Test 1 from HW Chapters 1-8

The GATT was

an international treaty governing trade.

External economies of scale

are more likely to be associated with a perfectly competitive industry.

For trade to take​ place, a country must face a world relative price that is

different from the relative price that would prevail in the absence of trade.

A country has a comparative advantage in producing a good if

its opportunity cost of producing that good is lower than elsewhere.

In the accompanying diagram the curves labeled SB and CC​ show, for soybeans and cigars​ respectively, how the​ land-labor ratio chosen for each​ good's production varies with the​ wage-rental (w/r) ratio. Using the line drawing​ tool, show​, for an arbitrary​ wage-rental (w/r)​ ratio, how the​ land-labor ratio varies across the two industries. Label this line​ 'w/r'. Carefully follow the instructions above and only draw the required object. From the intersection points of the CC and SB curves with the​ (w/r) line it can be deduced that cigars are the _______ good.

labor-intensive

The diagram to the right depicts a​ country's production possibilities​ frontier, labeled TT^1. Assume that cigars are​ labor-intensive and sugar is​ land-intensive. Output is at point​ 1, where the slope of the production possibilities frontier equals the negative of the relative price of​ cigars, -Pc/Ps. Suppose that one​ (and only​ one) of the​ economy's two resources increases by an amount such that the land​-intensive ​good's maximum output increases by 125​% ​(i.e., by a factor of 2.25​), while the labor​-intensive ​good's maximum output increases by just 20​%. Given these divergent​ increases, it has to be the case that the resource that increased was _____.

land

The following table contains information for the hypothetical United​ Colonies, a country known to be very​ capital-abundant. It might be said that the data conflicts with the​ factor-proportions theory since the U.C. has exports that are ____ ​capital-intensive than its imports. A similar contradiction was actually detected for the​ post-WWII United States by​ Russian-born economist Wassily Leontief​ (1906-1999) in a landmark 1953 study. One possible explanation for the apparent​ "paradox" for the United States​ (as well as for the hypothetical United Colonies shown​ above) is that

less while the country is abundant in physical​ capital, it is even more abundant in human capital.

When an economy is open to​ trade, the relative price of a good is determined by the

relative supply and demand for the world.

Within each country that opens itself to international​ trade,

some factor owners​ gain, but other factor owners lose.

Over the past forty years the composition of​ developing-country exports has

undergone a dramatic shift from primary products to manufactures.

Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant​ (primarily, Southeast Asia and the ​Caribbean)—but those firms do not integrate with their suppliers there. On the other​ hand, firms in many​ capital-intensive industries choose to integrate with their suppliers. What could be some differences between the​ labor-intensive apparel and footwear industries on the one hand and​ capital-intensive industries on the other hand that would explain these​ choices? A multinational may prefer to

use a foreign affiliate if it has a proprietary technology that it is concerned about​ losing, which is more likely to be the case in​ capital-intensive industries.

In claiming that​ "size matters," the gravity model asserts that there is a strong empirical relationship between the size of a​ country's economy and the

volume of its imports and exports.

In each sector of a specific factors​ economy, profit-maximizing employers will demand labor up to the point where

the marginal product of labor times the price of the product equals the wage rate.

Using the appropriate drawing tool​, shade in the region that represents​ 'Rents' given a real wage of ​$20. Carefully follow the instructions above and only draw the required object. At this real wage of ​$20​, what is the total wage bill​ (total payment to​ labor)? ​$____. ​(Enter your response rounded to the nearest​ dollar.)

$1200

Use the following expression for the gravity model and the​ table's hypothetical data to answer the questions​ below: Tij = 0.001 x ((Yi x Yj)/Dij) Country GDP Distance from Alada: Distance from: Belam Alada $25,000 ----- 50km Belam $5,000 50km ----- Canson $______ 250km 200km What is the predicted volume of trade between Alada and​ Belam? If Canson has the same trading volume with Alada as does​ Belam, Canson's GDP must be

$2,500 $25,000

Whether an economy engages in trade or remains​ closed, it will always be true that the value of its consumption must equal the value of its production. Suppose that an economy produces manufactured goods​ (M) and food​ (F). This requirement is indicated by the​ expression: (Pm x Dm) + (Pf x Df) = (Pm x Qm) + (Pf x Qf) Pm=price of manufactured goods Pf=price of food Dm=domestic consumption of manufactured goods Df=domestic consumption of food Qm=domestic production of manufactured goods Qf=domestic production of food Assuming this country engages in trade and ends up importing​ food, which of the following expressions reveals (Df-Qf), its imports of​ food?

