Econ Exam #1

4. According to Section 1.6 of the Salvatore text, what are some current international economic problems and challenges?

4. The Salvatore text lists and briefly describes "the Great Recession", trade protectionism in advanced economies, excessive fluctuations and misalignment of exchange rates, structural imbalances in advanced economies, insufficient restructuring in transition economies, deep poverty, and resource issues, including environmental degradation, climate change, and sustainable development.

4. In the H-O model, trade for a labor-rich nation will a) Increase the returns to labor and decrease the returns to capital. b) Decrease the returns to both labor and capital. c) Increase the returns to both labor and capital. d) Decrease the returns to labor and increase the returns to capital.

A

6. The models of trade developed in this chapter used differing output per unit of labor to explain trade. What might explain why output per unit of labor varies across nations?

6. The tools (physical capital) and talent (education and training) possessed by that labor.

6. Under what condition can trade occur if no nation has a comparative advantage in autarchy?

6. Trade can occur if no nation has a comparative advantage in autarchy if there are economies of scale.

6. a) Explain why primary goods can be expected to exhibit more price instability than manufactured goods. b) How could buffer stocks be used to reduce this instability?

6. a) Primary goods have both lower supply and demand price elasticities than other goods. When supply shifts, or when demand shifts, the excess supply or demand requires a larger price change to produce a new equilibrium. Visually, when the supply and demand curves are steep, a shift in either one will cause a larger price change than when the curves are flat. b) A buffer stock absorbs excess supply and demand so that the price does not change on the market. The export good should be added to its buffer stock when there is excess supply of the good. This will keep the price of the good from falling on world markets. When there is excess demand the good should be sold from the buffer stock in order to keep its price from increasing on world markets. This promotes stable prices through time, which can make planning easier at both the production level and at the national policy level.

7. a) According Case Study 8-3, how has globalization affected the growth of Real GDP of globalizing developing economies relative to non-globalizing developing economies over the three decades from 1980 to the present? b) How are globalizing and non-globalizing developing economies defined?

7. a) Globalizing developing economies have experienced significantly higher rates of growth in real GDP rates than nonglobalizing developing economies. b) Globalizing developing economies are defined as those with higher increases in the ratio of trade to GDP and greater reductions in tariff rates.

7. Suppose Japan, a capital rich nation relative to Mexico, attempts to negotiate a trade agreement promoting trade between Japan and Mexico. a) Which group in each nation, capital or labor, is likely to resist the agreement? b) Could the gainers possibly compensate the losers if the agreement were to pass?

7. a) Japan is most likely capital-rich relative to Mexico, so Japanese workers will resist trade with Mexico. In Mexico, owners of capital will resist trade with Japan. b) Yes, because there are gains from trade.

8. For which of the following products would you predict the greatest level of intra-industry trade, assuming there are increasing returns to scale? a) Common sand. b) Wheat. c) Children's toys. d) Rubber bands.

8. Children's toys. The other products have no or little differentiation. If there are economies of scale and little product differentiation, then one nation can produce at very low cost for other nations, but there will be no intra-industry trade. With the many varieties of children's toys, not one nation will be able to produce all varieties for itself and enjoy economies of scale.

9. a) What is outsourcing? b) How is outsourcing related to increasing returns to scale?

9. a) Outsourcing is the use of parts and labor from abroad in producing a domestic product. Salvatore (CaseStudy 4-3 on p. 95) provides the example of the production of Ford Fiestas using transmissions from France, clutches in Spain, and assembly in Germany. b) If there are increasing returns to scale, then the greater the level of production the lower the per-unit costs. With increasing returns to scale, it is cheaper for one nation to produce a large volume than for many countries to each produce a small volume. If France produces many transmissions it can do so more cheaply than Ford and other auto manufacturers to each produce their own.

1. In Figure 3.1, the opportunity cost of producing good X a) Increases as the production of X increases. b) Increases as the production of Y increases. c) Decreases as the production of Y increases. d) Remains constant as the production of good Y increases.

