ECO 2121

Question 1

What does the factor mobility refer to ?

Answer 1

It refers to factors of production (e.g.: land, labor, capital, etc.) = mobile within a country

• Importantce on identity

• Land is the LEAST mobile factor internationally
• Workets + capital do move internationally, but in RESPONSE to economic gain

Question 2

What does globalization mean in international economics ?

Answer 2

A process by which the economies of the world become more integrated by the free flow across national boundaries of goods, services, investments, etc.

It appeared in the 17th Century
Offshoring is an important aspect of globalization

Question 3

Explain the word that describes best these sentences ?

1) international markets for goods and services
2) international capital markets
3) international labour markets

Answer 3

1) trade
2) flow of savings and investment
3) migration

Question 4

What are the 2 ways to measure globalization?

Answer 4

1) import and export trade as a share of GDP
2) reduction in trade costs between countries (price gaps)

Question 5

What does merchandise trade mean ?

Answer 5

Tangible products that are physically shipped across borders

Question 6

In the reduction in trade costs between countries, what does mean?
1) law of one price
2) price gap
3) arbitrage

Answer 6

1) no transport costs or barriers to trade
2) difference in the price of X in the exporting and importing country
3) in the competitive equilibrium, the price gap should equal the sum of all trade costs –> it means buying smt in 1 market and reselling X in another market

Question 7

What is deglobalization ?

Answer 7

It’s the increasing trade costs during the depression

(1929-1933)

Question 8

What does balance of payment mean?

Answer 8

It records the sources and uses of foreign exchange

Separates in 3 major aspects:

1) portfolio investments –> buying foreign stocks/bonds
2) foreign direct investments –> ownership of foreign physical assets
3) current account (CA) –> EXPORTS - IMPORTS + NET INVESTMENT

CA deficit: X country is borrowing
CA surplus: X country is lending

Question 9

T/F, wagers differ accross countries due to migration costs?

Answer 9

TRUE

Question 10

Why can we affirm that international trade as a fraction of GDP has tripled for the US in the last 40 years?

Answer 10

It’s due to the US trade deficit

They control domestic spending + improve exports in order to limit trade deficit

Question 11

Give 3 examples of what the gravity model bases it’s structure on?

Answer 11

1) size of countries (focus on the GDP + volume of commerce, not geography)
2) distance between countries (trade costs + weather and it’s ressources)
3) existence of national frontiers (cultural + political affinity/shared history)

The main issue for #3 = frontiers + their barrier impositions (e.g.: costs ans tarrifs)

NAFTA = regional trade agreement = aim to reduce formalities + tarrifs + increase commerce

Question 12

What does the GDP measure ?

Answer 12

The GDP measures the value of all the goods and services produced in an economy.

Question 13

Give examples of non-tradable goods?

Answer 13

• National defense
• Government services
• Utilities
• Repair and daily services
• Healthcare services

Question 14

T/F, the challenge of globalization of the XXI century is linked to trade negociations ?

Answer 14

TRUE

Question 15

It is false to assume that the North-South relations have been stagnant since the 1990s ?

Answer 15

That statement is correct

Question 16

T/F, large disparities between countries are actually a source of gains from trade ?

Answer 16

TRUE (labour and productivity)

When countries specialize, they are more efficient

Question 17

Give examples of protectionist measures?

Answer 17

Tarrifs: a tax of imports or exports
Quotas: a quantity restriction on imports or exports
Export subsidies: a payment to producers that exports

Question 18

Since WW2, a number of policies have been created, name at least 2?

Answer 18

NAFTA
WTO
GATT

Question 19

What does DEMAND mean?

Answer 19

It’s a basic determinant of how much a consumer buys of a product (depends on a bunch of factors like taste, price, preferences, etc.)

Question 20

What does DEMAND CURVE mean?

Answer 20

• Courbe qui montre la relation entre le $ + quantité demandée

Shows the value consumers place on that product (the highest price the consumer is ready to pay to obtain X)

• a change in the drivers of quantity CAN HAVE a shift on the demand curve

Question 21

What does DEMAND RESPONSIVNESS mean?

