Chapters 1-3 Flashcards
The GATT was:
a) a US government agency
b) a collection of tariff standards
c) an international UN agency with trade oversight
d) an international treaty governing trade e) an International Monetary Fund agency with trade oversight
d) An international treaty governing trade
The international debt crisis of early 1982 was precipitated when _____ could not pay its international debts:
a) Mexico
b) China
c) Malaysia
d) Russia
e) Brazil
a) Mexico
The coordination of international macroeconomic policies among sovereign nations:
a) has only recently been advocated by economists.
b) is a well-established tradition.
c) is achieved through the governance of the UN
d) is unnecessary in a world populated with many nations.
a) has only recently been advocated by economists. In an integrated world economy one country’s economic policies usually affect other countries as well. As a result, attempts at international macroeconomic coordination are occurring with growing frequency. Only in the last few years have economists formatted at all precisely the case for policy coordination.
International capital markets:
a) link the capital markets of individual countries
b) have grown significantly since the 1960s
c) differ in trivial ways from domestic capital markets
d) all of the above
e) A & B only
e) A&B: International capital markets, which have seen enormous growth since the 1960s, differ in important ways from the domestic capital markets which they serve to link.
According to the figure, trade is least important for which country?
a) Alpha
b) Charlie
c) Bravo
d) Delta
With Alpha’s exports and imports at 10% percent of its GDP, trade for it is of relatively little importance.
International economics can be divided into two broad subfields:
a) monetary and barter
b) international trade and international money
c) static and dynamic
d) macro and micro
e) developed and less developed
b) international trade and international money
Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of:
a) international trade analysis
b) international intrigue
c) international diplomacy
d) international monetary analysis
a) international trade analysis
Classify each of the following transactions as belonging primarily to the sphere of international trade analysis or international monetary analysis.
1) Foreigners purchase US dollars.
2) US imports crude oil from the Middle East.
3) US imposes tariffs on foreign steel.
4) The Chinese government purchases US treasury bonds
5) The Chinese currency is seen as being undervalued
1) Foreigners purchase US dollars.
a) Monetary
2) US imports crude oil from the Middle East.
a) Trade
3) US imposes tariffs on foreign steel.
a) Trade
4) The Chinese government purchases US treasury bonds
a) Monetary
5) The Chinese currency is seen as being undervalued
a) Monetary
In the real world, the dividing line between trade and monetary issues is:
a) always clear and distinct.
b) neither simple nor clear-cut.
c) subject to negotiation between trading partners.
d) determined by the legal system
a) neither simple nor clear-cut. Because most trade involves monetary transactions and most monetary events have consequences for trade, the dividing line between trade and monetary issues is not clear-cut.
Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60% larger). But Canadian trade is twice as large, relative to GDP, as Australia’s. Why should this be the case? (choose all that apply)
a) Transportation costs for imports and exports are higher in Australia because the distance goods must travel.
b) Canada is a member of the WTO while Australia is not.
c) Australia’s GDP is very large; therefore, its volume of trade relative to GDP would be expected to be small.
d) Canada is close to a major economy
e) Canada’s GDP is approximately double that of Australia’s.
a) Transportation costs for imports and exports are higher in Australia because the distance goods must travel.
d) Canada is close to a major economy
Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States and Brazil trades about equally with the United States and with the European Union. Mexico does much more trade relative to its GDP. These differences can be explained via the gravity model. Which of the following equations is the most general form of the gravity model?
d)
Evaluate the following statement: “Mexico is quite close to the U.S., but it is far from the European Union (E.U.). So it makes sense that it trades largely with the U.S. Brazil is far from both, so its trade is split between the two.” Do you agree or disagree?
Based on the gravity model, I would:
a) disagree. The larger the difference in size the more the countries will trade. Since Mexico is much smaller than the U.S., it makes sense that it trades largely with the U.S. Brazil is a much larger economy; therefore, it splits its trade with other large economies, such as the U.S. and the E.U.
b) disagree. The gravity model predicts that trade volume is proportional to the ratio of the GDPs of the trading partners. The larger the difference in size, the larger the ratio, and the greater the trade volume.
c) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.
d) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and directly related to the distance from each other.
c) agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.
