Name:_______________

Spring 2008, 160A Midterm1 Professor Farshid

Mojaver

There are 40 MC questions worth 60 points. Please mark the best answer in your scantron.

1.Why do larger countries tend to have lower ratios of international trade to GDP than smaller
countries?
A) Larger countries tend to have more trade between states or provinces within their borders
than smaller countries.
B) Larger countries tend to have higher tariffs than smaller countries.
C) Larger countries tend to trade with other larger countries.
D) Larger countries tend to have larger trade deficits than smaller countries.

2.In trade, if due to technology a nation can produce a good (such as Germany in the production of
snowboards) with fewest resources, it is known as:
A) an absolute advantage. C) a comparative advantage.
B) a technology advantage. D) a resource advantage.

3.The focus of the Ricardian model is on:

A) how countries' resource bases explain international trade.
B) how countries' different technologies explain international trade.
C) how transportation costs explain international trade.
D) how different languages and cultures explain international trade.

4.According to the Ricardian principle of comparative advantage, international trade increases a

nation's total output because:
A) The nation's resources are used where they are most productive.
B) The output of the nation's trading partner declines.
C) The nation can produce to the exterior of its production possibilities frontier.
D) The nation is able to increase its consumption.

5.Whenever a nation has a lower opportunity cost of producing any good or service in relative
terms, that nation is said to have:
A) an absolute advantage.
B) a comparative advantage.
C) low labor costs.
D) better technology to produce that good or service.

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Use the following to answer questions 6-7:

Table: Output in the United States and China

6.(Table: Output in the U.S. and China) Which statement is correct?

A) The United States has an absolute advantage in both apparel and wheat and a comparative
advantage in wheat.
B) China has an absolute advantage in both apparel and wheat and a comparative advantage in
apparel.
C) The United States has an absolute advantage in both apparel and wheat and a comparative
advantage in neither apparel nor wheat.
D) China has an absolute disadvantage in both apparel and wheat and a comparative advantage
in apparel.

7.(Table: Output in the U.S. and China) Which product will the United States export to China?
A) wheat B) apparel C) both wheat and apparel D) neither wheat nor apparel

8.Compared with constant cost production, if production occurs under increasing cost conditions, it
is more likely that countries will:
A) completely specialize. C) not engage in international trade.
B) incompletely specialize. D) trade with one another.

9.Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is
2/5 and MPLc/MPLb for China is 1, then Germany and China have a comparative advantage in:
A) cloth and beer, respectively. B) beer and cloth, respectively. C) beer. D) cloth.

10.With other things unchanged, a rise in the average price of imports or a fall in the average price
of exports will:
A) improve the terms of trade.
B) worsen the terms of trade.
C) expand the production possibilities frontier.
D) contract the production possibilities frontier.

11.When there are diminishing marginal returns to factors of production, the PPF is:
A) a negatively sloped straight line. C) caved in toward the origin.
B) bowed out from the origin. D) a positively sloped straight line.

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Use the following to answer questions 12-15:

Table: Production and Prices in Two Industries

12.According to the information provided in the table, the wage rate in the agriculture sector is:
A) $50. B) $15. C) $30. D) $10.

13.According to the information provided in the table, the wage rate in the manufacturing sector is:
A) $50. B) $10. C) $100. D) $30.

14.Using the information from the table, we can expect the following to happen in the economy:
A) Labor will migrate from the agriculture to the manufacturing sector.
B) Labor will migrate from the manufacturing to the agriculture sector.
C) The marginal product of labor in the agriculture sector will increase.
D) The marginal product of labor in the manufacturing sector will decrease.

15.According to the information provided in the table, if the price of the agriculture good decreases
to $5, then:
A) Wages in the manufacturing sector will decrease.
B) The wage rate in the agriculture sector will be $25.
C) The marginal product of both sectors will decline.
D) We should import more agriculture goods.

16.Workers displaced due to trade:

A) have had larger losses in manufacturing compared with services.
B) have had larger losses among older workers than younger workers.
C) are likely to find replacement jobs within 3 years (in an economy like US).
D) have experienced all of these answer choices.

17.The Trade Adjustment Assistance program is:

A) an unemployment insurance program regardless of the reason for job loss.
B) an unemployment insurance program that pays for job loss due to import competition.
C) a subsidy program for the producers.
D) a tax on importers of foreign goods.

18.Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-
factors model has a comparative advantage in manufacturing output. What will happen to the
return (rental) on land when trade occurs?
A) It will fall. B) It will rise. C) It will not change. D) It will first fall, then rise.