(Pm/Pf) x (Qm-Dm)

Classify each of the following transactions as belonging primarily to the sphere of international trade analysis​ (T) or international monetary analysis​ (M). ​(Enter T for Trade or M for​ Monetary.)

*Foreigners purchase US dollars - Monetary *The US imports crude oil from the Middle East - Trade *The US imposes tariffs on foreign steel - Trade *The Chinese government purchases US treasury bonds - Monetary *The Chinese currency is seen as being undervalued - Monetary

In our discussion of labor market​ pooling, we stressed the advantages of having two firms in the same​ location: If one firm is expanding while the other is​ contracting, it's to the advantage of both workers and firms that they be able to draw on a single labor pool. But it might happen that both firms want to expand or contract at the same time. Does this constitute an argument against geographical​ concentration? To answer this​ question, imagine that there are two companies that both use the same kind of specialized​ labor, say, two film studios that make use of experts in computer animation. Suppose that there are 400 workers with this special skill. Now compare two different​ scenarios: In scenario​ 1, both firms and all 400 workers are in the same​ city, and each firm is able to hire 200 workers. In scenario​ 2, the two​ firms, each with 200 ​workers, are in two different cities. Now suppose that both firms are contracting, decreasing their demand for labor down to 190 each. In the first​ scenario, each firm will face a local labor In the second​ scenario, each firm will face a local labor ​Thus, locating next to each other ______ disadvantages over locating far apart when both firms are contracting.

1st scenario - surplus of 10 workers. 2nd scenario - surplus of 10 workers. Thus, locating next to each other does not present any....

Assume the U.S. currently grows 2.32.3 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 200,000 laptop computers.​ Therefore, the opportunity cost of those 2.32.3 million tons of fruit is ______ computers. ​(Enter your response as an​ integer.) Suppose that South America could have instead produced those 2.32.3 million tons of fruit at an opportunity cost of​ 150,000 laptops. Because of the difference in opportunity costs between the two​ regions, it can be shown that trade gives the possibility of

200,000 computers a mutually beneficial rearrangement of world production.

In Home and Foreign there are two factors of​ production, land and​ labor, used to produce only one good. The land supply in each country and the technology of production are exactly the same. The marginal product of labor in each country depends on employment as shown in the table to the right. ​Initially, there are 11 workers employed in​ Home, but only 3 workers in Foreign. Find the effect of free movement of labor from Home to Foreign on​ employment, production, real​ wages, and the income of landowners in each country. In​ equilibrium, there will be ___ workers in Home and ___ workers in Foreign. World output will increase from ___ units to ___ units. The real wage in Home will ____ and the real wage in Foreign will _____. ​Landowners' income in Home will _____ and​ landowners' income in Foreign will increase.

7 workers in Home and 7 workers in Foreign increase from 222 units to 238 unites Home will increase and the real wage in Foreign will decrease Home will decrease and landowners' income in Foreign will increase

The sources of modern trade are largely rooted in

country differences in human and​ human-created resources

A century​ ago, most British imports came from relatively distant​ locations: North​ America, Latin​ America, and Asia. ​ Today, most British imports come from other European countries. How does this fit in with the changing types of goods that make up world​ trade?

A century ago trade was mostly in commodities that were not produced in Europe.​ Today, 61 percent of trade is in manufactured​ goods, and as the gravity model​ predicts, Britain trades with the other large European economies.

From the list​ below, choose two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of the above​ examples, "learning-by-doing" is important to the dynamic increasing returns in the industry.

Biotechnology and Aircraft Design Draw a curved inward line from a higher unit cost to a high cumulative output - downward

Canada and Australia are​ (mainly) English-speaking countries with populations that are not too different in size​ (Canada's is 60 percent​ larger). But Canadian trade is twice as​ large, relative to​ GDP, as​ Australia's. Why should this be the​ case?

Canada is close to a major economy AND Transportation costs for imports and exports are higher in Australia because the distance goods must travel.

