workers can produce 2 loaves of bread, or 1 ton of steel per hour. The information indicates that
he U.S. has absolute advantage in bread, and the U.S also has absolute advantage in steel.
One of the strongest motivations for holding the Bretton Woods Conference was to design new international institutions that would
help countries avoid the mistakes of the 1920s and 1930s.
Countries that have high rates of savings also have
high rates of investment.