19.The specific-factors model concludes that if there is an increase in relative price (and an
expansion) in one industry, the factor specific to that industry will:
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 A) experience an increase in its marginal product.
B) experience a decrease in its marginal product.
C) be transferred to other industries.
D) have competition as additional units of that specific factor are hired from other industries.

20.Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-
factors model has a comparative advantage in agricultural output. What will happen to the return
(rental) on land when trade occurs?
A) It will fall. B) It will rise. C) It will not change. D) It will first fall, then rise.

21.Suppose that the Home country in the two-sector (manufacturing and agriculture) specific-
factors model has a comparative advantage in manufactured output. What will happen to the
marginal product of capital used in manufacturing production when trade occurs?
A) It will fall. B) It will rise. C) It will not change. D) It will first fall, then rise.

22.Which of the following statements about the specific-factors model is true?

A) When exports of a product rise, the increase in revenue is divided among the factors of
production equally.
B) When imports rise, revenues of firms that compete with imports fall. The decrease in
revenue is divided among the factors of production equally.
C) When exports of a product rise, specific factors gain less and mobile factors gain more;
when imports rise, specific factors gain more and mobile factors gain less.
D) When exports of a product rise, specific factors gain more than mobile factors; when imports
rise, specific factors lose more than mobile factors.

23.In general, the gains to some resources from free trade exceed losses suffered by other resources.
This means that, in principle:
A) The government should be able to tax resources that gain and compensate resources that lose
so that all resources are better off with trade.
B) The government should tax imports in order to reduce the losses suffered by some resources.
C) The government ought to tax exports in order to collect revenue to compensate resources
that lose from free trade.
D) The government ought to tax returns on land because they always increase with free trade.

24.Which model best explains U.S. exports of chemicals to China and U.S. imports of Chinese
tennis shoes?
A) specific-factors model C) Heckscher-Ohlin model
B) Ricardian comparative advantage model D) comparative advantage model

25.A long-run model of trade basic to the determination of how mobile factors of production affect
national welfare and the returns to the factors is known as:
A) the specific-factors model. C) the Chicago model of trade.
B) the Ricardian model. D) the Heckscher-Ohlin model.

26.The Hecksher-Ohlin model of international trade uses _____ and ______ to explain trade
patterns.
A) comparative; absolute advantage C) factor availability; factor usability
B) factor abundance; factor intensity D) tariffs; quotas
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 27.In a capital-intensive industry, the capital/labor ratio will:
A) rise as the wage/rental ratio falls. C) rise as the country's capital stock rises.
B) fall as the wage/rental ratio falls. D) fall as the country's capital stock falls.

28.The implication of resources being mobile domestically is:

A) There is often unemployment.
B) Capital and land are often not suited for use in other industries.
C) Labor and capital are paid the same wage and rental price in all domestic industries.
D) They lose the chance to become guest workers in other nations.

29.The Heckscher-Ohlin Model assumes that:

A) Factor endowments are same.
B) Consumer tastes are the same across countries,
C) The technologies used to produce the two goods are identical across the countries.
D) Consumer tastes and technologies are the same across countries.

30.It may be unrealistic to assume that consumer tastes are the same across nations and invariant
with respect to income,
A) so it is not one of the HO assumptions.
B) but it is an HO assumption because it enables the analysis to focus on other issues that drive
trade and prices.
C) but it actually is true so it is an HO assumption.
D) and it is not an HO assumption because consumer tastes within a nation are not relevant to
international trade.

31.Consider two products, automobiles and shoes. If shoes are labor intensive and automobiles are
capital intensive, what can we expect in free-trade conditions?
A) The relative price of automobiles in the auto-exporting country will decrease.
B) The relative price of shoes in the shoe-exporting country will increase.
C) More shoes will be produced by the capital-abundant country.
D) More automobiles will be produced by the labor-abundant country.

32.Why is the PPF bowed out in the Hecksher-Ohlin model?

A) because capital is specific to computer production
B) because labor is specific to shoe production
C) because capital is better suited to computer production than shoe production
D) because labor is specific to shoe production, capital is specific to computer production, and
capital is better suited to computer production than shoe production

33.The Leontief paradox found that:

A) exports should always be capital intensive. C) the U.S. exports were labor intensive.
B) imports should always be labor intensive. D) the U.S. exports were capital intensive.

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Use the following to answer questions 34-39:A Country's Before and After Trade Equilibria

34.What is the equilibrium post-trade point of production?

