Econ 3110 Exam 1 Review
About what percentage of the world's population are immigrants?
3%
How many different theorems or results does the H-O Model include?
4
Leontief use a ratio of (Kx/Lx)/(Km/Lm) in his test. What did he find to be true about this ratio, based his empirical test?
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Leontief use a ratio of (Kx/Lx)/(Km/Lm) in his test. What did he expect to be true about this ratio, based on the H-O theorem?
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Which of the following correctly states the Heckscher-Ohlin Theorem?
A country has comparative advantage in the good or service that uses its relatively abundant factor relatively intensively.
What is an empirical test?
A test that uses data to determine if a theory is accurate.
In the short-run, who wins from free trade?
All owners of factors used in the export sector.
Why is comparative advantage better than absolute advantage in determining the direction of trade?
CA uses opportunity cost, but AA uses resource cost.
Which of the following is NOT a characteristic of community indifference curves?
CICs bend away from the origin.
In a PPF/CIC diagram, the slope of any line tells us the price of the y-axis good in terms of the x-axis good (i.e., Py-axis/Px-axis).
False
The winners and losers from trade in the short run depend on which factor they own.
False
Which of the following statements is true about specialization and trade?
Global production increases, each country can become better off, and each individual can become better off.
How did Leontief estimate factor intensities in the rest of the world?
He assumed the ROW I-O table was identical to the US I-O table.
Natural resources are a factor of production, but Leontief's test only allowed for two factors. How did Leontief categorize products that were natural resource intensive when he conducted his test?
He included them with capital intensive products.
How did Leontief categorize unskilled labor, skilled labor and human capital?
He treated them as identical.
Which types of goods trade consistently with the H-O theorem?
Homogeneous goods produced with constant returns to scale.
What does an I-O table show for a country?
How many units of each input are required to produce one unit of each output.
What is the main addition to trade theory from the H-O Model?
It allows for multiple factors of production.
What have researchers found about the Leontief Paradox since Leontief's original test?
It applies to many countries at many different points in time.
What was wrong with the way that Leontief categorized natural resources?
It made imports that were natural resource intensive appear to be capital intensive.
Which of the following is true about the autarky budget line?
It passes through the production point and shows all points that consumers could afford to consume. The (absolute value of the) slope tells us the opportunity cost of the x-axis good.
When one country has absolute advantage in both products, what is true for the other country?
It should specialize in producing the product in which its autarky price is lower than the other country's autarky price.
Who gains more from trade, the exporting country or the importing country?
It's impossible to tell without knowing the shapes of the demand and supply curves.
In a country with capital abundance (where labor is the other factor), which of the following is true?
K/L in this country is higher than K/L in the other country
In a country that is abundant in the factor "natural resources," which of the following goods are most likely to be the comparative advantage goods? Assume that the other factor is capital and that there are more than two goods, so the country could have CA in multiple goods.
Lumber and coal.
What was wrong with assuming that the US and the ROW used identical factor intensities in production?
Most capital was in the US, so the ROW couldn't use the same K/L for production.
Does the Leontief Paradox only apply to US trade in 1947?
No
If (K/L)country 1 > (K/L)product 1, what do you know?
Nothing, because these two ratios aren't comparable.
What must happen for the long run to be reached when a country moves from autarky to free trade.
Output prices change, production becomes more specialized, factors move between industries, and factor prices change.
When the world imposed a trade embargo against Iran, Iran went from free trade back to autarky. Assume that Iran has two factors of production, oil and labor, and that it is abundant in oil. What happened to factor owners in the short run following the embargo?
Owners of oil fields and oil workers became worse off.
Which of the following products does NOT exhibit US trade consistent with the H-O theorem.
Pharmaceuticals
If a country starts with free trade and then returns to autarky, what are some things that will happen in that country's import-competing sector?
Price rises and domestic production rises.
In the numerical example, compute China's autarky relative price of lollipops in terms of ice cream. Write your answer, rounded to two decimal places (if there are more than two decimals in the answer.
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =0.67
In the numerical example, compute Japan's autarky relative price of ice cream in terms of lollipops. Write your answer, rounded to two decimal places (if there are more than two decimals in the answer.
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =0.8
In the numerical example, compute Japan's autarky relative price of lollipops in terms of ice cream. Write your answer, rounded to two decimal places (if there are more than two decimals in the answer.
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =1.25
In the numerical example, compute China's autarky relative price of ice cream in terms of lollipops. Write your answer, rounded to two decimal places (if there are more than two decimals in the answer.
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =1.5
Which country should import ice cream?
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =China
Which country has absolute advantage in producing ice cream?
Product China Japan Lollipops 2 hrs 5 hrs Ice Cream 3 hrs 4 hrs =Japan
What do economists conclude from the continuing existence of the Leontief Paradox?
That additional theories or models are needed to explain the types of trade that H-O doesn't explain.
What did the US Department of Commerce conclude about US steel and aluminum, allowing President Trump to impose 25% and 10% tariffs on their imports, respectively?
That imports threatened US national security.
In autarky equilibrium, what is true about the PPF, CIC and budget line?
The PPF and CIC are tangent, but the budget line is tangent only to the PPF. The PPF and CIC are tangent, but the budget line is tangent only to the CIC. The budget line connects the equilibrium production and consumption points.
What did Leontief assume about factor abundance for his test?
The US was K-abundant and the ROW was L-abundant.
How could one state the Leontief Paradox?
The US was capital abundant but was a net exporter of labor-intensive products.
