international trade practice questions for midterm PDF

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CHAPTER 3 PROBLEMS:

1) A country engaging in trade according to the principles of comparative advantage gains from trade because it A) is producing exports indirectly more efficiently than it could alternatively. B) is producing imports indirectly more efficiently than it could domestically. C) is producing exports using fewer labor units. D) is producing imports indirectly using fewer labor units. E) is producing exports while outsourcing services.

2) Given the information in the table above, if it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. 3) Given the information in the table above, if the Home economy suffered a meltdown, and the Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. 4) Given the information in the table above, if wages were to double in Home, then Home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) export widgets and import cloth. 5) Given the information in the table above A) neither country has a comparative advantage in cloth. B) Home has a comparative advantage in widgets. C) Foreign has a comparative advantage in widgets. D) Home has a comparative advantage in both cloth and widgets. E) neither country has a comparative advantage in widgets.

6) Given the information in the table above, Home's opportunity cost of cloth is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. 7) Given the information in the table above, Home's opportunity cost of widgets is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0.

8) Given the information in the table above, Foreign's opportunity cost of cloth is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0 9) Given the information in the table above, Foreign's opportunity cost of widgets is A) 0.5. B) 2.0. C) 6.0. D) 1.5. E) 3.0. 10) Given the information in the table above, if the world equilibrium price of widgets were 4 cloth, then A) both countries could benefit from trade with each other. B) neither country could benefit from trade with each other. C) each country will want to export the good in which it enjoys comparative advantage. D) neither country will want to export the good in which it enjoys comparative advantage. E) both countries will want to specialize in cloth. 11) Given the information in the table above, if the world equilibrium price of widgets were 40 cloths, then A) both countries could benefit from trade with each other. B) neither country could benefit from trade with each other. C) each country will want to export the good in which it enjoys comparative advantage. D) neither country will want to export the good in which it enjoys comparative advantage.

E) both countries will want to specialize in cloth. 12) A nation engaging in trade according to the Ricardian model will find its consumption bundle A) inside its production possibilities frontier. B) on its production possibilities frontier. C) outside its production possibilities frontier. D) inside its trade-partner's production possibilities frontier. E) on its trade-partner's production possibilities frontier. 13) If a very small country trades with a very large country according to the Ricardian model, then A) the small country will suffer a decrease in economic welfare. B) the large country will suffer a decrease in economic welfare. C) the small country only will enjoy gains from trade. D) the large country will enjoy gains from trade. E) both countries will enjoy equal gains from trade. 14) Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour. B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour. C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour. D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour. E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour. 15) If the United States' production possibility frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis, we know that A) the United States has no comparative advantage B) Germany has a comparative advantage in butter. C) the U.S. has a comparative advantage in butter. D) Germany has comparative advantages in both products. E) the U.S. has a comparative disadvantage in widgets. 16) The pauper labor theory, and the exploitation argument A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative advantage. B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance. C) are not relevant because the Ricardian model is based on the labor theory of value. D) are not relevant because the Ricardian model allows for different technologies in different countries. E) invalidate the Ricardian model. 17) The pauper labor theory, and the exploitation argument A) are theoretical weaknesses that limit the applicability of the Ricardian concept of comparative advantage.

B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance. C) are not relevant because the Ricardian model is based on the labor theory of value. D) are not relevant because the Ricardian model allows for different technologies in different countries. E) invalidate the Ricardian model. 18) Which of the following statements is TRUE? A) Free trade is beneficial only if your country is strong enough to stand up to foreign competition. B) Free trade is beneficial only if your competitor does not pay unreasonably low wages. C) Free trade is beneficial only if both countries have access to the same technology. D) Free trade is never beneficial for developing countries. E) Free trade can be beneficial to economic welfare of all countries involved.

19) Given the information in the table above. What is the opportunity cost of Cloth in terms of Widgets in Foreign? 20) Given the information in the table above. If these two countries trade these two goods in the context of the Ricardian model of comparative advantage, then what is the lower limit of the world equilibrium price of widgets? 21) Given the information in the table above. If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage, what is the lower limit for the price of cloth? 22) Given the information in the table above. What is the opportunity cost of cloth in terms of Widgets in Foreign? 23)You are given the information shown in the table about the production relationship between Wonderland and the rest of the world and use the standard Ricardian assumptions: Labor Hours per Labor Hours per Bottle of Wine Pound of Cheese Home 10 5 Foreign 6 2 Home has 40 million labor hours in total and the foreign has 30 million labor hours in total per year. a. Which country has absolute advantage in wine? In cheese? b. Which country has comparative advantage in wine? In cheese? c. Write out an equation for each country’s PPF

d. When trade is opened between home and the foreign, what is the pattern of trade If the world price ratio is 0.4 bottle of wine per pound of cheese (Be careful this is not Pw/Pc but Pc/Pw), what happens to production in each country? e. Describe the world relative supply (RS) curve for this example.

