EC433 Test 1

Heckscher-Ohlin model

A country will tend to export those goods that use intensively its abundant resources; it will tend to import those goods that use intensively its scarce resources. When an industrialized country gets good at producing a good, eventually it does not need skilled labor to produce it. This is when they begin importing the good instead because they can utilize the cost benefits associated with importing the good

According to David Ricardo, it is not possible for a country engaged in international trade to have a. an absolute advantage in all goods .b. an absolute disadvantage in all goods. c. a comparative disadvantage in all goods.

. a comparative disadvantage in all goods.

Stolper-Samuelson Theorem

As a country liberalizes its international trade, its *abundant factors tend to gain* from trade and its *scarce factors tend to lose* from trade

What is the Leontief Paradox?

- Tested truthfulness of Heckscher-Ohlin theory - Proved the theory right, the US was a net exporter of products that use factors intensively

Consumer surplus:

- The difference between what a buyer is willing to pay for a given amount of a good or what he or she pays for that amount of the good. - Consumers are left with a net gain when they pay the market price instead of what they valued the product at.

What is clustering? What kind of economy is it an example of?

- When export opportunities provide an advantage to firms in a given industry clustered in a particular location. Knowledge spillovers and pooling of labor reduce their costs of production. - Example of external scale economies

World Bank

- World Bank = lends funds to developing countries

Major product categories can be broken down into primary products (agriculture, fuels, ores), manufactured products (chemicals, machinery and transport equipment, textiles and clothing, and Other), and services. Countries can be broken down broadly as developed and developing. Data show that, relatively speaking, a. Developing countries are large exporters of services and textiles and clothing; developed countries are large exporters of primary products and chemicals .b. Developing countries are large exporters of primary products and of chemicals; developed countries are large exporters of textiles and clothing and services. c. Developing countries are large exporters of primary products and textiles and clothing; developed countries are large exporters of services and chemicals. d. Developing countries are large exporters of services and chemicals; developed countries are large exporters of textiles and clothing and chemicals.

Developing countries are large exporters of primary products and textiles and clothing; developed countries are large exporters of services and chemicals.

Brexit involved the United Kingdom leaving the

European Union

5 entry modes to foreign markets:

Exporting ,Licensing, Franchising, Joint ventures , Wholly-owned subsidiaries

ssume that a country produces two goods, food and clothing, and that the country's production possibility curve is bowed out, i.e., concave to origin. As the country produces more food the opportunity cost of food in terms of forgone clothing a. increases. b. decreases. c. remains unchanged. d. first increases, then decreases.

Increases

If a firm encounters significant up-front costs before production of a product begins, the more of the product that the firm produces, the lower the average cost of the product will be because those up-front costs will be spread over a larger number of products than if the firm produced less of the product. This effect is an example of a(n):

Internal Scale Economy (because it is just inside one org/country)

What do scale economies mean?

Refers to the lowering of per unit costs as a firm grows bigger.

Producer surplus

The difference between the price at which producers are willing to sell their goods and the price they actually receive.

What is autarky?

When a country has economic self-sufficiency

Assume the standard trade model with one country, Alpha, and the rest of the world. There are two goods (food and cloth) and two factors of production (land and labor). Further, assume that Alpha is labor abundant; the rest of the world is land abundant; cloth is labor intensive; and food is land intensive. When trade opens, Alpha exports cloth. Which of the following is most likely to happen in Alpha following the opening of free trade between Alpha and the rest of the world *in the long run* when land and labor are mobile between the two industries? (The result is consistent with the Heckscher-Ohlin model of trade.) a. All labor will gain while all the landowners will lose. b. All labor will lose while all the landowners will gain. c. Labor and landowners in the food industry will gain while labor and landowners in the cloth industry will lose. d. Labor and landowners in the food industry will lose while labor and landowners in the cloth industry will gain.

a. All labor will gain while all the landowners will lose. In the *LONG RUN* = ALL WIN & ALL LOSE

