Reading 17. International Trade and Capital Flows

Germany has much more capital per worker than Portugal. In autarky each country produces and consumes both machine tools and wine. Production of machine tools is relatively capital intensive whereas winemaking is labor intensive. According to the Heckscher-Ohlin model, when trade opens: A Germany should export machine tools and Portugal should export wine. B Germany should export wine and Portugal should export machine tools. C Germany should produce only machine tools and Portugal should produce only wine.

A

If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a: A customs union. B common market. C free trade area (FTA).

A

The sale of mineral rights would be captured in which of the following balance of payments components? A Capital account. B Current account. C Financial account.

A

Which of the following international trade organizations has a mission to help developing countries fight poverty and enhance environmentally sound economic growth? A World Bank Group (World Bank). B World Trade Organization (WTO). C International Monetary Fund (IMF).

A

Which of the following statements best describes the benefits of international trade? A Countries gain from exchange and specialization. B Countries receive lower prices for their exports and pay higher prices for imports. C Absolute advantage is required for a country to benefit from trade in the long term.

A

Which type of trade restriction would most likely increase domestic government revenue? A Tariff. B Import quota. C Export subsidy

A

A large country can: A benefit by imposing a tariff. B benefit with an export subsidy. C not benefit from any trade restriction.

A is correct. By definition, a large country is big enough to affect the world price of its imports and exports. A large country can benefit by imposing a tariff if its terms of trade improve by enough to outweigh the welfare loss arising from inefficient allocation of resources.

Suppose the cost of producing tea relative to copper is lower in Tealand than in Copperland. With trade, the copper industry in Copperland would most likely: A expand. B contract. C remain stable.

A is correct. The copper industry in Copperland would benefit from trade. Because the cost of producing copper relative to producing tea is lower in Copperland than in Tealand, Copperland will export copper and the industry will expand.

A country has a comparative advantage in producing a good if: A it is able to produce the good at a lower cost than its trading partner. B its opportunity cost of producing the good is less than that of its trading partner. C its opportunity cost of producing the good is more than that of its trading partner

B

According to the Heckscher-Ohlin model, when trade opens: A the scarce factor gains relative to the abundant factor in each country. B the abundant factor gains relative to the scarce factor in each country. C income is redistributed between countries but not within each country.

B

Patent fees and legal services are recorded in which of the following balance of payments components? A Capital account. B Current account. C Financial account.

B

Which of the following international trade organizations regulates cross- border exchange among nations on a global scale? A World Bank Group (World Bank). B World Trade Organization (WTO). C International Monetary Fund (IMF).

B

Which of the following most likely contributes to a current account deficit? A High taxes. B Low private savings. C Low private investment.

B

Which of the following statements best describes the costs of international trade? A Countries without an absolute advantage in producing a good cannot benefit significantly from international trade. B Resources may need to be allocated into or out of an industry and lessefficient companies may be forced to exit an industry, which in turn may lead to higher unemployment. C Loss of manufacturing jobs in developed countries as a result of import competition means that developed countries benefit far less than developing countries from trade.

B

Which of the following chronic deficit conditions is least alarming to the deficit country's creditors? A High consumption. B High private investment. C High government spending.

B is correct. A current account deficit tends to result from low private saving, high private investment, low government savings, or a combination of the three. Of these choices, only high investments can increase productive resources and improve future ability to repay creditors.

During the most recent quarter, a steel company in South Korea had the following transactions ● Bought iron ore from Australia for AUD50 million. ● Sold finished steel to the United States for USD65 million. ● Borrowed AUD50 million from a bank in Sydney, Australia. ● Received a USD10 million dividend from US subsidiary. ● Paid KRW550 million to a Korean shipping company. Which of the following would be reflected in South Korea's current account balance for the quarter? A The loan. B The shipping. C The dividend.

C

Suppose Mexico exports vegetables to Brazil and imports flashlights used for mining from Brazil. The output per worker per day in each country is as follows: Flashlights Vegetables Mexico 20 60 Brazil 40 80 Which country has a comparative advantage in the production of vegetables and what is the most relevant opportunity cost? A Brazil: 2 vegetables per flashlight. B Mexico: 1.5 vegetables per flashlight. C Mexico: ⅓ flashlight per vegetable.

C

Suppose three countries produce bananas and pencils with output per worker per day in each country as follows: Bananas Pencils Mexico 20 40 Brazil 30 90 Canada 40 160 Which country has the greatest comparative advantage in the production of bananas? A Canada. B Brazil. C Mexico.

C

Which of the following factors best explains why regional trading agreements are more popular than larger multilateral trade agreements? A Minimal displacement costs. B Trade diversions benefit members. C Quicker and easier policy coordination.

C

Which of the following organizations helps to keep global systemic risk under control by preventing contagion in scenarios such as the 2010 Greek sovereign debt crisis? A World Bank Group (World Bank). B World Trade Organization (WTO). C International Monetary Fund (IMF).

C

In the Ricardian trade model, a country captures more of the gains from trade if: A it produces all products while its trade partner specializes in one good. B the terms of trade are closer to its autarkic prices than to its partner's autarkic prices. C the terms of trade are closer to its partner's autarkic prices than to its autarkic prices.

C is correct. A country gains if trade increases the price of its exports relative to its imports as compared to its autarkic prices, i.e. the final terms of trade are more favorable than its autarkic prices. If the relative price of exports and imports remains the same after trade opens, then the country will consume the same basket of goods before and after trade opens, and it gains nothing from the ability to trade. In that case, its trade partner will capture all of the gains. Of course, the opposite is true if the roles are reversed. More generally, a country captures more of the gains from trade the more the final terms of trade differ from its autarkic prices.

Which of the following international trade bodies was the only multilateral body governing international trade from 1948 to 1995? A World Trade Organization (WTO). B International Trade Organization (ITO). C General Agreement on Tariffs and Trade (GATT).

C is correct. The GATT was the only multilateral body governing international trade from 1948 to 1995. It operated for almost half a century as a quasiinstitutionalized, provisional system of multilateral treaties and included several rounds of negotiations.

Which of the following trade restrictions is likely to result in the greatest welfare loss for the importing country? A A tariff. B An import quota. C A voluntary export restraint

C is correct. With a voluntary export restraint, the price increase induced by restricting the quantity of imports (= quota rent for equivalent quota = tariff revenue for equivalent tariff) accrues to foreign exporters and/or the foreign government