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.
a) The GDP of some East Asian countries has grown faster than others; therefore, the difference in GDP between some East Asian countries is now larger. And as the gravity model predicts, exports from richer countries to poorer countries have increased.
b) 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.
c) Since the GDP of East Asian countries has grown, the ratio of any two East Asian countries’ GDP is now larger. And as the gravity model predicts, the trade volume between them has grown.
d) The GDP of some East Asian countries has grown faster than others; therefore, the difference in GDP between some East Asian countries is now larger. And as the gravity model predicts, exports from poorer countries to richer countries have increased.
b) 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.
In 2013, what percent of all world consumption (private and public, including real investment) was imported?
a) 30%
b) 100%
c) 50%
d) 15%
a) 15%
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) 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.
b) A century ago trade was mostly in agricultural and mining products not produced in Europe. Today, 38 percent of trade is in services, and as the gravity model predicts, Britain trades with the other large European economies.
c) A century ago trade was mostly in commodities that were not produced in Europe. Although they are inferior, these commodities are now purchased from European countries because of higher transportation costs.
d) A century ago trade was mostly in commodities such as sugar, wheat, and cotton that were not produced in Europe. Today, oil and mining products are the most important commodities traded, which Britain imports from Eastern European countries and Ireland.
a) 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.
In the present, most of the exports from China are in:
a) manufactured goods
b) services
c) technology intensive products
d) primary products in eluding agricultural
a) Manufactured goods account for more than 90% of China’s exports
The current process of increasing economic integration among national economies, better known as globalization,
a) has been a constant since the start of the 20th century.
b) is a new phenomenon and hence an issue posing some apprehension.
c) is not considered to be an issue of much importance.
d) is actually the world’s second wave of such integration.
d) According to economic historians, the ongoing enhancement of economic linkages between nations is not new. The world’s first wave of globalization began around 1940 and ended in 1914.
Since World War II (the early 1950s), the proportion of most countries’ production being used in some other country
a) remained constant.
b) increased.
c) fluctuated widely with no clear trend.
d) decreased.
b) increased
In the current Post-Industrial economy, international trade in services (including banking and financial services):
a) does not exist
b) is relatively stagnant
c) dominates world trade
d) is relatively small.
d) In 2005, servies comprised 19.2% of total world exports.
The Ricardian trade model put forth by British economist David Ricardo nearly two centuries ago is one that:
a) expounds principles still valid in today’s world.
b) is not valid in a world dominated by technological change.
c) is relevant only to agrarian-based economies.
d) holds little relevance in today’s world.
a) Even though much about international trade has changed since 1819, the fundamental principles elucidated by and through Ricardo’s model still apply today.
A century ago each country’s exports were shaped largely by:
a) treaties and diplomacy
b) climate and natural resources
c) physical capital
d) human resources
b) For example, tropical countries exported tropical products (e.g. coffee, cotton) while land rich nations such as the US and Australia exported food.
The sources of modern trade are largely rooted in:
a) country differences in climate and natural resources.
b) treaties written by capitalist governments.
c) country differences in human and human-created resources.
d) decisions implemented by multinational organizations.
c) The more subtle modern sources have come to supersede climate and natural resources, the dominate underpinnings of trade in the global economy of a bygone era.
The nature of political battles over trade in the modern era:
a) centers on disputes between landowners and manufacturers.
b) originates with the fundamental conflict between workers and capitalists.
c) has remained unchanged from he battles fought throughout history.
d) typically centers on issues involving the trade-induced devaluation of labor skills.
d) Particularly in the developed world, where workers are seeing the value of their skills diminished by imports coming increasingly from the developing countries, there is a considerable political agitation.
- Assume the US currently grows 2.7 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 250,000 laptop computers. Therefore, the opportunity cost of those 2.7 million tons of fruit is ___ computers.
- Suppose that South America could have instead produced those 2.72.7 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
a) unfair competition for U.S. winter fruit producers.
b) U.S. exploitation of its poorer neighbors to the south.
c) unfair competition for South American laptop makers.
d) a mutually beneficial rearrangement of world production.
1) 250,000
2) d: a mutually beneficial rearrangement of world production. Because opportunity costs differ, specialization by the two regions will raise total global output.
Suppose that the resource base in Country X can produce either 150 units of alpha or 400 units of beta. Similarly, suppose that Country Y’s resource base is capable of producing 150 units of alpha or 300 betas.