Answer 21

It is a ‘unit-free’ of elasticity

It measures the % change in one variable resulting from a 1% change in another variable

• Quantity falls when the $ increases

• PRICE ELASTICITY OF DEMAND: the % change in the quantity demanded resulting from 1% increase in the price

Question 22

What does CONSUMER SURPLUS mean?

Answer 22

The increase in the economic well-being of consumers who are able to buy the product at a market price lower than the highest price that they are willing/able to pay for X.

• It is the NET GAIN from being able to buy a product through a market
• It is the difference between the highest price someone is willing to pay for X and the actual market price that is paid

Question 23

What does SUPPLY mean?

Answer 23

The product supplied to consumers

The firm/CIE supplies to product because it is trying to earn a profit on it’s production and sales activities

The 2 influences are :
- the price the firm receives for it’s sales
- the cost of producing and selling the product

To produce:
- the resources and inputs ( labour, land, capital, materials)
- the prices that have to be paid for each specific item

Question 24

What does the SUPPLY CURVE mean?

Answer 24

It shows the quantity that producers will offer for sale at each possible market price.

It shows the marginal cost of producing units of the product.

• a change in one of the other drives of quantity supplied CAN CAUSE a shift in the supply curvbe

Question 25

What does PRODUCER SURPLUS mean?

Answer 25

It is the increase in the economic well-being of producers that are able to sell the product at a market price higher than the lower price that would have drawn out their supply.

Question 26

What does SUPPLY RESPONSIVENESS mean?

Answer 26

It refers to the ‘price elasticity of supply’ - meaning it measures the % increase in the quantity supplied resulting from a 1% increase in the market price.

Question 27

What does NET GAIN mean?

Answer 27

It’s the difference between the value that consumers place on the product and the payment that they must make to buy the product

REFERS to the CONSUMER SURPLUS

Question 28

What does FREE-TRADE EQUILIBRIUM entail ?

Answer 28

It refers to the ‘international price OR world price’

Demand for imports: the excess demand of X
Supply for exports: the excess supply of X

Question 29

Give examples of what makes the demand curve + supply steeper/flatter?

Answer 29

DEMAND
STEEPER:
- necessities (essential goods) = people will still buy them even though the price rise
- few substitutes (gaz)
- cost of wages+ production costs
- fewer produce + not willing to $$$ extra

FLATTER:
- luxury items = people won’t buy them if the price is too high
- many substitutes

SUPPLY
STEEPER:
- limited production capacity (rare minerals, specialized machinery)
- short run (the producers can’t adjust their production levels quickly)
- high costs of increasing output

FLATTER:
- easily expandable production (mass production of goods like plastic)
- long run (adjust better their prices)
- low costs of increasing output (software or digital products)

Question 30

When the demand line is completly vertical, what does that mean?

Answer 30

That their is NO choice

Question 31

Why do countries trade?

Answer 31

1) Their demand/supply conditions vary SO theirs PRICES vary equally if there’s NO international trade

2) Trade BEGINS when X country does ARBITRAGE to earn profits from the PRICE DIFFERENCE between different markets

3) Therefore, a product will be EXPORTED from countries where it’s price was LOWER without trade to countries where it’s price was HIGHER

Question 32

How does trade affect production and consumption in each country ?

Answer 32

1) The move from NO-TRADE to TRADE EQUILIBIRUM changes the PRODUCT PRICE to a ‘world-price’

2) That price change results in changes in the QUANTITIES consumed + produced

3) In the country IMPORTING X, trade RAISES the quantity consumed and LOWERS the quantitity produced (vice -versa for exporting X)

PRODUCTION:
- Specialization
- Economies of scale
- Tech + innovation

CONSUMPTION:
- Varied goods
- Lower prices
- Quality improvements

Question 33

Who gains from trade ?