One use to which a gravity model can be put is as an assessment tool of the effectiveness of a trade agreement. The figures above summarize data for a group of hypothetical countries. According to the figure on the​ left, trade prior to any agreement among the countries is ________ with predictions from the gravity model. Suppose that countries D and B reach a trade pact that substantially lowers trade impediments between them. According to the figure on the​ right, the agreement appears to have been

Consistent Effective

Suppose that GDP for each country in the table to the right doubled. Complete the following table Values of Exports ($ trillion) To: A B C D A -- 3.2 0.8 0.8 B 3.2 -- 0.8 0.8 C 0.8 0.8 -- 0.2 D 0.8 0.8 0.2 -- Does this mean that if the GDP of every country in the world​ doubled, world trade would​ quadruple? No.

Country /%Share of World Spending / GDP ($ trillion) A - 40 - 4 B - 40 - 4 C - 10 - 1 D - 10 - 1 Values of Exports ($ trillion) To: A B C D A -- 1.6 0.4 0.4 B 1.6 -- 0.4 0.4 C 0.4 0.4 -- 0.1 D 0.4 0.4 0.1 --

Suppose that the resource base in Country X can produce either 100 units of alpha or 300 units of beta.​ Similarly, suppose that Country​ Y's resource base is capable of producing 100 units of alpha or 200 betas.​ Clearly, the opportunity cost of 100 alphas is lower in Based on this​ result, it would be best for Country X to concentrate on good Complete the following table to reveal the changes in production if country X stops producing alphas while country Y shifts resources out of its beta industry to concentrate on alphas.

Country Y beta Hypothetical changes in Production -----units of alpha / units of beta country X -100 +300 country Y +100 -200 total 0 +100

The quantity of direct foreign investment by the United States into Mexico has increased dramatically during the last decade. How would you expect this increased quantity of direct foreign investment to affect migration flows from Mexico to the United​ States, all else being​ equal?

Direct foreign investment has increased the amount of capital per worker in Mexico. This will increase the marginal product of labor and increase the real​ wage, which should slow the flow of labor from Mexico.

Suppose a specific factors economy produces two​ goods: X and Y. Given that the economy is open to​ trade, and assuming that D is​ consumption, Q is​ production, and P is​ price, the budget constraint can be defined as

Dx-Qx = (Py/Px)*(Qy-Dy)

Consider the figure to the​ right, in which two countries​ (country A and country​ B) that can produce a good are subject to​ forward-falling supply curves. In this​ case, the two countries have the same​ costs, so that their supply curves are identical. What would you expect to be the pattern of international specialization and​ trade? What would determine who produces the​ good? What are the benefits of international trade in this​ case? Do they accrue only to the country that gets the​ industry?

If one country starts out as a producer of a​ good, then all production will occur in that particular country and it will export to the rest of the world. Likely historical accident or chance would determine who produces the good. Consumers in both countries are better off because of lower prices.

International trade based on scale economies is likely to be associated with

None of the above: the law of diminishing returns. Ricardian comparative advantage. comparative advantages associated with​ Heckscher-Ohlin factor-proportions. absolute advantages due to resource abundance.

Recently, computer programmers in developing countries such as India have begun doing work formerly done in the United States. This shift has undoubtedly led to substantial pay cuts for some programmers in the United States. Answer the following two​ questions: How is this possible when the wages of skilled labor are rising in the United States as a​ whole? Which of the following arguments would trade economists make against seeing these wage cuts as a reason to block outsourcing of computer​ programming?

In the short​ run, programmers with specific skills that compete with Indian workers may face wage​ cuts, while, in the long​ run, programming in general becomes more​ efficient, which can increase wages for others in the industry. All of the above: It is possible for those who gain from outsourcing to compensate those who lose. Allowing programming to be done more cheaply expands the production possibilities frontier of the​ US, making the entire country better off on average. The income distribution effects from outsourcing are not specific to international trade.

The table to the right gives the employment share of four industries within the three regions of a country. ​Which, if​ any, of these industries would you classify as​ tradable?

Industries A and B

All Hondas produced in the United States come from plants in​ Ohio, Indiana, or Alabama.

Internal economies of scale

All airframes for​ Airbus, Europe's only producer of large​ aircraft, are assembled in​ Toulouse, France.

Internal economies of scale

Why do internal economies of scale lead to imperfectly competitive​ industries?

Large firms have cost advantages over small firms.