ANSWERS: 1)B 2)A 3)A 4)A 5)C 6)A 7)B 8)B 9)A 10)A 11)A 12)C 13)C 14)A 15)B 16)B 17B 18)E 19) One half a widget. 20) 1/2 Cloths. 21) One half a widget. 22) 2 widgets. 23)

Home Foreign*

Labor Requirement aLW aLC 10 5 6 2

Opportunity Costs PW/PC 2 3

PC/PW 1/2 1/3

Labor Endowment 40m 30m

a. Foreign has absolute advantage on producing both wine and cheese because its labor requirements are lower. b. Comparative advantage means lower opportunity costs. Therefore, home has comparative advantage in producing wine and foreign has comparative advantage in producing cheese. c. Linear equation for production frontier: Home: 10QW + 5QC = 40; Foreign: 6 QW + 2QC = 30 d. When the world price ratio is .4 bottle wine per pound of cheese, PC/PW = .4 and therefore, PW/PC = 2.5. In this case, the world price ratio is between these two country’s opportunity costs, therefore, home will specialize in producing wine (4m bottles of wine) and foreign will specialize in producing cheese (15m pounds of cheese). e. World relative supply (RS) curve is a step function like Fig: 3.3, slide 45, ch 4.

Cheese

CH 4 PROBLEMS

1) International trade can have important effects on the distribution of income because A) some resources are immobile in the short run. B) of government corruption. C) the more powerful country dictates the terms of trade. D) rich countries take advantage of poor countries. E) different countries use different currencies. 2) A factor of production that cannot be used outside of a particular sector of an economy is a(an) A) specific factor. B) mobile factor. C) variable factor. D) import-competing factor. E) export-competing factor. 3) In the specific factors model, a country's production possibility frontier is ________ because of ________. A) a straight line; diminishing marginal returns B) a curved line; diminishing marginal returns C) a straight line; constant marginal returns D) a curved line; constant marginal returns E) a curved line; a limited supply of labor 4) The slope of a country's production possibility frontier with cloth measured on the horizontal and food measured on the vertical axis in the specific factors model is equal to ________ and it ________ as more cloth is produced. A) -MPLC/MPLF; is constant B) -MPLF/MPLC; becomes flatter C) -MPLF/MPLC; is constant D) -MPLC/MPLF; becomes steeper E) -MPLF/MPLC; becomes steeper 5) Under perfect competition, the equilibrium price of labor used to produce cloth will be equal to A) the marginal product of labor in the production of cloth times the price of cloth. B) the average product of labor in the production of cloth times the price of cloth. C) the ratio of the marginal product of labor in the production of cloth to the marginal product of labor in the production of food times the ratio of the price of cloth. to the price of food. D) the slope of the production possibility frontier. E) the price of cloth divided by the marginal product of labor in the production of cloth. 6) In the specific factors model, which of the following will increase the quantity of labor used in food production?

A) a decrease in the price of labor B) an increase in the price of cloth relative to that of food C) an increase in the price of food relative to that of cloth D) an equal percentage decrease in the price of food and cloth E) an equal percentage increase in the price of food and cloth 7) In the specific factor model, the effect of an increase in the productivity of labor in the production of cloth will cause a(an) ________ in the quantity of labor used to produce cloth, a(an) ________ in the quantity of labor used to produce food and a(an) ________ in the wage rate. A) increase; decrease; increase B) decrease; increase; increase C) increase; decrease; decrease D) decrease; increase; no change E) increase; increase; no change 8) The slope of a country's production possibility frontier is equal to ________ and the optimal production point is located where the slope is equal to ________. Assume that output of good Y is measured on the vertical axis, output of good X is measured on the horizontal axis, MPL is the marginal product of labor with a subscript indicating which good, P is the price of a good, and w is the wage rate. A) -MPLY/w; -MPLF/w B) -PX/PY; -MPLY/MPLX; C) -PX/w; -PY/w D) -MPLY/MPLX; -PX/PY E) -MPLX/MPLY; -PX/PY 9) In the specific factors model, a 5% increase in the price of food accompanied by a 5% increase in the price of cloth will cause wages to ________, the production of cloth to ________, and the production of food to ________. A) increase by 5%; remain unchanged; remain unchanged B) increase by less then 5%; decrease; increase C) increase by more then 5%; increase; remain unchanged D) remain constant; increase; increase E) remain constant; decrease; decrease 10) In the specific factors model, a 0% increase in the price of food accompanied by a 5% increase in the price of cloth will cause wages to ________, the production of cloth to ________, and the production of food to ________. A) increase by 5%; remain unchanged; remain unchanged B) increase by less then 5%; increase; decrease C) increase by more then 5%; increase; remain unchanged D) remain constant; increase; increase E) remain constant; decrease; decrease

11) In the specific factors model, a 5% increase in the price of food accompanied by a 1% increase in the price of cloth will cause ________ in the welfare of labor, ________ in the welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed factor in the production of cloth. A) an ambiguous change; an increase; a decrease B) an ambiguous change; a decrease; an increase C) an ambiguous change; an ambiguous change; an ambiguous change D) a decrease; an ambiguous change; an ambiguous change E) an increase; a decrease; an increase

12) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If there is an increase in the wage rate, the new equilibrium is most likely to be A) point b. B) point d. C) point f. D) point h. E) point e.

13) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If the price of good A increases, the new equilibrium is most likely to be A) point h. B) point e. C) point f. D) point d E) point b. 14) Refer to the production possibility graph above. Assume that the economy is in equilibrium

at point e. If the price of good B increases, the new equilibrium is most likely to be A) point f. B) point d. C) point e. D) point h. E) point b. 15) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If the labor supply increases due to immigration, the new equilibrium is most likely to be A) point d. B) point f. C) point h. D) point e. E) point b. 16) Refer to the production possibility graph above. Assume that the economy is in equilibrium at point e. If a war reduces the country's capital stock by 40%, the new equilibrium is most likely to be A) point d. B) point h. C) point f. D) point b. E) point e. 17) In the specific factors model, the effects of trade on welfare are ________ for mobile factors, ________ for fixed factors used to produce the exported good, and ________ for fixed factors used to produce the imported good. A) ambiguous; positive; negative B) ambiguous; negative; positive C) positive; ambiguous; ambiguous D) negative; ambiguous; ambiguous E) positive; positive; positive 18) Those who will lose from free trade are ________ factors in sectors that produce goods that are ________. A) immobile; also imported B) mobile; also imported C) immobile; exported D) mobile; exported E) mobile; untraded 19) The effect of trade on specialized employees of exporting industries will be ________ jobs and ________ pay because they are relatively ________. A) more; lower; immobile B) fewer; lower; immobile

C) fewer; lower; mobile D) more; higher; immobile E) more; higher; mobile 20) Economists consider the effects of free trade on income distribution to be ________ important than the effects on overall welfare because ________. A) less; those who are harmed can be compensated by those who gain B) more; those who are harmed are not compensated by those who gain C) less; the effects on income distribution are minor and inconsequential D) more; the effects on income distribution are major and consequential E) less; the wealthy benefit and only the poor lose

ANSWERS CH 4 PROBLEMS:

1) A 2) A 3) B 4) E 5) A 6) C 7) A 8) D 9) A 10) B 11) A 12) E 13) D 14) A 15) C 16) C 17) A 18) A 19) D 20) A

CH 5 PROBLEMS:

1) In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would A) move the point of production along the production possibility curve. B) shift the production possibility curve outward, and increase the production of both goods. C) shift the production possibility curve outward and decrease the production of the laborintensive product. D) shift the production possibility curve outward and decrease the production of the capitalintensive product. E) shift the possibility curve outward and displace preexisting labor.

2) In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in A) tastes and preferences. B) military capabilities. C) the size of their economies. D) relative abundance of factors of production. E) labor productivities. 3) If a country produces good Y (measured on the vertical axis) and good X (measured on the horizontal axis), then the absolute value of the slope of its production possibility frontier is equal to A) the opportunity cost of good X. B) the price of good X divided by the price of good Y. C) the price of good Y divided by the price of good X. D) the opportunity cost of good Y. E) the cost of capital (assuming that good Y is capital intensive) divided by the cost of labor. 4) In the 2-factor, 2 good Heckscher-Ohlin model, the production possibility frontier is kinked when A) transportation costs are very high. B) the opportunity cost of production is constant. C) there are unemployed factor resources. D) a country does not engage in trade. E) there is no factor substitution in production. 5) The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike in the Ricardian model, it is likely that A) countries will not be fully specialized in one product. B) countries will benefit from free international trade. C) countries will consume outside their production possibility frontier.

D) comparative advantage will not determine the direction of trade. E) global production will decrease under trade. 6) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a country's ________ factor and will ________ the good that uses that factor intensively. A) benefit; scarce; export B) harm; abundant; import C) benefit; abundant; export D) benefit; scarce; import E) harm; scarce; export 7) Which of the following is an assertion of the Heckscher-Ohlin model? A) An increase in a country's labor supply will increase production of both the capital-intensive and the labor-intensive good. B) In the long-run, labor is mobile and capital is not. C) Factor price equalization will occur only if there is costless mobility of all factors across borders. D) Factor endowments determine the technology that is available to a country, which determines the good in which the country will have a comparative advantage. E) The wage-rental ratio determines the capital-labor ratio in a country's industries. 8) Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively labor abundant, then once trade begins A) wages should fall and rents should rise in H. B) wages and rents should rise in H. C) wages and rents should fall in H. D) wages should rise and rents should fall in H. E) rent will be unchanged but wages will rise in H. Assume that only two countries, A and B, exist.

9) Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory A) country A will export good S. B) country B will export good S. C) both countries will export good S. D) trade will not occur between these two countries. E) both countries will import good S