Answer 33

Each country’s net national gains will increase = they are proportional to the change in its price that occurs in the shift from no trade to free trade

The country whose prices are disrupted more by trade gains more

Question 34

How can a country’s supply/demand curves for X be used to dertermine the country’s supply of export curve ?

Answer 34

The supply of exports is the amount by which the country’s domestic quantity supplied EXCEEDS the country’s domestic quantity demanded.

The supply of export curve shows the quantity that the country would want to export for each possible international markets.

Question 35

Explain what is WRONG with this statement: “trade is self-eliminating, opening trade opportunities drives prices and costs into equality between countries.”

Answer 35

Ongoing trade is NECESSARY for trade equilibrium - it is by doing so, that prices are equalized

Question 36

What factors contributed to the controversies affecting trade and production in the 21st century?
A) COVID
B) Immigration
C) Brexit
D) All of the above

Answer 36

ALL OF THE ABOVE

Question 37

Explain the impact of national identity elements like languages, customs, and traditions on international mobility of factors of production.

Answer 37

National identity influence international mobility because governments impose more stringent limitations on international migration compared to relocation within the country.

These identity elements can create barriers to integration and mobility, impacting the movement of labor and possibly capital.

Question 38

Discuss the role of regional trade agreements, like NAFTA, in overcoming barriers to trade.

Answer 38

Regional trade agreements (RTAs) like NAFTA are designed to reduce trade barriers between member countries, facilitating easier exchange of goods, services, and capital.

By lowering or eliminating tariffs and standardizing regulations, RTAs encourage economic integration and create larger markets for the countries involved.

This can lead to increased trade volumes, production efficiencies, and economic growth.

For example, NAFTA has led to an increase in trade and investment flows among the U.S., Canada, and Mexico, promoting sectors like manufacturing and agriculture in these economies.

Question 39

What does a steep demand curve indicate about the responsiveness of quantity demanded to price changes?
A) High responsiveness
B) Low responsiveness
C) No responsiveness
D) Variable responsiveness based on product type

Answer 39

B, LOW RESPONSIVENESS

Question 40

Define autarky and discuss its impact on consumer and producer surplus.

Answer 40

Autarky is an economic system where a country does not engage in international trade but rather relies on its own resources.

In an autarky, consumer surplus might be lower because consumers have access to fewer products at potentially higher prices due to lack of competition.

Producer surplus might also be impacted negatively if producers cannot achieve economies of scale or access cheaper inputs from abroad, thus potentially increasing production costs and reducing market efficiency.

Question 41

Analyze how the elasticity of supply is affected by factors such as labor, land, and capital.

Answer 41

The elasticity of supply depends on how quickly and effectively producers can adjust their production in response to price changes.

• Factors like labor, land, and capital play crucial roles.

For instance, if labor is highly skilled and readily available, the supply can be more elastic as firms can increase production quickly.

Conversely, if land is scarce and capital is not easily accessible, the supply will be less elastic as it’s harder for producers to expand operations swiftly.

• For example, in high-tech industries, where capital equipment is expensive and specialized, supply elasticity is generally lower.

Question 42

True or False: Subsidies on local products generally increase the international competitiveness of these products.

Subsidies = a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

Answer 42

True.

Subsidies can lower production costs, allowing local products to be priced more competitively in international markets.

Question 43

Identify whether the following statement is correct or incorrect: “International trade decreases economic efficiency.”

Answer 43

Incorrect.

International trade generally increases economic efficiency by allowing countries to specialize in the production of goods and services they can produce most efficiently.

Question 44

True or False: Price elasticity of demand is solely determined by price changes.

Answer 44

False.

Price elasticity of demand is influenced by several factors, including the availability of substitutes, necessity of the good, and consumer preferences.

Question 45

True/false: Elasticity of supply is generally higher in the long run than in the short run.

Answer 45

True.

Producers have more time to adjust their production processes and resource allocation in the long run.

Question 46

What does a flatter supply curve indicate?
A) Higher price elasticity of supply
B) Lower price elasticity of supply
C) No change in quantity supplied
D) Decreased production costs

Answer 46

A) Higher price elasticity of supply.