The United​ States' imports from 1945 through 1970 were more​ capital-intensive than its exports. One would have expected that the United States would have imported more​ labor-intensive goods and exported​ capital-intensive goods during this period. This phenomenon that occurred in the United States is known as the During the time period​ 1945-1970 the U.S. exported more

Leontief paradox. ​technologically-intensive goods.

The international debt crisis of early 1982 was precipitated when​ _____ could not pay its international debts.

Mexico

The figure to the right summarizes 2006 data​ (Source: CIA World​ Factbook) for the seven Central American economies and their trade with the United States. Legend B ​- Belize H ​- Honduras CR ​- Costa Rica N ​- Nicaragua ES ​- El Salvador P ​- Panama G ​- Guatemala Based on this​ figure, anomalies in trade appear most evident for

Panama and Guatemala. (On the diagram, Panama and Guatemala are the outliers)

Which of the following is true regarding the expansion in multinational production and​ outsourcing?

Relocating production to take advantage of cost differences leads to overall gains from trade.

Over the last few​ decades, East Asian economies have increased their share of world GDP.​ Similarly, intra-East Asian tradelong dash—that ​is, trade among East Asian nationslong dash—has grown as a share of world trade. More than​ that, East Asian countries do an increasing share of their trade with each other. Using the gravity​ model, explain why East Asian countries do an increasing share of their trade with each other.

Since the GDP of East Asian countries has​ grown, the product of any two East Asian​ countries' GDP is now larger. And as the gravity model​ predicts, the trade volume between them has grown.

What is a​ "forward-falling supply​ curve"?

The supply curve of a perfectly competitive industry with external economies.

Although trade creates gains for some and losses for​ others, 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

The U.S. labor movement—which mostly represents​ blue-collar workers rather than professionals and highly educated workers—has traditionally favored limits on imports from​ less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union​ members? How does the answer depend on the model of​ trade?

Using the Ricardian​ model, this policy would not be rational.​ However, considering the​ Heckscher-Ohlin model, which specifically addresses income​ distribution, unskilled​ labor, the scarce​ resource, loses from trade.

In the United States where land is​ cheap, the ratio of land to labor used in cattle raising is higher than that of land used in wheat growing. But in more crowded​ countries, where land is expensive and labor is​ cheap, it is common to raise cows by using less land and more labor than Americans use to grow wheat. Can we still say that raising cattle is​ land-intensive compared with farming​ wheat? Why or why​ not?

Yes. As long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country.

Recall the model with firm performance differences in a single integrated market discussed in the chapter. Now assume that a new technology becomes available. Any firm can adopt the new​ technology, but its use requires an additional​ fixed-cost investment. The benefit of the new technology is that it reduces a​ firm's marginal cost of production by a given amount. a. Could it be profit maximizing for some firms to adopt the new technology but not profit maximizing for other firms to adopt that same​ technology? Which firms would choose to adopt the new​ technology? How would they be different from the firms that choose not to adopt​ it? Assuming that if a firm invests in the​ technology, it will face a fixed cost T​, but face a marginal cost cT which is lower than its marginal cost c without the​ technology, b. Now assume that there are also trade costs. In the new equilibrium with both trade costs and technology​ adoption, firms decide whether to export and also whether to adopt the new technology. Would exporting firms be more or less likely to adopt the new technology relative to​ nonexporters? Why? A firm that exports faces a higher marginal cost than one that does not​ export, and will therefore be ___ likely to use this new technology.

a firm with low marginal costs will need a higher level of output to justify the technology than a firm with high marginal costs. b. higher .... more

Suppose that fixed costs for a firm in the automobile industry​ (start-up costs of​ factories, capital​ equipment, and so​ on) are​ $5 billion and that variable costs are equal to​ $17,000 per finished automobile. Because more firms increase competition in the​ market, the market price falls as more firms enter an automobile​ market, or specifically P=17,000+(150/n)​, where n represents the number of firms in a market. Assume that the initial size of the U.S. and the European automobile markets are 300 million and 533 million​ people, respectively. a. Calculate the equilibrium number of firms in the U.S. and European automobile markets without trade. b. What is the equilibrium price of automobiles in the United States and Europe if the automobile industry is closed to foreign​ trade? c. Now suppose that the United States decides on free trade in automobiles with Europe. The trade agreement with the Europeans adds 533 million consumers to the automobile​ market, in addition to the 300 million in the United States. How many automobile firms will there be in the United States and in Europe​ combined? What will be the new equilibrium price of​ automobiles?

a. In the U.S., there will be 3 firms. In Europe, there will be 4. b. The equilibrium price in the U.S. is $17050. The equilibrium price in Europe is $17037.5. c. The combined number of firms will be 5. The equilibrium price will be $17030. d. Prices fall in part (c) relative to part (b) because there are more firms in the combined market than in each of the individual markets. Consumers are better off with trade not only because of lower prices but because they now have more variety to choose from.

Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. a. Using the line drawing​ tool, draw​ Home's production possibility frontier. Label the curve PPF. b. What is the opportunity cost of apples in terms of​ bananas? c. In the absence of​ trade, what would the price of apples in terms of bananas​ be? ____ Why?___

a. start at 600 bananas, draw diagonally to the right to 400 apples b. 1.5 bananas c. 1.5 bananas per​ apple; without​ trade, the relative prices of the goods are equal to their relative unit labor requirements.

Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​ (with labor and​ land). Initially, both countries have the same supply of labor ​(250 units​ each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a. Show how the decrease in the supply of capital for Home affects its production possibility frontier b. Given the decreasein the supply of capital for​ Home, the relative supply of Home​ (defined as Q1​/Q2​) is further to the _____ than the relative supply for Foreign. c. If those two economies open up to​ trade, what will be the pattern of trade​ (i.e., which country exports which​ good)? If both countries open to​ trade, Home will export ______ and Foreign will export _____. d. Describe how opening up to trade affects all three factors​ (labor, capital,​ land) in both countries. Owners of

a. start at the same 250, move line to the left on x axis - label ppf 1 b. left c. good 2. good 1. d. land in Home and owners of capital in Foreign will benefit from​ trade, while owners of capital in Home and owners of land in Foreign will be hurt

This exercise applies the basic Ricardian model of one factor​ (labor) and two goods to the national economy of Home. Assume the​ following: aLS = number of labor hours needed to produce a unit of steel in​ Home; aLC​= number of labor hours needed to produce a unit of calico in​ Home; PS​=the price per ton of steel​; PC​=the price per bolt of calico Which of the following represents the opportunity cost of calico​? In the absence of international​ trade, Home will have to produce both calico and steel for itself. ​ However, it will do so only if

aLC/aLS All of the above are correct: PC/aLC=PS/aLS PC/PS=aLC/aLS Workers are indifferent as to where (Calico or Steel) they work

The figure to the right shows curves representing the average cost of hockey pucks produced in Canada ​(ACc​) and the Slovak Republic ​(ACsr​) as well as the Slovak demand ​(Dsr​) and the world demand ​(Dworld​) for hockey pucks. Assuming that Canada's historical association with hockey led it to first manufacture hockey pucks​, this figure indicates that the Slovak Republic will import pucks from Canada rather than produce pucks themselves since Slovak producers can initially produce pucks If no trade in hockey pucks were allowed and the Slovak Republic were forced to be​ self-sufficient, then

at cost C0, which exceeds Canada's price P1 Slovak producers and players would both benefit

Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. There is now also another​ country, Foreign, with a labor force​ (L) of 800. ​Foreign's unit labor requirement in apple production (aLA) is​ 5, while in banana production (bLB) it is 1. a. Derive the equation for​ Foreign's production possibility frontier​ (assume the quantity of bananas is the dependent ​variable)​: Qb=(800/1) - (5/1) x Qa b. Which of the 4 diagrams represents the world relative supply curve given the above​ information?

b. Choice C (1.5 to 0.5 on x) (1.5 up to 5) (5 over to 1 on x)

According to your​ figure, newly-emerging producers in Beta will

be able to enter the market even though they lack Alpha's experience. (b/c the price is lower for Beta than Alpha)

Despite major​ gains, Chinese manufacturing workers have much lower productivity than their U.S. counterparts. Chinese service workers are relatively more​ productive, but most services​ aren't tradable. So which matters for Chinese wages--—manufacturing or service​ productivity? For Chinese​ wages,

both sectors matter because Chinese wages are a function of productivity and prices in all sectors.

