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Name:_________________________ NETID:________________ UIN:______________

UNIVERSITY OF ILLINOIS - Department of Economics Economics 420, Sections A1/A2 Instructor: Luiz Felipe Amaral

Form A

Midterm 1, Spring 2020 March 4, 2020

Instructions: • You have 2 hours to take this exam. • Your exam should have 40 multiple choice questions. • Please complete your scantron before starting the exam. If you are from section A1 (meets 11:00 AM) mark 101 in the section part of the scantron card. If you are from section A2 (meets 12:30 PM) mark 102 in the section part of the scantron card. • Be sure to fill in your name, net-id and UIN. Sign and turn in your exam copy. • Good luck!

1. Which of the following is not used in a gravity equation to explain trade flows between countries i and j? a. The GDP of country i. b. The GDP of country j. c. The presence of a free-trade agreement between country i and country j. d. The distance between country i and country j.

2. World trade is nowadays is mostly comprised of: a. Agricultural goods. b. Fuels and mining. c. Manufactures. d. Services.

3. Which of the following is true regarding the evolution of exports from developing countries in the past century? a. It has been focused on agricultural goods only. b. It has shifted from manufactured to agricultural goods. c. It has been focused on manufactured goods only. d. It has shifted from agricultural to manufactured goods.

4. Consider the following statements: (i) Service outsourcing has increased recently due to improved telecommunications and information technology. (ii) Service outsourcing is a significant part of world trade today because most jobs are tradable. Which is true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

Information for questions 5 – 9 Consider the trade of cell phone cases between South Korea and Japan. In South Korea, the demand for cases is DK = 180 − 5P, and the supply of cases is SK = −60 + 3P. In Japan, the demand for cases is DJ = 300 − 4P, and the supply of cases is SJ = −100 + 4P. 5. What are the autarky prices? Which country will export phone cases? a. $30 in South Korea, $50 in Japan, South Korea exports. b. $60 in South Korea, $25 in Japan, South Korea exports. c. $30 in South Korea, $50 in Japan, Japan exports. d. $60 in South Korea, $25 in Japan, Japan exports.

6. If there is international trade with no barriers, what will the world price be? a. $106.67. b. $80.00. c. $40.00. d. $20.00.

7. If there is international trade with no barriers, what will the quantity traded be? a. 613.36. b. 400.00. c. 240.00. d. 80.00.

8. In this context, what are the welfare effects of international trade? a. Both countries are better off with trade, but in Japan consumers gain while producers lose. b. Both countries are better off with trade, but in Japan producers gain while consumers lose. c. Both countries are better off with trade, but in South Korea consumers gain while producers lose. d. Only South Korea is better off with trade, where producers gain and consumers lose.

9. Suppose the importing country adds a $6 tariff on case imports. What will be the new prices of cases? How many cases will be traded? a. $49 in the importing country, $43 in the exporting country, 56 cases will be traded. b. $49 in the importing country, $43 in the exporting country, 104 cases will be traded. c. $43 in the importing country, $37 in the exporting country, 56 cases will be traded. d. $43 in the importing country, $37 in the exporting country, 104 cases will be traded.

10. The figure above depicts the introduction of a $15 import tariff in the market for textbooks. What is the welfare effect of this tariff? a. $2000 gain. b. $2000 loss. c. $3250 gain. d. $3250 loss.

11. Consider the following statements: (i) The overall (i.e., for the entire country) welfare effects of a tariff and the import quota equivalent to it are the same. Their distribution, however, may be different. (ii) In the absence of market failures, an import tariff is not advisable for a large country because there are no terms of trade effects. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

12. The figure above depicts the introduction of an export subsidy in a market. What is the welfare effect of this subsidy? a. Area a + b + c. b. Area a + b + c + d. c. Area – b – c – d – e – f – g. d. Area – b – d – e – f – g.

Information for questions 13 and 14 The figure below depicts the PPF, an isovalue line, and an indifference curve for a country that can produce goods A and B and trade them in the international market.

13. When there is international trade, what is the price of good A relative to good B (i.e. PA/PB)? a. 0.11. b. 0.80. c. 1.25. d. 9.00.

14. What are this country’s imports and exports? a. Imports: 270 of good B, Exports: 30 of good A. b. Imports: 270 of good A, Exports: 30 of good B. c. Imports: 30 of good B, Exports: 270 of good A. d. Imports: 30 of good A, Exports: 270 of good B.

15. Consider the following statements: (i) In general equilibrium models of trade, an increase in the relative price of the good imported causes a country to benefit more from international trade. (ii) In general equilibrium models of trade, the relative supply for the whole world is a weighted average of the relative supplies of each country. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

16. Suppose that in Argentina, it takes 1 acre of land to produce one bushel of corn and 3 acres of land to produce one bushel of wheat; while in the U.S. it takes 4 acres of land to produce one bushel of corn and 14 acres of land to produce one bushel of wheat. Which of the following is true? a. Argentina has an absolute advantage in both corn and wheat, but a comparative advantage in corn. b. Argentina has an absolute advantage in both corn and wheat, but a comparative advantage in wheat. c. Argentina has an absolute advantage only in corn, but a comparative advantage in corn. d. The U.S. has an absolute advantage in both corn and wheat, but a comparative advantage in corn.