A

10. If a nation's opportunity cost of producing one unit of X is 1 unit of Y, and the world equilibrium price ratio is (PX/PY)=2, then the nation will a) Specialize in good X. b) Specialize in good Y. c) Export good Y. d) Import good X.

A

2. If the US is capital rich relative to Italy and construction equipment is capital intensive relative to olives, then a) Italy has a comparative advantage in olives. b) The US should produce its own olives. c) Italy should produce its own construction equipment. d) The US has a comparative advantage in olives.

A

3. If Nation 1 has an absolute advantage in one good and Nation 2 has an absolute advantage in a different good, then a) Comparative advantage will be the same as the absolute advantage. b) Neither nation will have a comparative advantage. c) Comparative advantage cannot be determined. d) Gains from trade cannot occur.

A

3. If a nation can produce three more units of X by producing one less unit of Y, then a) (PX/PY)=1/3 b) Y/X = 3/1 c) The opportunity cost of one unit of Y is one-third unit of X. d) The opportunity cost of one unit of X is three units of Y.

A

1. a) With Y on the vertical axis and X on the horizontal axis, draw a diagram that showing a country that is currently producing in autarky where its community indifference curve is steeper than its production possibility frontier. Label the production point as "A." b) What is the MRSY/x relative to the opportunity cost of X at point A in the graph you drew for part a). c) Based on your graph for part a), should the country produce more of good X or less of good X? d) At equilibrium, what is the relationship between the number of units the community will give up for X and the opportunity cost of X?

1. a) b) MRSY/X exceeds the opportunity cost of X. c) More X. d) They are equal. Any inequality means a reallocation will improve welfare

1. The output per laborer in the production of candles and incense for Thailand and Cambodia are given in the table below. Output per Laborer Thailand Cambodia Candles Incense 1 3 4 4 a) Which nation has the absolute advantage in each good? b) Which nation has the comparative advantage in each good? c) Assume that Thailand transfers 2 laborers to the product of its comparative advantage, and Cambodia transfers 1 laborer to the product of its comparative advantage. Calculate the changes in production for Thailand, Cambodia, and the net changes and record the changes in the table below. Changes in Production from Reallocating Two Units of Labor Thailand Cambodia Net Changes Change in Production of Candles Change in Production of Incense ______ ______ ______ ______ ______ ______ d) Will Thailand trade if 3 units of Incense can be traded for 1 or fewer units of Candles? e) Will Cambodia trade if 4 units of Candles can be traded for 4 or fewer units of Incense? f) Will Cambodia and Thailand trade if 6 units of Incense can be traded for 4 units of Candles? g) Based on your answers to parts (d), (e) and (f), summarize what the terms of trade must be in order for two nations to gain from trade. (This is an important questions and should be reviewed carefully.)

1. a) Cambodia has the absolute advantage in both goods. b) Cambodia has the comparative advantage in Candles and Thailand has the comparative advantage in Incense. c) Changes in Production from Reallocating Two Units of Labor Thailand Cambodia Net Changes Change in Production of Candles Change in Production of Incense __-2__ __+6__ __+4__ __-4__ __+2__ __+2__ d) Thailand has a comparative advantage in Incense, so Thailand will export Incense for Candles if the terms are favorable. Domestically Thailand can get 1 Candle for 3 units of Incense, so they will not trade if 3 units of Incense trade for 1 or fewer units of Candles. e) Cambodia has a comparative advantage in Candles, so Cambodia will export Candles for Incense if the terms are favorable. Domestically Cambodia can get 4 units of Incense for 4 units of Candles so they will not trade if 4 units of Candles trade for fewer than 4 units of Incense. f) Yes. For Thailand, 6 Incense for 4 Candles is better than 3 Incense for 1 Candle (6 Incense for 2 Candles). For Cambodia, 4 Candles for 6 Incense is better than 4 Candles for 4 Incense. g) In Thailand, C/I = 1/3, so Thailand will be willing to export Incense if the terms are greater than this, e.g., C/I = 2/3. In Cambodia C/I = 4/4, so Cambodia will be willing to export Candles if the terms are less than this, e.g., C/I = 4/5. Thus, Thailand and Cambodia will both willingly trade if the terms of trade lie in between the nations' opportunity costs.