In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (Pc/Ps) and the​ wage-rental ratio​ (w/r). From the slope of this​ curve, it can be determined that

cigars are​ labor-intensive while soybeans are​ capital-intensive.

A century ago each​ country's exports were shaped largely by

climate and natural resources.

Most Scotch whiskey comes from Scotland.

comparative advantage

Much of the​ world's best wine comes from France.

comparative advantage

Half of the​ world's large jet aircraft are assembled in Seattle.

economies of scale

Most of the​ world's aluminum is smelted in Norway or Canada.

economies of scale

Most semiconductors are manufactured in either the United States or Japan.

economies of scale

We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods​ (apples and​ bananas), and that each country has only one factor of​ production, labor. The graph to the right shows the world relative supply and relative demand curves. As in the two country​ case, the flat sections of the RS curve are countries with different unit labor requirement ratios (aLA/aLB). Referring to the​ graph, countries to the left of the equilibrium relative price would ______ apples to the countries to the right of the intersection.

export

Suppose the United Colonies​ (a hypothetical​ country) happens to be the​ world's most​ capital-abundant country. According to the​ factor-proportions (aka​ Heckscher-Ohlin) model, the U.C. would be expected to The following table contains information for the United Colonies for a recent year. Compute the​ capital-labor ratio for​ U.C.'s imports and exports and record the values in the​ table's boxes. ​(Enter your responses as​ integers.) Factor Content of U.C. Exports and Imports for 2006 Capital per billion dollars (Imports = $2800. Exports=$2700) Labor (person years) per billion dollars (Imports=14. Exports=18) Capital-labor ration (dollars per worker) (Imports = 200. Exports=150) Are the​ table's results consistent with the​ Heckscher-Ohlin model's​ prediction?

export​ capital-intensive goods and import​ labor-intensive goods. No.

A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina.

external economies of scale

Cranbury, New​ Jersey, is the artificial flavor capital of the United States.

external economies of scale

External economies of scale occur when average costs

fall as the industry grows larger but rise as the representative firm grows larger.

​Cost-benefit analysis of international trade

focuses attention on conflicts of interest within countries.

The coordination of international macroeconomic policies among sovereign nations

has only recently been advocated by economists.

Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant​ (primarily, Southeast Asia and the ​Caribbean)—but those firms do not integrate with their suppliers there. On the other​ hand, firms in many​ capital-intensive industries choose to integrate with their suppliers. What would these choices imply for the extent of ​intra-firm trade across​ industries? That​ is, in what industries would a greater proportion of trade occur within​ firms? ​Intra-firm trade will be

higher in industries with a high degree of vertical FDI.

The graph to the right depicts a specific factors economy that produces two​ goods: cloth and food. Assuming that the country is open to​ trade, at the lower relative​ price, (Pc/Pf)^1​, the economy

imports cloth and exports food

Consider the response of firms in a world with two identical countries​ (Home and​ Foreign). Assume that a firm must incur an additional cost t for each unit of output that it sells to customers across the border. Consider the decisions of firms 1 and 2​ (with marginal costs c1 and c2​) in the figures below. Firm 1 can profitably operate

in both the domestic and the export markets

Since World War II​ (the early​ 1950s), the proportion of most​ countries' production being used in some other country

increased

Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of

international trade analysis.

The figure to the right shows​ Home's monopolistically competitive market for computers​ which, initially, has 9 firms. According to the relationship shown in the​ graph, product price​ (PP) and market size are ____ related. The inverse relationship between market size and product price occurs​ because:

inversely an increase in market size allows each firm to produce more and thus have a lower average cost. The resulting economic profit entices new firms to​ enter, putting downward pressure on price.

In the context of the​ "2 by 2 by​ 2" idealized​ factor-proportions model, assume the following facts about the​ world: In each country​ (Home and​ Foreign) coal is the​ labor-intensive good; Home is the​ labor-abundant country. From these few​ facts, it can be asserted that before trade According to the​ model, the establishment of trade between Home and Foreign will ultimately bring

in​ Home, workers earn​ less, land earns​ more, and the relative price of coal is lower than in Foreign. an equalization of both the relative prices of goods and factor prices.

The degree of specialization predicted by the basic Ricardian model

is much more extreme than is observed in the real world.

In the current​ Post-Industrial economy, international trade in services​ (including banking and financial​ services)

is relatively small

An important insight of international trade theory is that when countries exchange goods and services one with the​ other, it

is usually beneficial to both countries.