A flatter supply curve indicates that the quantity supplied is more responsive to changes in price, meaning that producers are willing and able to increase or decrease production significantly with even a small change in price.

Price Elasticity of Supply (PES) measures how much the quantity supplied of a good changes in response to a change in its price.

• In contrast, a steeper supply curve would indicate a lower price elasticity of supply, meaning that quantity supplied doesn’t change much with price changes.

Question 47

Which scenario would likely result in a decrease in consumer surplus?

A) A decrease in the price of a good
B) An increase in the price of a good
C) An increase in consumer income
D) A decrease in the price of substitutes

Answer 47

B) An increase in the price of a good.

Question 48

Identify whether the following statement is correct or incorrect: “Inelastic demand implies that consumers are highly sensitive to price changes.”

Answer 48

Incorrect.

Inelastic demand implies that consumers are not highly sensitive to price changes; quantity demanded changes little with a price change.

Question 49

Evaluate how elasticity of demand can affect a firm’s pricing strategy.

Answer 49

The elasticity of demand is crucial for determining a firm’s pricing strategy.

For products with elastic demand, firms might lower prices to increase volume and revenue, as consumers are sensitive to price changes.

Conversely, for products with inelastic demand, firms might increase prices to increase revenue without significantly reducing quantity sold, such as with necessary medications.

Question 50

True or False: It is possible for a country to have a comparative advantage in all products.

Answer 50

False. According to comparative advantage theory, a country can have a comparative advantage in one product, but not in all products.

• A country cannot have a comparative advantage in all goods because comparative advantage is based on opportunity cost. Producing more of one good means sacrificing the production of another, leading to varying opportunity costs across different goods.

But absolute advantage, yes.

Question 51

True or False: Labor specialization always leads to greater efficiency.

Answer 51

True. Specialization in labor typically leads to efficiency as workers focus on tasks they are most skilled at, though this may also lead to disadvantages such as worker dissatisfaction or over-dependence on specific skills.

Question 52

What is the key difference between comparative and absolute advantage in trade?

Answer 52

Absolute advantage refers to the ability of a country to produce more of a good with the same resources compared to another country

Comparative advantage refers to producing goods at a lower opportunity cost.

Question 53

Define “arbitrage” in the context of trade.

Answer 53

Arbitrage refers to the practice of taking advantage of price differences between markets.

In trade, it involves buying a good in one market where it’s cheaper and selling it in another where it’s more expensive, thereby profiting from the difference.

Question 54

Which of the following best describes the North-South wage gap?

A) Wages are generally higher in the global South than in the North.
B) Wages are equal between North and South regions due to international trade agreements.
C) Wages in the global North are higher than in the South due to differences in productivity and economic development.

Answer 54

C

Question 55

Which of the following factors does not typically impact labor productivity?
A) Education
B) Technology
C) Time spent commuting
D) Capital investment

Answer 55

C

While commuting time can affect worker availability, it does not directly influence productivity as education, technology, and capital investment do

Question 56

Which statement is correct about labor wages?
A) Wages are only determined by the demand for labor.
B) Productivity increases typically lead to higher wages.
C) Wages are completely unrelated to economic conditions.

Answer 56

B

Wages are influenced by productivity, labor demand, and economic conditions.

Question 57

Which of the following is incorrect regarding mercantilism?
A) Mercantilism focuses on accumulating wealth through trade surpluses.
B) Mercantilism advocates for free trade and minimal government intervention.
C) Mercantilism encourages self-sufficiency within nations.

Answer 57

B

Mercantilism typically involves heavy government control and intervention in the economy.

Question 58

If a country has a comparative advantage in producing wheat but not cloth, what should it do to maximize its economic output?

Answer 58

The country should focus on producing wheat and trade for cloth with other nations, benefiting from specialization and maximizing its comparative advantage.

Question 59

Based on the labor productivity formula (output per hour worked), calculate the productivity if a worker produces 50 units in 5 hours.