1. Match the graphs in Figure 8.2 with the changes described below. Assume that good X is the capital intensive, good Y is labor intensive good, and there are constant returns to scale. a) A 10% increase in supply of capital. b) A 10% increase in the supply of labor. c) A 10% increase in both the supply of capital and labor. d) Technical progress in the production of Good X, but not Good Y. e) Technical progress at the same rate in the production of both Goods X and Y.

1. a) Graph (ii). b) Graph (iv). c) Graph (i). d) Graph (iii). e) Graph (i).

1. Suppose the US implements a trade policy that produces an increase in imports. a) What special-interest groups in the US will most likely gain from the increased imports? b) What special-interest groups in the US will most likely lose from the increased imports?

1. a) In the case of increased imports of consumer goods, consumers will gain. In the case of increased imports of inputs (raw materials, physical capital, etc.), firms that produce with the inputs will gain, as will the workers hired by these firms. b) Firms that produce products that compete with imports - import competing firms - and the workers hired by the import competing firms.

1. Textiles are labor intensive and Computers are capital intensive. a) Based on the ppfs in Figure 4.3, which nation is relatively capital abundant? b) Does the nation you chose in part a) necessarily have more capital?

1. a) Nation 2. The slope of the ppfs is the opportunity cost of computers. Because Nation 2's ppf is flatter at each production level of computers, Nation 2 has a comparative advantage in computers, so Nation 2 must be capital rich. b) Not necessarily. Based on comparative advantage the most we can say is (K/L)2>(K/L)1.

2. The table below gives the number of labor-hours required by two nations to produce one unit of each good indicated. Labor-hours Required Per Unit of Output Upland Overland Good A Good E 1 4 4 1 a) Which nation has the absolute advantage in each good? b) Which nation has the comparative advantage in each good?

2. First note that the numbers represent the labor-hours per unit of output. (Question 1 used units of output per laborer.) a) Upland has the absolute advantage in Good A because it can produce one unit with fewer hours. Overland has the absolute advantage in Good E. b) In this particular case the comparative advantage for each nation is the same as the absolute advantage.

2. a) Suppose in autarchy that Midland and Zeeland have the following price ratios for Chicken (C) and Noodles (N). Midland: PC/PN=4/1 Zeeland: PC/PN=1/2. b) What is the range of relative prices for which Zeeland willingly specializes in and exports Chicken? c) What is the range of relative prices for which Midland willingly specializes in and exports Noodles? d) What is the range or prices for which both a) and b) is true? e) Assume a relative price within the range given in d) and graphically show each of the following for Midland. i) Autarchy equilibrium. Label it A. ii) The production point after trade. Label it P. iii) The consumption point after trade. Label it C. iv) Exports. Show the distance. v) Imports. Show the distance. vi) Gains from trade.

2. a) Any PC/PN above ½, such as PC/PN = ¾, 1/1, 2/1, etc. b) Any PC/PN below 4, such as PC/PN = 3, 2,1/1, etc. c) Any PC/PN between ½ and 4. d)

2. a) How would each individual's standard of living be affected if each individual decided to be completely economically self-reliant? b) How would a nation's standard of living be affected if each nation decided to be completely economically self-reliant?

2. a) If each individual had to produce her own autos, clothes, coffee, etc. the individual's standard of living would undoubtedly be reduced. b) It would be compromised because nations would be limited to those goods produced domestically. The nation could not take advantage of goods produced more cheaply abroad nor have access to the rich assortment of goods available abroad.

2. For the changes described in question 1, explain the effect on total income and per capita incomes, assuming that the dependency ratio does not change.

