Chapter 5&6 Flashcards
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?
a) No. Since labor is abundant in crowded countries, cattle production will be labor-intensive.
b) Yes. As long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country.
c) No. In this case, wheat production is land-intensive because the land to labor ratio for cattle production is lower than in America.
d) Yes. Factor intensity depends on the ratio of land or labor to the output of the good, whichever is higher is the intensively used factor.
b) Yes. As long as the ratio of land to labor for cattle production exceeds the ratio in wheat production in that country.
The diagram to the right depicts a country’s production possibilities frontier before (TT1) and after (TT2), a biased expansion of its production possibilities. If it is known that this shift occurred because of an increase in land supply, one can deduce that the land-intensive good must be____?
In looking at the diagram it is clear that, at an unchanged relative price of cigars (shown by the tangencies at points 1 and 2),
a) the output of cigars increases and the output of sugar falls.
b)the output of both sugar and cigars increases.
c)the output of sugar increases and the output of cigars falls.
d)the output of both sugar and cigars decreases.
sugar ; c) the output of sugar increases and the output of cigars falls.
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
a) a higher relative wage impacts soybean production costs more than cigar production costs.
b) cigars are labor-intensive while soybeans are capital-intensive.
c) soybeans are labor-intensive while cigars are capital-intensive.
d) neither good is capital-intensive.
b)cigars are labor-intensive while soybeans are capital-intensive.
Evaluate the following statement:
”The world’s poorest countries cannot find anything to export. There is no resource that is abundantcertainly not capital nor land, and in small poor nations not even labor is abundant.”
The above statement is
a)true because what matters for trade is the absolute abundance of factors.
b)true. In the poorest of countries, there is very little production for domestic use let alone any for export.
c)false because what matters for trade is the relative abundance of factors.
d)false because at the very least land will be abundant.
c)false because what matters for trade is the relative abundance of factors.
The figure to the right shows a country in pretrade equilibrium at point X. Suppose this country is abundant in the factor that is used intensively in the production of coal.
Suppose the country begins to trade. Which of the following statements describes the production changes that will occur inside this country?
a) The output of both goods rises.
b)Coal output rises and sugar output falls.
c)Sugar output rises and coal output falls.
d)The output of both goods declines.
b)Coal output rises and sugar output falls.
Explain why the Leontief paradox and the more recent Bowen, Leamer, and Sveikauskas results reported in the text contradict the factor-proportions theory.
The factor-proportions theory predicts that the U.S. should export ______ goods. However, Leontief found that the US actually exported ______ goods.
Bowen, Leamer, and Sveikauskas tested the Heckscher-Ohlin theory by comparing the ratio of a country’s endowment of a factor to each country’s share of world income. Assuming the factor proportions theory is correct, a country whose factor share exceeded their income share would be an ______ of that factor.
For two-thirds of the factors tested, trade ran in the predicted direction less than ______ percent of the time.
capital-intensive; labor-intensive; exporter ; 70%
In the discussion of empirical results on the Heckscher-Ohlin model, we noted that recent work suggests that the efficiency of factors of production seems to differ internationally. Explain how this would affect the concept of factor-price equalization.
a) The model would be applied to “effective factors” which adjust for the differences in efficiency. In this case, effective factor prices would be equalized.
b) The model would be applied to “effective factors” which adjust for the differences in efficiency. In this case, effective factor prices would not be equalized.
c) Efficiency differences are incorporated in the Heckscher-Ohlin model so there is no effect on the concept of factor-price equalization.
d) Although efficiency differences were not anticipated by the Heckscher-Ohlin model, they do not significantly alter the concept of factor-price equalization.
a)The model would be applied to “effective factors” which adjust for the differences in efficiency. In this case, effective factor prices would be equalized.
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 a) biased factor trade pattern b)US factor reversal c)Leontief paradox d)trade anomaly
During the time period 1945-1970 the U.S. exported more
a)unskilled labor-intensive goods b)capital-intensive goods c)technologically-intensive goods d)land-intensive goods
c)Leontief paradox ; c)technologically-intensive goods
The predictive power of the Heckscher-Ohlin model, at least in terms of forecasting the volume of trade, appears to undergo improvement upon abandonment of the assumption
a) that technologies are the same across countries.
b) that trading goods is an indirect way of trading factors.
c) that technologies vary across countries.
d) of 2 countries, 2 factors, and 2 goods.
a)that technologies are the same across countries.
From an economic point of view, India and China are somewhat similar: Both are huge, low-wage countries, probably with similar patterns of comparative advantage, which until recently were relatively closed to international trade. China was the first to open up.