Looking at the product cycle, __________countries are more apt to export newer non-standardized products at ____________ stages of the product cycle. a. developed; earlier b. developed; later c. developing; earlier d. developing; later

a. developed; earlier

Since the late 1970s, China has been a strong __________ of manufactured goods and __________ of land-intensive products such as wheat. The trade pattern is ____________ with what happened in Japan, Korea, Taiwan, and Hong Kong previously. a. exporter; importer; consistent b. exporter; importer; inconsistent c. importer; exporter; consistent d. importer; exporter; inconsistent

a. exporter; importer; consistent

Comparing inter-industry trade with intra-industry trade, inter-industry trade is____________________________, while intra-industry trade is __________________________. a. more consistent with the Heckscher-Ohlin model of international trade; more likely to take place between developed countries b. more consistent with the Heckscher-Ohlin model of international trade; more likely to take place between a developed country and a developing country c. more likely to take place between developed countries; more consistent with the Heckscher-Ohlin model of international trade d. more likely to take place between a developed country and a developing country; more consistent with the Heckscher-Ohlin model of international trade

a. more consistent with the Heckscher-Ohlin model of international trade; more likely to take place between developed countries

Specialization and International trade allow a country to ___________ beyond its production frontier. a. produce b. consume c. produce and consume d. neither produce nor consume

b. consume

If the dollar-pound exchange rate changes from $1.50 per £ to $2 per £, the dollar has _________against the pound (£) and the pound (£) has against _____________the dollar. a. appreciated; appreciated b. depreciated; appreciated c. appreciated; depreciated d. depreciated; depreciated

b. depreciated; appreciated

After doing his test, Leontief discovered that the U.S. was ____________ labor-intensive goods and ______________ capital-intensive goods. After this realization, Leontief concluded that there are different kinds of labor, natural resources, and capital, which is why his results were ______________ the original Heckscher-Ohlin model. a. exporting; importing; the same as b. exporting; importing; different from c. importing; exporting; the same as d. importing; exporting; different from

b. exporting; importing; different from

U.S intra-industry trade is _____for-high tech products (such as semiconductors and electrical generating machinery) which the U.S exports and imports in similar values mostly from advanced countries and leading emerging market economies. Intra-industry trade is_____ for some low-tech, labor-intensive products (such as apparel and household goods) which the U.S mainly imports from developing countries. a. high; high b. high; low c. low; low d. low; high

b. high; low

What is arbitrage?

buying something in one market and reselling the same thing in another market to profit from a price difference.

Adam Smith explained the benefits of trade in terms of ___________ advantage, and David Ricardo explained the benefits in terms of ____________ advantage. a. absolute; absolute b. comparative; comparative c. absolute; comparative d. comparative; absolute

c. absolute; comparative

"Many computer companies are clustered in California's Silicon Valley, and financial institutions and banks are concentrated in New York City." An explanation of this clustering and concentration is: a. increasing returns; i.e. economies of scale within a given firm in the industry. b. perfect competition within the industry. c. knowledge spillovers among employees within the industry interacting outside of the workplace.

c. knowledge spillovers among employees within the industry interacting outside of the workplace.

Marginal Cost Equation

change in total cost / change in quantity

Assume the standard trade model with one country, Alpha, and the rest of the world. There are two goods (food and cloth) and two factors of production (land and labor). Further, assume that Alpha is labor abundant; the rest of the world is land abundant; cloth is labor intensive; and food is land intensive. When trade opens, Alpha exports cloth. Which of the following is most likely to happen in Alpha following the opening of free trade between Alpha and the rest of the world *in the short run* when land and labor are immobile between the two industries? a. All labor will gain while all the landowners will lose. b. All labor will lose while all the landowners will gain. c. Labor and landowners in the food industry will gain while labor and landowners in the cloth industry will lose. d. Labor and landowners in the food industry will lose while labor and landowners in the cloth industry will gain.

d. Labor and landowners in the food industry will lose while labor and landowners in the cloth industry will gain. (Food industry contracts in demand, in cloth industry there are gains because it is the good that is intensive... if *short run*, then one of the longer 2 options)

Which of the following is true of mercantilism? Mercantilists believed that: a. free trade is beneficial for the trading nations. b. under free trade each of the trading countries benefit equally. c. a nation does not benefit directly from its exports. d. national well-being was based on national holdings of gold and silver.

d. national well-being was based on national holdings of gold and silver.

Assume that a country produces two goods, food and clothing, and that the country's production possibility curve is bowed out, i.e., concave to origin. As the country produces more food the opportunity cost of food in terms of forgone clothing a. increases. b. decreases .c. remains unchanged. d. first increases, then decreases.

increases.

A rough measure of the degree of economic interdependence of a nation is given by: a. the size of the nation's population. b. the percentage of its population to its GDP. c. the percentage of a nation's imports and exports to its GDP.

the percentage of a nations imports and exports to its GDP

International Monetary Fund

work w countries on financial issues

World Trade Organization

work with countries on trade issues