2. a) If the stock of capital increases with no change in the labor force, then each labor will be able to produce more. Both total and per laborer income will increase, so per capita income will increase. b) With an increased labor force but no change in capital, the amount produced by the new laborers will be less than the previous laborers, so although production increases, the amount produced per laborer will fall. With a constant dependency ratio, per capita income will fall. c) If there are constant returns to scale, then total income increases and per capita income is unchanged. d) Total income increases, and with no change in the labor force, per worker and per capita income will increase. e) Same as d).

2. Use the ppf for Nation 1 in Figure 4.3 and community indifference curves to show the following. a) A likely equilibrium in autarchy. Label it A. b) A likely production point after trade. Label it P. c) A likely consumption point after trade. Label it C. d) Exports. Show the distance. e) Imports. Show the distance.

2. a) The diagram is drawn with Textiles as Nation 1's export good.

3. In answering Question 2, what did you implicitly assume about employment before and after trade?

3. Before trade the nation is producing on its ppf at point A, and after trade the nation is producing at point P. Both points are on the ppf so there is full employment before and after trade.

3. Is complete specialization more or less likely if production possibility frontiers exhibit increasing costs rather than constant costs?

3. Complete specialization is less likely with increasing costs. With constant opportunity costs, a nation's comparative advantage is maintained no matter what the level of production so as production of the good with the comparative advantage increases the advantage still exists. Gains continue as production increases until production is completely specialized. With increasing costs, specialization in a product increases the cost of production. As production of the good with the comparative advantage increases, the advantage will be lost. If the advantage is lost before complete specialization then specialization will be incomplete.

3. a) Name some goods or services that are traded internationally. b) Name some goods or services that are not traded internationally. c) What are some differences between goods and services that are traded and goods and services that are not traded?

3. a) Autos, wine, cheese, computers, and software. b) Land and personal services like haircuts. c) Goods that are not traded tend to have very high transportation costs. In order for trade to occur, price differences between nations must exceed the transportation costs.

3. The output per laborer per day in the production of steel and tin for Russia and China are given in the table below. Output per Labor-Day Russia China Steel Tin 10 5 3 6 a) What is the opportunity cost of producing Tin in Russia? b) What is the opportunity cost of producing Tin in China? c) Assume that Russia has 500 labor days available for producing Steel and/or Tin, and that China has 900 labor days available. Putting Steel on the vertical axis, draw the straight-line production possibility frontiers for both Russia and China. d) What is the slope of Russia's production possibility frontier, and what is the slope of China's production possibility frontier? e) How is the slope of a production possibility frontier related to the opportunity cost of the good on the horizontal axis? (See your answers to parts (a) and (b) of this question.) f) What does a straight-line production possibility frontier imply? g) Which country will specialize in and export Tin? h) What is a possible terms of trade at which both nations will be willing to trade? (See your answer to 1.g.) i) Plot a terms of trade line at which both nations will be willing to trade on your production possibility frontiers of part (c), starting the terms of trade line from a point of complete specialization for each nation. j) How does your diagram from part (i) demonstrate how nations gain from trade?

3. a) Each unit of Tin costs 2 units of Steel in Russia. b) Each unit of Tin costs ½ unit of Steel in China. c) d) The slope of Russia's ppf is S/T = 2. The slope of China's ppf is S/T = ½. e) The slope of a ppf is equal to the opportunity cost of the good on the horizontal axis. f) A linear ppf indicates a constant opportunity cost at all levels of production. g) China. h) Any terms of trade between the opportunity costs of Russian and China, so any S/T between 2 and ½. i) j) Each nation can trade along the terms of trade to a point outside its own ppf. Thus, with trade each nation can consume beyond its ability to produce in the absence of trade.

3. The price indices of exports and imports, and a quantity index of exports are contained in Table 8.1 below for various years for the country of Mauritius. Table 8.1 Year Export Price Index Import Price Index Export Quantity Index 1992 1993 1994 108.7 104.5 107.4 102.1 99.9 105.3 100.0 104.2 105.1 Source: Adapted from the IMF's, International Financial Statistics, April 1997. a) Calculate the commodity terms of trade of Mauritius for the years 1992-1994. b) Comment on the meaning of the changes in the commodity terms of trade from 1992-1994. c) Calculate the income terms of trade for the years 1992-1994. Set the 1992 income terms of trade equal to 100. d) Comment on the meaning of the changes in the income terms of trade from 1992-1994.