What did Kx mean in Leontief's test?
The amount of capital embodied in US exports.
The change in producer surplus in a graph is
The area between the old and new prices from the quantity axis to the supply curve.
What does the height of the supply curve indicate?
The cost to the producer of producing that unit.
Which of the following convinced some British voters to vote to exit the European Union (EU)? (Check all that apply.)
The desire to decrease immigration from other EU countries. The ability to have more control over its own policies. To save money by no longer contributing to the EU's budget.
What is consumer surplus?
The difference between the value of consumption and the cost of consumption for the consumer.
In the PPF/CIC diagram, suppose that you have a steeper line and a flatter line. Which indicates a higher price of the y-axis good?
The flatter line
In the graph showing the effects of moving from autarky to free trade, which changes in the graph also appear in the foreign country's graph?
The free trade price and the quantity of goods traded.
If you have two goods, X and Y, and Y is unskilled labor (UL) intensive, which of the following is true. Assume the second factor to be human capital (HC). Canvas doesn't seem to want to allow subscripts here, so please interpret (UL)X as UL with an X subscript, etc.
(UL/HC)X < (UL/HC)Y
If the autarky price of shirts is $20 in Argentina and $10 in Vietnam, which of the following is a reasonable free trade price for shirts between the two countries? Assume that Argentina has a larger economy than Vietnam.
$17
The rule of law doesn't apply in many international economic analyses because of national sovereignty.
True
The winners and losers from trade in the short run depend on which industry employs their factors of production.
True
If the autarky price of cars in the US is $30,000 and the autarky price of cars in Brazil is $35,000 (both measure in US dollars), which country has comparative advantage in producing cars? Assume both countries are large and both produce the identical cars.
US
What did Leontief's I-O table allow him to estimate so that he could test the H-O theorem?
US factor intensity for each output industry.
Suppose that the countries of Lilliput and Brobdingnag trade miniature boats and yachts. Lilliput has comparative advantage in miniature boats. In the short run, which factor owners in Lilliput benefit from trade? Assume that the factors are capital and labor.
Workers and capital owners in the miniature boat industry.
When the world imposed a trade embargo against Iran, Iran went from free trade back to autarky. Assume that Iran has two factors of production, oil and labor, and that it is abundant in oil. What happened to factor owners in the long run following the embargo?
Workers in all sectors benefited, because labor is the scarce factor in Iran.
According to Adam Smith, having absolute disadvantage in soybeans means that a country should:
import soybeans
What is the symbol for the price of capital?
r
What is the symbol for the real wage if labor and capital are the two factors of production?
w/r
Suppose that Australia and New Zealand trade lamb and crocodile meat. Lamb is intensive in pasture land, which New Zealand has in abundance. Crocodile meat requires swamp land, which Australia has in abundance. Labor is used to produce each product, in addition to the relevant type of land, but in each case, the land is the intensive factor. Which factor owners benefit from trade in the long run?
Australian swamp land owners and New Zealand pasture land owners.
How did the fact that trade wasn't free affect Leontief's test?
Because countries usually protect their comparative disadvantage industries, exports and imports were too low .
What does economic analysis say about the effects of immigrants on immigrants themselves and on the country (the "host" country) to which they immigrated?
Both immigrants and the host country gain.
In 2018, President Trump identified China's undervalued yuan as a major problem for US exporters. Which of the following is true about the value of the yuan in that year?
By April 2018, most economists agreed that the yuan was approximately correctly valued.
Which of the following is an important reason that China's government resisted pressure to increase the value of its currency (the yuan) in the early 2000s?
China's government did not want to be viewed as responding to foreign pressure.
What is the effect of imports on the welfare of the economy?
Consumers and the country are better off, but producers are worse off.
Which of the following do changes in exchange rates affect?
Costs of exporting. Investments. Costs of importing. Resource mobility.
What is on the axes in a PPF/CIC graph?
Each axis has the quantity of a different good or service.
Which of the following does NOT cause a difference in analyzing international economic issues?
Economic principles.
To what does the term "human capital" refer?
Educated workers
Why is the PPF normally curved away from the origin?
Increasing costs of production.
The US has 11% of the world's cropland, despite occupying a much smaller fraction of the earth's land. What does this imply about the ROW's endowment of cropland?
ROW is scarce in cropland.
What does the change in net welfare tell you?
The net effects of a price change on consumer and producer well-being.
Which lines/curves are the boundaries of consumer surplus in the supply-demand graph?
The price axis The equilibrium price The demand curve
If the price of a natural resource intensive product increases by 5% due to free trade, what happens to the price of natural resources in that country in the long run?
The price of natural resources rises.
How does importing affect the quantity supplied and quantity demanded, when compared to the autarky equilibrium.
The quantity supplied decreases and the quantity demanded increases.
Why can't a point inside the PPF be the equilibrium consumption point in autarky?
The society can reach a higher indifference curve by consuming more of both goods at another point that lies on the PPF.
In the PPF/CIC diagram, suppose that you have a steeper line and a flatter line. Which indicates a higher price of the x-axis good?
The steeper line.
Why do the CICs bend toward the origin?
To remain indifferent, consumers consume more of one good to make up for consuming less of the other good.
According to economic analysis, which of the following is true about international trade?
Trade is a postive-sum activity, meaning that all countries generally gain from trade.
Some groups win and some groups lose from free trade, but because trade increases global production, it would be possible to make even the losers better off with free trade.
True
What is the key two-word term in Adam Smith's theory of trade?
absolute advantage