Now that India is also opening up to world trade, how would you expect this to affect the welfare of China? Of the United States? (Hint: Think of adding a new economy identical to that of China to the world economy.)
a)From China’s perspective, the world relative supply curve will shift to the left. This shift will worsen China’s terms of trade. The U.S. purchase of Chinese exports will benefit the U.S. by increasing the relative price of goods that the U.S. exports.
b)From China’s perspective, the world relative supply curve will shift to the right. This shift will worsen China’s terms of trade. The U.S. purchase of Chinese exports will benefit the U.S. by increasing the relative price of goods that the U.S. exports.
c)From China’s perspective, the world relative supply curve will shift to the right. This shift will improve China’s terms of trade. The U.S. purchase of Chinese exports will hurt the U.S. by decreasing the relative price of goods that the U.S. exports.
d)From China’s perspective, the world relative supply curve will shift to the left. This shift will improve China’s terms of trade. The U.S. purchases of Chinese exports will hurt the U.S. by decreasing the relative price of goods that the U.S. exports.
b)From China’s perspective, the world relative supply curve will shift to the right. This shift will worsen China’s terms of trade. The U.S. purchase of Chinese exports will benefit the U.S. by increasing the relative price of goods that the U.S. exports.
Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Determine the impact on Japan’s terms of trade of the following events:
a) war in the ME disrupts oil supply
b) Korea develops the ability to produce automobiles that it can sell in Canada and the United States.
c) U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants.
d) harvest failure in Russia
e) A reduction in Japan’s tariffs on imported beef and citrus fruit.
a) deteriorates terms of trade
b) deteriorates terms of trade
c) improves terms of trade
d) deteriorates terms of trade
e) deteriorates terms of trade
Suppose that one country (Country A) subsidizes its exports and the other country (Country B) imposes a “countervailing” tariff that offsets its effect, so that in the end relative prices in the second country are unchanged. What happens to the terms of trade? What about welfare in the two countries?
a) From Country A’s perspective, world relative supply will increase and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses.
b) From Country A’s perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses.
c) From Country A’s perspective, world relative supply will decrease and world relative demand will increase. This will improve its terms of trade. The countervailing tariff exacerbates this effect so Country A will definitely gain and Country B definitely loses.
d) From Country A’s perspective, world relative supply will decrease and world relative demand will increase. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses.
Suppose, on the other hand, that Country B retaliates with an export subsidy of its own. Contrast the result.
a) Country B’s export subsidy would offset the terms of trade effect from Country A’s export subsidy, which helps Country B and hurts Country A.
b) Country B’s export subsidy would offset the terms of trade effect from Country A’s export subsidy, which helps Country A and hurts Country B.
b) From Country A’s perspective, world relative supply will increase and world relative demand will decrease. This will worsen its terms of trade. The countervailing tariff exacerbates this effect so Country B will definitely gain and Country A definitely loses.
b) Country B’s export subsidy would offset the terms of trade effect from Country A’s export subsidy, which helps Country A and hurts Country B.
Explain the analogy between international borrowing and lending and ordinary international trade. The analysis of intertemporal trade follows directly the analysis of trade of two goods. Instead of two goods, you have _________.
The relative price of future consumption is _____.
Present consumption is relatively cheap in the country that has relatively ______ interest rates. This country will “export” present consumption (i.e. lend) to countries in which present consumption is relatively dear.
The equilibrium real interest rate after borrowing and lending occur lies between that found in each country before borrowing and lending take place. Gains from borrowing and lending are analogous to gains from trade-there is ________ efficiency in the production of goods intertemporally.
present consumption and future consumption ; 1/1+r ; low ; greater
Which of the following countries would you expect to have intertemporal production possibilities biased toward current consumption goods, and which biased toward future consumption goods?
a) A country, like Argentina or Canada in the last century, that has only recently been opened for large-scale settlement and is receiving large inflows of immigrants.
b) A country, like the United Kingdom in the late 19th century or the United States today, that leads the world technologically but is seeing that lead eroded as other countries catch up.
c) A country that has discovered large oil reserves that can be exploited with little new investment (like Saudi Arabia). Assume the price of oil is high and there are few domestic investment opportunities.
d) A country that has discovered large oil reserves that can be exploited only with massive investment (like Norway, whose oil lies under the North Sea).
e) A country like South Korea that has discovered the knack of producing industrial goods and is rapidly gaining on advanced countries.
a) biased toward future consumption
b) biased toward current consumption
c) biased toward current consumption
d) biased toward future consumption
e) biased toward future consumption
In the model of intertemporal trade, if interest rate is r, the relative price of future consumption is
a) (1-r)
b) -r
c) -(1+r)
d) 1/(1+r)
d)1/(1+r)
According to the model of intertemporal trade, a country is most likely to borrow internationally if
a) The returns on investment in this country are low.
b) The returns on investment in this country are high.
c) This country is producing less than it can consume.
d) This country is producing more than it can consume.
b)The returns on investment in this country are high.
A decrease in the real interest rate will likely lead to
a) An inefficient use of resources available for present and future consumption.
b) Less present consumption in favor of future consumption.
c) An outward shift in the intertemporal production possibility frontier.
d) Less future consumption in favor of present consumption.
d)Less future consumption in favor of present consumption.
Which of the following represents an equation for the intertemporal budget constraint?
a) DP + DF/(1+R)= QP
b) (DF-QF) = (1+r) x (Qp - Dp)
c) DF- (1+r)Dp
b) (DF-QF) = (1+r) x (Qp - Dp)