3. a) The commodity terms of trade is N = (PX/PM)100, so for 1992 the commodity terms of trade is N1992 = (108.7/102.1)100 = 106.46. Making the same substitutions for 1993 and 1994 produces: N1993 = (104.5/99.9)100 = 104.60, and N1994 = (107.4/105.3)100 = 101.99. b) There was deterioration in the commodity terms of trade for Mauritius from 1992-94. The price of exports relative to the price paid for imports fell, suggesting that Mauritius received less imports for each unit of exports. c) The income terms of trade are expressed as I = (PX/PM) QX. Substituting from the table in Question 3 produces I1992 = (108.7/102.1)100 = 106.46 I1993 = (104.5/99.9)104.2 = 109.00, and I1994 (104.5/99.9)105.1 = 109.94. If the 1992 income terms of trade is set to 100, and the 1993 and 1994 adjusted accordingly (dividing by 106.46 and multiplying the result by 100), then the income terms of trade index for those years will be I1992 = 100 I1993 = 102.39 I1994 = 103.27. d) Although the commodity terms of trade fell from 1992-94, the income terms of trade improved. The reduction in export prices relative to import prices was more than compensated for by an increase in the quantity exported.

4. a) A nation exports baseballs and imports baseball bats. Show this graphically using ppfs, community indifference curves, and relative price lines. Measure the number of baseballs on the vertical axis and the number of bats on the horizontal axis. b) Using your graph from a), demonstrate how the welfare of this nation is affected by a decrease in the international price of baseballs relative to baseball bats.

4. a) b) In the graph above an increase in the price of baseballs flattens the line along which trade can occur. The higher price of baseballs for a nation producing baseballs increases production from P to P', changes production from C to C', and makes the nation better off by the move from indifference curve I2 to I'2.

4. a) For which nation in Figure 4.3 is w/r higher before trade? b) How will trade affect w/r in Nation 2? c) Will laborers gain or lose in Nation 2? d) Will owners of capital gain or lose in Nation 2?

4. a) Nation 2 is capital rich so labor is relatively expensive. Nation 2 has the higher w/r. b) Nation 2's abundant factor is capital, so w/r will fall in Nation 2. c) Laborers will lose in capital-rich Nation 2. d) Owners of capital in capital-rich Nation 2 will gain.

4. Use the table of output per labor-day from Question 3. a) Fill in the table below, assuming that the wage rate in Russia, expressed in dollars, is $10 per day, and that the wage rate in China, expressed in dollars, is $6 per day. Price of Steel and China Russia China Price of Steel Price of Tin ___ ___ ___ ___ b) Based on your table values from part (a), does the nation with the lower wage always have the lower price? c) Other than wages, what determines prices? d) Assume now that the wage rate in Russia is $10 per day, as before, but the wage rate in China is $1. Could these be equilibrium wage rates?

4. a) Price of Steel and China Russia China Price of Steel Price of Tin _$1_ _$2_ _$2_ _$1_ b) No, China has the lower wage, but Russia has a lower price for Steel. c) The productivity of labor. d) No, because China would have lower prices in both goods at these wages. Trade would produce a higher demand for Chinese products and Chinese labor, causing an increase in Chinese wages.

4. a) What has been the long-run experience of countries that have pursued import-substitution industrialization? b) What's a possible justification for the view that export-oriented industrialization is a better development strategy than import-substitution industrialization?

4. a) The long-run experience has been negative. Although ISI may be useful in promoting employment and industrialization in the short run, the use of the policy in the long run creates the demand for additional imported inputs to support the industrial base. Additionally, the need for skilled labor becomes a constraint after the initial easy phases of ISI have been completed. b) ISI attempts to replace imported goods with domestic production. If the goods were initially imported, then other nations have the comparative advantage in these goods. Export-oriented growth relies on a nation's comparative advantage, and so makes better use of a nation's resources. Export-oriented growth is less likely to get bogged down by the necessity for imported inputs, and the necessary labor is available in the domestic market.