Information for questions 17 – 19 Suppose there are two countries in the world, Home and Foreign, that use one factor of production, labor (L), to produce two goods, A and B. At Home the production of one unit of A requires 10 labor-hours and the production of one unit of B requires 5 labor hours. At Foreign the production of one unit of A requires 30 labor-hours and the production of one unit of B requires 20 labor hours. Finally, suppose that Home has an endowment of 30,000 labor-hours and that Foreign has an endowment of 150,000 labor-hours. The market for good A relative to good B is described by the figure below:

17. What are, respectively, the numbers denoted by XX and YY in the graph? a. 0.50 and 0.67. b. 0.50 and 1.50. c. 2.00 and 0.67. d. 2.00 and 1.50.

18. What is the number denoted by ZZ in the graph? a. 0.83. b. 1.20. c. 1.25. d. 2.50.

19. In the equilibrium with international trade depicted: a. Home produces both goods and exports A. b. Home produces both goods and exports B. c. Home produces and exports B, while Foreign produces and exports A. d. Foreign produces both goods and exports A.

20. Which of the following are evidence in favor of the Ricardian model of trade? (i) Higher relative productivity between the US and Britain is positively correlated to the ratio of US and British exports. (ii) Chinese output in apparel is high relative to Germany in comparison to Chinese output in all manufacturing. a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

21. Imagine a world with two countries, France and Spain, one factor of production, labor, and five goods, labeled A to E. France’s relative productivity advantages are, in order, from A to E: 8, 6, 1.5, 0.75, and 0.5. If the wage rate in France is $40 per hour and the wage rate in Spain is $30 per hour, which goods will France produce? a. A. b. A and B. c. A, B, and C. d. A, B, C, and D.

22. Consider an economy that produces cars and faucets using capital and labor. Factors are substitutable and exhibit diminishing marginal productivities. The figure above depicts two same-valued isoquant curves, one for the car sector (CC) and one for the faucet sector (FF), as well as an isocost line. Which of the following is true? a. Faucet production is labor intensive and car production is capital intensive. b. Faucet production is labor intensive and car production is labor intensive. c. Faucet production is capital intensive and car production is capital intensive. d. Faucet production is capital intensive and car production is labor intensive.

23. Imagine an economy with two goods, two factors, factor substitutability and diminishing marginal productivities. If there is an increase in the endowment of one of the factors of production, what happens? (i) The economy’s PPF expands at the same proportion in all directions. (ii) Given constant output prices, the economy will produce more of the good whose production is intensive in the factor whose endowment expanded, and less of the other good. a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

24. Consider international trade in a Heckscher-Ohlin context. There are two goods, A and B, two factors of production, capital (K) and labor (L), and two countries, Home and Foreign. Assume the production of good B is labor intensive. If Home’s factor endowments are L = 50,000 and K = 20,000 and Foreign’s factor endowments are L* = 30,000 and K* = 15,000 , what will the pattern of trade be? a. There is not enough information to answer this question. b. Home will export good A and Foreign will export good B. c. Home will export good B and Foreign will export good A. d. Home will export both goods.

25. Consider the Heckcscher-Ohlin model, if a capital-abundant country starts to trade, what are the welfare effects? a. Trade will benefit both workers and capital owners. b. Trade will benefit capital owners and harm workers. c. Trade will benefit workers and harm capital owners. d. Trade will hurt both workers and capital owners.

26. Suppose that a particular country is endowed with 15% of the labor of the world and 7% of the capital of the world. If it’s GDP is $235,000 and the world GDP is $2,350,000, what will be this country’s factor content of trade from a Heckscher-Ohlin-Vanek perspective? a. Its exports will embody both labor and capital. b. Its exports will embody labor and its imports will embody capital. c. Its exports will capital labor and its imports will embody labor. d. Its imports will embody both labor and capital.

27. Which of the following is evidence in favor of the Heckscher-Ohlin model? a. The Case of missing trade. b. Developing countries’ exports shifting towards more skill-intense industries. c. Factor-contents of trade predict less than 1/3 of net exports. d. Leontief’s Paradox.

28. The figure above depicts international trade when there are external economies of scale. The world demand is denoted by DW. Suppose that the production of a good is concentrated in one country, whose average cost curve is denoted by AC. Suppose then, that a new country joins world market. Which of the following is true? a. In Context A production will remain concentrated in the original country and the world price will not change, whereas in Context B production will shift to the new country and the world price will fall. b. In Context B production will remain concentrated in the original country and the world price will not change, whereas in Context A production will shift to the new country and the world price will fall. c. In both Contexts A and B production will remain concentrated in the original country and the world price will not change. d. In both Contexts A and B production will shift to the new country and the world price will fall.