1) Clearly, the opportunity cost of 150 alphas is lower in _____
2) Based on this result, it would be best for Country Y to concentrate on good _____
3) Calculate the over all production changes in goods Alpha and Bata based on specialization.
1) Fewer betas are sacrificed when Country Y specializes in alphas
2) Country Y should concentrate on good Alpha and country X should specialize in good Beta
3) See image:
Economists use the term opportunity cost to refer to: a) only those goods which are in short supply b) the value of all alternatives forgone as a result of making a particular choice c) the value of the next best alternative occurring as a result of making a particular choice d) either B or C
c) Opportunity cost is the highest-valued, next best alternative that must be sacrificed as a result of making a particular choice.
The potential for gains from the rearrangement of production among countries is due to: a) trade-offs b) absolute advantage c) differing opportunity costs d) scarcity
c) Differences in opportunity costs among countries is the basis for specialization which, in turn, leads to gains in total world production.
Complete the following chart
See Image
Draw the PPF
See image
Calculate Opportunity Cost
1.5
Calculate Price
1.5 bananas per apple; without trade, the relative prices of the goods are equal to their relative unit labor requirements.
Draw the PPF
The production possibilities frontier is a straight line with veritcal intercept 40 (120 / 3) and horizontal intercept 120 (120/1). The frontier is linear because the Reicardian model has only one factor of producation (labor).
Where will the workers want to work?
a) recall that everyone will wish to work where wages are highest.
Which of the following represents the opportunity cost of canvas?
a) Alc / Als
b) Pc / Ps
c) Pc
d) Als / Alc
a) Alc / Als gives the amount of steel that is sacrificed when a unit of canvas is produced. In other words, the opportunity cost of canvas.
In the absence of international trade, Home will have to produce both canvas and steel for itself. However, it will do so only if:
a) Pc/ Alc = Ps / Als
b) Pc / Ps = Alc / Als
c) Workers are indifferent as to where (canvas or steel) they work
d) A and B are correct
e) All of the above are correct
e) All these responses tell us that Home will produce both goods.
Home has 1,200 units of labor available. It can produce twogoods, 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 (aLB) it is 1.
a. Derive the equation for Foreign’s production possibility frontier (assume the quantity of bananas is the dependent
variable):
See image
Which of the 4 diagrams represents the relative supply curve given:
Qb = 800/1 - 5/1 * Qa
Choice C
There are two countries Home and Foreign.
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.
Foreign has a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
Suppose world relative demand takes the following form: Demand forapples/demand for bananas = price of bananas/price of apples.
On the graph to the right:
1.) Using the 3-point curved line drawing tool, draw the relative demand curve. Label the curve RD.
2.) Using the point drawing tool, indicate the equilibrium relative price of apples. Label this point EQ.
See Graph
Given the equilibrium relative price, describe the pattern of trade.
a) Home produces both goods, Foreign produces onlybananas, each country trades with the other.
b) Home produces only apples, Foreign produces onlybananas, and each country trades with the other.
c) Home produces only bananas, Foreign produces onlyapples, and each country trades with the other.
d) Each country produces both goods and they do not trade with each other.
b) Home produces only apples, Foreign produces only bananas, each country trades with the other.
With respect to the equilibrium relative price, which of the following statements is FALSE?
a) Through specialization and trade, each country gains because it can purchase the other good at a lower opportunity cost than if it produced it itself.
b) Without trade, Home gains 1.5 bananas for every apple it gives up, but with trade, it can trade one apple for 2 bananas.
c) With trade, Foreign is worse off because one apple can only purchase 2 bananas, whereas without trade one apple can purchase 5 bananas.
d) With trade, the exchange rate is one apple for two bananas.
c) With trade, a relative price of 2/1 means that one apple can purchase 2 bananas. Without trade, Home would be worse off because giving up one apple only gains it 1.5 bananas instead of two with trade. Without trade, Foreign would be worse off because to gain one apple it must give up 5 bananas instead of just two with trade. Therefore, Home will specialize in the production of apples, Foreign will specialize in the production of bananas, and each country will trade its good for the other country’s good. At this exchange rate, both countries gain from trade.
There are two countries Home and Foreign.
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.
Foreign has a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
Suppose world relative demand takes the following form: Demand forapples/demand for bananas = price of bananas/price of apples.