5. Comment on the following statement. "If the ppf shifts out and the terms of trade are unaffected, then a country is unambiguously better off because a higher community indifference curve can be reached."

5. It depends upon the cause of the shift of the ppf. If the shift is due to more labor with no change in other factors of production or technology, then diminishing returns will occur and production per laborer will decrease. If the shift is due to more capital with no change in other factors of production or technology, then the productivity per laborer will increase, so production per capita will increase.

5. Two nations have straight-line production possibility frontiers, but with different slopes. Explain or demonstrate why complete specialization maximizes the gains from trade.

5. The idea is illustrated for one nation in the diagram to the right. There is less than complete specialization at point G and complete specialization at point H. The terms of trade line from point H lies outside that from point G.

5. a) Why is product differentiation by itself incapable of explaining intra-industry trade? b) How does product differentiation combined with increasing returns to scale explain intra-industry trade?

5. a) If the only relevant aspect of intra-industry trade were product differentiation, then what is not explained is why nations simply do not produce all of the product variety demanded by its citizens. b) If there are economies of scale, then a nation cannot produce a small amount of all varieties of products at a low cost because the production of each product would be relatively small. It is efficient for each nation to produce a large quantity of one or a few varieties of products in order to exploit economies of scale, and then trade the products to other nations specializing in other differentiated products.

5. a) Could two nations beneficially trade crackers and cheese if they have identical preference maps for crackers and cheese? b) Could two nations beneficially trade crackers and cheese if they have identical production possibility frontiers for crackers and cheese? c) Could two nations beneficially trade crackers and cheese if they have both identical preference maps and ppfs for crackers and cheese?

5. a) Yes, if they have different ppfs b) Yes, if they have different preference maps. c) No, the autarky prices would be identical.

5. A nation's two factors are low-wage unskilled labor and high-wage skilled labor. The nation is rich in unskilled labor. As a result of trade a) Inequality will be reduced in the nation. b) Inequality will be increased in the nation. c) Inequality will be unaffected in the nation. d) The wages of both types of labor will increase.

A

6. Given a nation's ppf, an increase in the nation's terms of trade will a) Increase the degree of specialization. b) Reduce the nation's gains from trade. c) Make other nations better off. d) Make the nation worse off.

A

7. If world demand increases for a nation's export good then a) The commodity terms of trade will increase. b) The commodity terms of trade will be unchanged. c) The income terms of trade will decrease. d) The income terms of trade will be unchanged.

A

7. Which of the following is not a characteristic of a community's set of indifference curves for goods? a) They may intersect. b) They are downward sloping. c) The MRS changes as consumption changes. d) They indicate opportunity cost.

A

8. If there are increasing returns to scale then a) There will be higher levels of specialization. b) Increases in production will increase cost. c) It is better for a nation to produce all varieties of a product it demands. d) trade will be inter-industry trade.

A

9. The mercantilists' view on trade implies which of the following? a) Gains from trade in one nation mean a net loss to that nation's trading partners. b) All nations could simultaneously experience a gold inflow. c) Nations always gain from trade. d) Trade is a positive-sum game.

A

10. If two nations have the same opportunity costs for two goods, then it must be the case that a) Neither has an absolute advantage in either good. b) One nation will have a comparative advantage in one of the goods. c) Trade can occur at the right terms of trade. d) Neither nation has a comparative advantage in either good.

D

1. Imports will most likely a) Increase the cost of living. b) Increase competition for import-competing firms. c) Compromise the quality of domestic goods. d) Limit the variety of goods available to domestic consumers.

B

2. In Figure 3.1, the opportunity cost of producing good Y a) Increases as the production of X increases. b) Increases as the production of Y increases. c) Decreases as the production of Y increases. d) Remains constant as the production of good Y increases.