29. Which of the following is seen under international trade with external economies, but not under international trade in the standard partial equilibrium model? a. Output increases in the exporting country and decreases in the importing country. b. Price decreases in the importing country and increases in the exporting country. c. Output decreases in the exporting country and increases in the importing country. d. Price increases in the importing country and decreases in the exporting country.

30. Suppose that the production of a good exhibits external economies of scale. In particular, assume the total cost of producing a quantity Q is given by C(Q) = [80/(Q + 4)]Q +4Q. What is the average cost when 16 units are produced and what is the minimum price that a firm must face to start producing this good, respectively? a. $4 and $4. b. $8 and $4. c. $4 and $24. d. $8 and $24.

31. Consider a model with internal economies of scale. Assuming that all firms are identical, facing the same marginal costs, in equilibrium, what is associated with a move from autarky to free trade? a. A smaller market size, a higher price, a higher average cost, and a decrease in the number of firms. b. A larger market size, a higher price, a higher average cost, and a decrease in the number of firms. c. A larger market size, a smaller price, a smaller average cost, and an increase in the number of firms. d. A larger market size, a smaller price, a smaller average cost, and a decrease in the number of firms.

32. Consider the following statements regarding trade with internal economies of scale: (i) In a symmetric equilibrium, a lower average cost implies that firms produce more when there is trade. Therefore, number of firms increases by a smaller proportion then the market size. (ii) In a symmetric equilibrium, international trade, then, benefits firms that stay on the market, and harms those that exit the market. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

33. Consider the following statements regarding trade with internal economies of scale: (i) An important feature of international that these models explain but other ones usually don’t is the presence of intra-industry trade: countries simultaneously importing and exporting the same type of goods. (ii) Consumers in these models benefit from international trade only because they face smaller prices and consume more. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

34. Consider a model with internal economies of scale. Assume that firms are heterogeneous, facing different marginal costs. In particular, consider firm 1 with a marginal cost of $15 and firm 2 with a marginal cost of $3. Which of the following is true? a. Firm 1 has a larger operating profit, sells more, and is more likely to expand if there is international trade. b. Firm 2 has a larger operating profit, sells more, and is more likely to expand if there is international trade. c. Firm 1 has a larger operating profit, sells more, and is more likely to contract if there is international trade. d. Firm 2 has a larger operating profit, sells less, and is more likely to expand if there is international trade.

35. Which of the following are political arguments supporting free trade? a. Free trade maximizes welfare for small economies, and even if free trade is not welfaremaximizing, any policy different than it may be subverted by the political process. b. Free trade maximizes welfare for small economies, and free trade limits rent-seeking activities. c. Free trade limits rent-seeking activities since it eliminates rents, and even if free trade is not welfare-maximizing, any policy different than it may be subverted by the political process. d. Free trade limits rent-seeking activities since it eliminates rents, and the gains from free trade go beyond that due to economies of scale, innovation incentives due to higher competition and the expansion of exporting firms.

36. Suppose a small country adds a $10 tariff on the imports of a good. This tariff brings a welfare loss of $20,000 to this country due to production and consumption distortions. It also decreases imports and increases the domestic supply of this good from 150 to 200 units. If the production of this good is associated with a marginal social benefit given by MSB(Q) = 1000 – 4Q, should this country impose this tariff? a. No, since the social benefit does not exceed the distortion loss. b. Yes, since the social benefit exceeds the distortion loss. c. No, since a small country should never impose a tariff. d. There is not enough information to answer.

37. Which of the following is not an advancement from the transition from the GATT to the WTO? a. The use of preferential trading agreements. b. The creation of a dispute settlement procedure. c. The move toward agreements and regulations for trade in services as well as in goods. d. The international application of international property rights.

38. Which of the following is not a cost associated with import substitution industrialization?? a. Import substitution aggravated income inequality issues. b. Fiscal costs associated with tariffs. c. Protectionist policies led to highly distorted incentives. d. Import substitution led to production at small, unprofitable scales.

39. Consider the following statements regarding sophisticated arguments for an active trade policy: (i) The benefits of the spillovers associated with high-technology sectors are easy to identify and target. (ii) In the presence of imperfect competition, there are excess profits that may be greater than the cost of a potential export subsidy to obtain them, making the subsidy a welfare-improving policy. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii).

40. Consider the following statements regarding international trade and environmental issues: (i) According to the environmental Kuznets curve, if a very poor country starts to trade, it is likely that this will benefit the environment. (ii) Homogeneous environmental regulations across countries will not help to eliminate pollution havens. Which are true? a. Neither. b. Only(i). c. Only (ii). d. Both (i) and (ii)....