International capital markets

link the capital markets of individual countries AND have grown significantly since the 1960s.

The diagram to the right shows the Home​ economy's pretrade equilibrium at point X. If this economy opens itself to​ trade, its consumption point _______ its production point. Now suppose that trade commences between Home and the rest of the world​ and, as a​ result, the relative price of coal in Home rises. Click on the diagram anywhere to activate the relative price selector and use it to increase the price to 1.2 units of sugar​ (per unit of​ coal). Which part of​ Home's budget constraint would represent choices in which​ Home's residents are unambiguously better off compared to their pretrade​ equilibrium?

may deviate from The portion inside the shaded region.

The figure to the right illustrates the causes and effects of international labor mobility between two​ countries, Home and Foreign​ (*). The horizontal axis represents the total world labor force. The workers employed in Home are measured from the​ left, the workers employed in Foreign from the right. The left vertical axis shows the marginal product of labor in​ Home; the right vertical axis shows the marginal product of labor in Foreign. Suppose the initial allocation of labor has L^3 workers in Home and ​0*L^3 workers in Foreign. Given this initial​ allocation, labor can be expected to From the perspective of the world​ economy, this migration of labor is desirable since

migrate from Foreign to Home total world output rises by DAE.

The claim that trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other countries is shown by the Ricardian model to

miss the point because it fails to consider the​ alternative, which would be even lower wages.

In the figure to the right the curve labeled PP​ shows, for a​ "typical" monopolistically competitive​ market, the relationship between product price and the number of firms. This curve is negatively sloped because

more firms give rise to more intense​ competition, and hence a lower price.

In the real​ world, the dividing line between trade and monetary issues is

neither simple nor​ clear-cut.

Internal economies of scale

occur when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.

External economies of scale

occur when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm.

In​ 1986, the price of oil on world markets dropped sharply. Since the United States is an​ oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and​ Louisiana, 1986 was a year of economic decline.​ Why? In Texas and​ Louisiana, 1986 was a year of economic decline because in these two​ states,

oil production was reduced.

Since the end of World War​ II, the view within the advanced democracies concerning the amount of trade has

recently been questioned by a largely political movement composed of traditional protectionists and new ideologues.

It is fairly common for an industrial cluster to break up and for production to move to locations with lower wages when the technology of the industry is no longer rapidly improving—when it is no longer essential to have the absolutely most modern​ machinery, when the need for highly skilled workers has​ declined, and when being at the cutting edge of innovation conveys only a small advantage. Explain this tendency of industrial clusters to break up in terms of the theory of external economies. As technological change and innovation slows in an​ industry,

specialized​ suppliers, labor market​ pooling, and knowledge​ spillovers, which are the reasons clusters are more efficient than individual​ firms, become less​ important; thus, firms will seek out low cost production locations and the cluster will breakdown.

A product is produced in a monopolistically competitive industry with economies of scale. If this industry exists in two​ countries, and these two countries engage in trade one with the​ other, then we would expect

that this trade will lead to greater product differentiation.

The figure to the right shows curves representing the average cost of hockey pucks produced in Canada ​(ACc​) and the Slovak Republic ​(ACsr) as well as the world demand​ (D) for hockey pucks. It is assumed that the world demand for pucks can be satisfied entirely by either country. According to this​ figure, economic efficiency considerations would ideally have hockey puck production located in Suppose, however, that hockey puck production is first established in Canada​, where the game of hockey is said to have originated. In this case Canada's producers will effectively block the entry of new Slovak producers because

the Slovak Republic their prevailing price is below the average cost for a Slovak ​start-up firm.

Assume a specific factors economy produces two​ goods, cloth and​ food, and that when representing this economy​ graphically, cloth is on the​ x-axis and food is on the​ y-axis. For a trading​ economy,

the budget constraint is tangent to the production possibility frontier at the chosen production point.

According to the gravity​ model, a characteristic that tends to affect the probability of trade existing between any two countries is

the distance between them.

Assume a specific factors economy produces two​ goods, cloth and​ food, and that when representing the output of this economy​ graphically, cloth is on the​ x-axis and food is on the​ y-axis. When the price of cloth increases by 33​% and the price of food does not change does not change​,

the wage rate rises by less than the increase in the price of cloth