B

6. One reason why trade may promote development is that trade: a) Stabilizes export prices of developing nations. b) Promotes the spread of ideas. c) Has increased the net barter terms of trade. d) Has lowered the income terms of trade.

B

6. Which of the following statements is an example of the Leontief Paradox? a) A capital-rich nation exports capital-intensive products. b) A capital-rich nation imports capital-intensive products. c) A capital rich nation imports labor-intensive products. d) A labor-rich nation imports capital-intensive products.

B

7. The wage rate in Nation H is $4 per laborer and output per laborer in Nation H is 8 units of Cheese. The wage rate in Nation L is $1 per laborer and output per laborer in Nation L is 1 unit of Cheese. Which of the following must be true at these wage rates and productivity levels? a) Nation L will out-compete nation H in the production of Cheese. b) The price of Cheese in Nation H will be $0.50 and the price of Cheese in Nation L will be $1. c) The price of Cheese in Nation H will be $2 and the price of Cheese in Nation L will be $1. d) As a result of its lower wage rate, Nation L must have an absolute advantage in the production of Cheese.

B

8. Export-oriented industrialization is generally preferred to import-substitution industrialization because it a) Relies on an already existing domestic market. b) Relies on the nation's comparative advantage. c) Export prices are more volatile than import prices. d) There is more competition in the import sector.

B

9. Suppose China exports MP3 players and the US imports MP3 players. If US income increases and MP3 players are a normal good then based on supply and demand curves like those shown in Figure 3.4 a) The terms of trade will improve for the US. b) The terms of trade will improve for China. c) China will reduce its specialization in MP3 players. d) The quantity of MP3 players traded between China and the US will decrease.

B

10. In the Heckscher-Ohlin model a) Trade is inter-industry trade. b) Trade is in differentiated products. c) There are increasing returns to scale. d) There are increasing costs.

D

2. International trade refers to a) Foreign financial investment. b) Emigration and immigration. c) The exchange of foreign currency. d) Exports and imports of goods and services.

D

10. Which of the following could cause unstable export prices? a) High income elasticity of demand for exports. b) High price elasticity of supply and demand for exports. c) Low price elasticity of supply and demand for exports. d) Buffer stocks.

C

2. If Nation 1 has an absolute advantage in two goods relative to Nation 2, and the absolute advantage is not the same for both goods, then a) Nation 1 will have a comparative advantage in both goods. b) Nation 2 will have an absolute advantage in one good. c) Nation 1 will have a comparative advantage in only one good. d) Mutually beneficial trade cannot occur.

C

2. If the dependency ratio is unchanged, then growth in the labor force with no change in capital will a) Reduce production. b) Leave production unchanged. c) Reduce per capita production. d) Increase production per laborer.

C

3. If Nation 1 has a comparative advantage in good X and Nation 2 has a comparative advantage in good Y then a) (PX/PY)1 > (P X/PY)2 in autarchy. b) (PX/PY)1 = (P X/PY)2 in autarchy. c) (PX/PY)1 = (P X/PY)2 after trade. d) (PX/PY)1 > (P X/PY)2 after trade.

C

3. International organizations like the WTO, NAFTA and APEC a) Are part of the anti-globalization movement. b) Are opposed to increased international trade by nations. c) Promote freer trade between nations. d) Are exporters and importers of goods and services.

C

3. Which of the following will occur if export prices double, export quantities halve and import prices remain unchanged? a) The commodity terms of trade remain constant. b) The net barter terms of trade remain constant. c) The income terms of trade remain constant. d) The income terms of trade increase.

C

4. Which of the following best characterizes the effect of trade? a) The ppf of at least one nation must shift in. b) One nation can gain only if another loses. c) All nations can consume outside its ppf. d) Nations move to a preferred position on the ppf.

C

4. Which of the following is a possible cause of a decrease in a nation's commodity terms of trade? a) Low price elasticity of demand for the nation's export good. b) High price elasticity of supply for the nation's export good. c) Low income elasticity of demand for a nation's export good. d) Low income elasticity of demand for a nation's import good.