1.) Using the 3-point curved line drawing tool, draw the relative demand curve on the graph to the right. Label the curve RD.
Now suppose that instead of 1,200 workers, Home had 2,400. The relative supply curve (RS) would shift to the right (as shown by
RS1).
2) Using the point drawing tool, indicate the new equilibrium relative price of apples. Label this point EQ.
See image
What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in thiscase?
a) Although there are gains from trade, the outcome is inefficient.
b) Home gains from trade the most because it is the largercountry; however, Foreign does gain from trade.
c) Foreign gains from trade, but Home is indifferent between trade and autarky.
d) Home gains from trade, but Foreign is indifferent between trade and autarky.
c) Foreign gains from trade, but Home is indifferent between trade and autarky.
There are two countries Home and Foreign.
Home has 2,400 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.
Foreign has a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
Suppose world relative demand takes the followingform: Demand for apples/demand for bananas = price of bananas/price of apples.
1.) Using the 3-point curved line drawing tool, draw the relative demand curve on the graph to the right. Label the curve RD.
Now suppose that Home’s workers are only half as productive in both industries as we have been assuming. The relative supply curve (RS) would shift to the left (as shown by
RS1).
2.) Using the point drawing tool, indicate the equilibrium relative price of apples. Label this point EQ.
See image
How does the change in worker productivity in Home affect the gains from trade?
a) Because of the decrease in worker productivity in Home, neither country gains from trade.
b) The loss of worker productivity in Home has cut its and Foreign’s gains from trade in half.
c) The loss of worker productivity in Home has cut its gains from trade in half; however,Foreign’s gains remain unchanged.
d) Whereas before only Foreign gained fromtrade, now both countries gain from trade.
d) Whereas before only Foreign gained fromtrade, now both countries gain from trade.
Before the loss in worker productivity, Foreign gained from trade but the opportunity cost of apples in terms of bananas for Home is the same whether or not there is trade, so Home neither gains nor looses from trade. Following the loss in working productivity, the change in relative prices is such that both Home and Foreign gain from trade.
Japanese labor productivity is roughly the same as that of the US in the manufacturing sector (higher in some industries, lower in others), while hte US is still considerably more productive in the service sector. But most services are nontraded. Some analysts have argued that this poses a problem for the US, because our comparative advantage lies in things we cannot sell on world markets.
What is wrong with this argument?
a) The argument compares comparative advantage when it should be comparing absolute advantage, which is a LS < aLS.*
b) The argument incorrectly calculates comparative advantage. Its calculation is based on a LS
c) The argument incorrectly calculates comparative advantage. Its calculation is based on aLS / aLM < aLS* / aLM* instead of a LS < aLS.*
d) The argument compares comparative advantage when it should be comparing absolute advantage, which is a LS / aLM < aLS*/ aLM*.
The one-factor Ricardian model refutes the myth that free trade is beneficial only if a country is strong enough to stand up to foreign competition by:
a) only requiring that one country have an absolute productivity advantage over another country.
b) arguing that trade depends on the sheer amount of a good a country could produce.
c) indicating that a country only needs a comparative advantage to benefit from trade.
d) stating that trade is solely dependent upon the productivity level of a country’s workers.
c) indicating that a country only needs a comparative advantage to benefit from trade.
Benefits from trade accrue to any country, regardless of size, due to the concept of comparative advantage.
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:
a) be incorrect because it is based on relative poverty and not absolute poverty.
b) miss the point because it fails to consider the alternative, which would be even lower wages.
c) be true because autarky or isolationism makes countries unambiguously better off.
d) be true because countries with lower wages have greater levels of poverty.
b) miss the point because it fails to consider the alternative, which would be even lower wages.
The model refutes this claim of exploitation as it indicates that the country with lower wages accrues benefits from trade and is better off with trade than without trade.
According to the pauper labor argument, foreign competition is unfair and hurts other countries when it is based on:
a) high subsidies.
b) high productivity.
c) low taxes.
d) low wages.
d) low wages
Those who subscribe to this view contned that domestic industries should not have to compete with foreign industires that are less efficient but pay lower wages.
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 _____ (export or import) apples to the countries to the right of the intersection.
Export
The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home. Assume there are no transportation costs. Fill in the five blanks in the table below. (Enter your responses rounded to one decimal place where necessary.)