A) A B) B C) C D) D

35.What are the post-trade quantities of shoes and computers produced by this nation?
A) 300 shoes; 300 computers C) 225 shoes; 200 computers
B) 225 shoes; 175 computers D) 150 shoes; 300 computers

36.What happened to the relative price of shoes in this nation after trade?
A) Shoes became relatively more expensive in terms of computers.
B) Shoes became relatively cheaper in terms of computers.
C) Shoes were not as desirable after trade.
D) The price of shoes did not changeonly the quantity.

37.The trade triangle shows the exports that were exchanged for imports. What are the three points
of the trade triangle?
A) A, B, C B) A, B, D C) A, D, C D) B, C, D

38.How many shoes will this nation import?

A) 0 B) 125 C) 350 D) 500

39.How many computers will this nation export?

A) 0 B) 125 C) 350 D) 500

40.The Leontief paradox questioned the validity of:

A) the comparative advantage model. C) the Ricardian model.
B) the Heckscher-Ohlin model. D) the specific-factors model.

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[4 pts] 1) How can a developed country compete against some low foreign wage industries?

Wage rate are higher in developed countries because of higher overall productivity in those countries. But
higher wage rates do not necessarily imply higher labor cost. Higher productivity implies that it takes less
units of labor to produce a product in a DC. If the DC specializes on the sectors in which its productivity
advantages are larger than its wage disadvantages then it can easily compete with low wage countries.

[4 pts] 2) How do you resolve this seemingly paradoxical result that the most productive domestic firm may lose out to
some of the least productive firms in a low wage country.

A local firm might be the most productive firm in a certain industry (say a US firm in apparel industry) but the
industry is not amongst the more productive industries in the country. That is the productivity advantages of other
firms are even higher than the firm in question (compared to other countries). If the firm is located in a country
that average productivity is high wages are also high so the productivity advantage of the firm might not be strong
enough to outweigh its wage disadvantage.

[4 pts] 3) How could the navigation act protect Britain domestic industry?
Giving monopoly of import to British ships leads to expansion of the shipping industry which in turn
strengthens British naval power. This was instrumental for furthering British interest around the globe
including opening and monopolizing new markets for British products.

[4 pts] 4) What does the Smithian division of labor imply on the productivity of larger economies?
Larger economies with larger demand for everything imply more division of labor higher levels
of specialization and higher productivity. Thus larger economies are more productive according
to the Smithan model while in the Recardian model country size does not affect productivity.

[10 pts] 5) State and prove the Stopler-Samuelson Theorem using the Lerner diagram.

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[4 pts] 6) While international trade theory by and large argues in favor of free trade many countries specially developing ones
have some reservations about certain consequences of free trade. Name three of these concerns and discuss their
merits if any. (Hint: you may start by questioning the validity of the certain assumptions in trade models).

[10 pts] 7) Consider trade between two countries, Home and Foreign. Denote values associated with Foreign using asterisks.
Each country is capable of producing consumer goods X and Y. Each country is endowed with 1000 worker hours
(L=1000=L*). The table below gives the unit input requirement in each country for each good:
X Y
Home aLX= 1 aLy= 1/2
Foreign aLX*= 1/4 aLy*= 1
a) Draw Home's production possibility frontier (PPF); put output of good X on the horizontal axis and output of
good Y on the vertical. Be sure to label intercepts and axes, and indicate the slope. Do the same for Foreign.
b) Which country has comparative advantage in x production and why
c) State real wage in home country before and after opening up international trade assuming terms of trade is 1.
d) What is the effect of an increase in labor endowment in Home on its comparative advantage and wages

Solution
a) L = QX . aLX + QY . aLY rewriting this expression, we get QY = L/ aLX - (aLX /aLY)QX,
So for Home: QY = 1000/(1/2) (1/2)QX or QY = 2000 2QX
and for Foreign: QY* = L*/ aLX* - (aLX */aLY*)QX*, or QY* = 1000/1 (1/4)/1QX* or QY* = 1000 1/4QX*

b) Foreign has C.A. in X because the O.C (domestic price) of X is lower in that country. Homes C.A is in Y.
c) real wage in Home: before trade 1x or 2Y, after trade: 1x or 1y
d) None; none.

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Answer Key

1.A
2.A
3.B
4.A
5.B
6.A & D
7.A
8.B
9.B
10.B
11.B
12.A
13.D
14.B
15.B
16.D
17.B
18.A
19.A
20.B
21.B
22.D
23.A
24.D
25.D
26.B
27.B
28.C
29.D
30.B
31.B
32.C
33.C
34.C
35.D
36.B
37.C
38.C
39.B
40.B

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