C

7. According to the H-O model a) A capital-rich nation exports labor-intensive products. b) A capital-rich nation imports capital-intensive products. c) A capital rich nation imports labor-intensive products. d) A labor-rich nation exports capital-intensive products.

C

8. If Egypt has wage rates so low that the prices of the goods it trades with Germany are lower than Germany's prices, then a) Germans will buy all of these goods from Egypt for the foreseeable future. b) Egyptians will buy all of these goods from Germany for the foreseeable future. c) Germany's prices will eventually fall relative to Egypt's and trade will occur. d) Germany's prices will eventually increase relative to Egypt's and trade will occur.

C

9. According to the factor-price equalization theorem, trade will equalize a) The returns to labor and capital within a nation. b) The wage rate among all skill levels of labor in a nation. c) The wage rate between identical occupations across nations. d) The prices of the same goods no matter where they are produced.

C

1. France is necessarily capital rich if: a) France has more capital than the US. b) France has less labor than the US. c) France has more capital and labor than the US. d) France has more capital and less labor than the US

D

1. If there are constant returns to scale and capital and labor both double, then production per laborer a) Will double. b) Will decrease. c) Will more than double. d) Will be unchanged.

D

1. The Mercantilists recommended trade policies intended to produce which of the following? a) Specialization according to absolute advantage. b) Specialization according to comparative advantage. c) An export deficit. d) A gold inflow.

D

4. According to Figure 1.2 of the text, world export growth from 2002-2008 has been a) Greater than average world import growth. b) Less than average world import growth. c) Less than average world GDP growth. d) Greater than world GDP growth.

D

4. If the opportunity cost of producing Computers is equal to 4 in Nation 1 and is equal to 2 in Nation 2, then it is necessarily true that a) Nation 1 has an absolute advantage in Computers. b) Nation 2 has an absolute advantage in Computers. c) Nation 1 has a comparative advantage in Computers d) Nation 2 has a comparative advantage in Computers.

D

5. According to Figure 1.3 of the text, imports of the US as a percentage of GDP: a) Is smaller in 2000 than in 1990. b) Increased between 2008 and 2009. c) Was unchanged throughout the 1980s. d) Exceeded exports of the US as a percentage of GDP since 1975.

D

5. If Nation 1 can produce twice as many Autos per laborer as Nation 2, and Nation 2 can produce one-half as many DVD players per laborer as Nation 1, then a) The opportunity cost of producing DVD players is lower in Nation 2. b) The opportunity cost of producing autos is higher in Nation 1. c) Nation 2 must have an absolute advantage in DVD players. d) Neither nation has a comparative advantage in DVD players.

D

5. Import-Substitution Industrialization a policy that promotes development by: a) Stabilizing export prices. b) Stabilizing import prices. c) Promoting labor force growth. d) Using import protection to promote domestic industry.

D

5. In an increasing-cost model a) The gains from trade are fully offset by higher costs. b) Lower levels of production have higher opportunity cost. c) Complete specialization is more likely than in a constant-cost model. d) The opportunity cost of either good will increase if its production increases.

D

6. In Nation 1 the opportunity cost of producing 1 unit of Soup is 4 units of Nuts. In Nation 2 the opportunity cost of producing 1 unit of Soup is 1 Nut. Nation 1 will be able to gain from trade with Nation 2 if the terms of trade are a) 6 Nuts for 1 Soup. b) 5 Nuts for 1 Soup. c) 4 Nuts for 1 Soup. d) 3 Nuts for 1 Soup.

D

8. If an exporting nation's domestic demand for the good it exports increases then based on supply and demand curves like those shown in Figure 3.4 a) Import demand increases. b) Import demand decreases. c) Export supply increases. d) Export supply decreases.

D

9. If the rate of growth of the capital stock exceeds the rate of growth of labor then a) Wages will fall. b) Capital-labor ratios will fall. c) The productivity of labor will fall. d) The amount produced per laborer will increase.

D