See Image
The condition for Home production of good i
{w*(A*Li) >w(ALi)} can be shown to be equivalent to {(a*Li/aLi) > (w/w*)}.
In this latter formulation the left-hand term is the relative productivity advantage of 1. _______ (home or foreign) and the right-hand term denotes the relative
- ______ (wage or size) of Home’s labor.
- Home
- Wage
Given the data in the preceding table, we know that if the relative Home wage (w/w*) = 1:
a) Home produces cell phones, jackets, laptops, and MP 3 players; foreign produces MP3 players, sneakers.
b) Foreign produces all products.
c) Foreign produces sneakers and Home produces cell phones, jackets, and laptops.
d) Home produces all products.
a) Home produces cell phones, jackets, laptops, and MP 3 players; foreign produces MP3 players, sneakers.
Home produces cell phones, jackets, and laptops because for these goods it has the relative advantage in productivity. Foreign produces sneakers because it has the relative advantage in productivity for these goods. Each country produces MP3 Players since neither has the relative advantage in their production.
The diagram to the right shows the determination of the relative wage of Home’s workers
(w/w*).
The world demand for Home’s labor relative to its demand for Foreign’s labor is shown by the curve RD.
Note that the “flats” (i.e., the horizontal segments) in RD correspond to relative wages that equal Home’s relative productivity advantage. The world supply of Home’s labor relative to Foreign’s labor is shown by the line RS.
Assume in this multi-good, single-factor Ricardian model that there are NO transportation costs. The equilibrium relative wage in this market is equal to 1. _______.
According to the rule for allocating world production, Home will only specialize in those goods for which its relative productivity advantage is 2. _________ (larger, smaller, or equal to) 3.
- Equilibrium wage is 3. The equilibrium at 3 signifies that Home’s wages are 3 times greater than the wages prevailing in Foreign.
- Larger. If its relative productivity advantage is equal to or less than 7, Home will either share production (=3) or not produce the goods (<7) at all.
How does the fact that many goods are nontraded affect the extent of possible gains from trade?
a) As the number of nontraded goods increases, the gains from trade decrease.
b) The presence of nontraded goods has no effect on the gains from trade.
c) The effect of nontraded goods on gains from trade depends on the nature of the goods; they can either increase or decrease.
d) As the number of nontraded goods increases, the gains from trade increase.
a) As the number of nontraded goods increases, the gains from trade decrease.
The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home.
If the relative Home wage (w/w*) = 2 and transportation costs are 100% of production costs, it will be the case that:
a) cell phones and sneakers are nontraded.
b) jackets, laptops, and MP3 players are nontraded goods.
c) all five of the goods are traded.
d) all five of the goods are nontraded.
b) jackets, laptops, and MP3 players are nontraded goods.
Home’s ability to export jackets and laptops and Foreign’s ability to export MP3 players is nullified when transport costs rise from 0 to 100% of production costs. Since both countries produce these three goods in the presence of 100% transport costs, they are said to be nontraded.
The Ricardian model of international trade makes predictions about actual international trade flows that
a) are supported without qualification by the empirical evidence.
b) are supported with qualification by the empirical evidence.
c) cannot be evaluated with empirical evidence.
d) are contradicted by the empirical evidence.
b) are supported with qualification by the empirical evidence.
Although more recent evidence is less clear-cut than older research, it is nevertheless true that the model’s two principle implications are supported by the evidence.
The degree of specialization predicted by the basic Ricardian model:
a) is much more extreme than is observed in the real world.
b) cannot be compared to the real world since the model is theoretical.
c) is nearly identical to that observed in the real world.
d) is much less extreme than is observed in the real world.
a) is much more extreme than is observed in the real world.
The basic Ricardian model predicts that specialization will be complete. In otherwords, it predicts that only nontraded goods will be produced by more than one country. In the real world, specialization is incomplete.
The Ricardian model unequivocally asserts that countries as a whole will always gain from trade because it:
a) ignores the effects of trade on the distribution of income across countries.
b) shows that trade makes everyone more productive.
c) proves that trade raises everyone’s income.
d) ignores the effects of trade on the distribution of income within countries.
d) ignores the effects of trade on the distribution of income within countries.
In reality international trade has strong effects on the distribution of income within countries. These have the potential of at least clouding the national gains from trade.