Answer 59

Productivity = 50 units / 5 hours = 10 units per hour.

Question 60

Given the following data: Country A produces 30 units of wheat and 10 units of cloth per day, while Country B produces 20 units of wheat and 40 units of cloth per day. Which country has an absolute advantage in each product?

Answer 60

Country A has an absolute advantage in wheat production (30 units vs. 20), and Country B has an absolute advantage in cloth production (40 units vs. 10).

Question 61

Explain the impact of trade on wage disparities between countries.

Answer 61

Trade can reduce wage disparities as countries that specialize in goods where they have a comparative advantage tend to see economic growth, which can lead to increased wages.

• However, trade can also exacerbate wage gaps if higher-income countries maintain dominance over labor markets.

Question 62

What would happen if a country attempted to produce all goods it needs without trading?

Answer 62

The country would likely be less efficient, producing fewer goods at a higher cost.

This would result in lower overall productivity, higher prices for goods, and potentially lower standards of living.

Question 63

A country specializes in cloth production and trades for wheat. However, global wheat prices increase dramatically. What should the country do?

Answer 63

The country should consider adjusting its trade strategy, potentially increasing domestic wheat production or seeking alternative trade partners, to mitigate the impact of rising wheat prices.

Question 64

Question: A company reports the following data on its workforce productivity over three months:

January: 1,000 units of output, 100 hours worked
February: 1,200 units of output, 150 hours worked
March: 1,500 units of output, 200 hours worked
Calculate the labor productivity (units per hour) for each month, and determine if productivity is increasing or decreasing over time.

Answer 64

January: 1,000 units / 100 hours = 10 units per hour
February: 1,200 units / 150 hours = 8 units per hour
March: 1,500 units / 200 hours = 7.5 units per hour

• Interpretation: Productivity is decreasing over time, even though the total output is increasing. This suggests inefficiencies or other factors negatively impacting the labor force.

Question 65

Country A can produce 500 units of wheat and 1,000 units of cloth per year, while Country B can produce 300 units of wheat and 1,200 units of cloth.

• If they specialize and trade, which product should each country specialize in, and what would be the opportunity cost if they produce both?

Answer 65

Country A:
Produces 500 units of wheat and 1,000 units of cloth.
The opportunity cost of producing 1 unit of wheat = 1,000 units of cloth / 500 units of wheat = 2 units of cloth (meaning Country A gives up 2 units of cloth for every unit of wheat it produces).
The opportunity cost of producing 1 unit of cloth = 500 units of wheat / 1,000 units of cloth = 0.5 units of wheat.

Country B:
Produces 300 units of wheat and 1,200 units of cloth.
The opportunity cost of producing 1 unit of wheat = 1,200 units of cloth / 300 units of wheat = 4 units of cloth.
The opportunity cost of producing 1 unit of cloth = 300 units of wheat / 1,200 units of cloth = 0.25 units of wheat.

Specialization Decision:
* Country A should specialize in cloth because its opportunity cost of producing cloth is lower (it sacrifices less wheat).
* Country B should specialize in wheat because its opportunity cost of producing wheat is lower in comparison to its opportunity cost of producing cloth.

Question 66

A factory has two departments, A and B.

Department A can produce 50 units in 10 hours, while Department B can produce 70 units in 20 hours.

If the factory wants to produce 240 units in total, how should the production be divided between the two departments to minimize total working hours?

Answer 66

Department A’s productivity: 50 units / 10 hours = 5 units per hour
Department B’s productivity: 70 units / 20 hours = 3.5 units per hour

To minimize total working hours, prioritize production in Department A (higher productivity).

Assign 150 units to Department A: 150 / 5 = 30 hours
Assign 90 units to Department B: 90 / 3.5 = ~25.7 hours

Total hours worked: 30 + 25.7 ≈ 55.7 hours.

Question 67

You are tasked with setting a production target for a company that produces goods with the following marginal productivity data:

1st worker: 10 units/day
2nd worker: 15 units/day
3rd worker: 12 units/day
4th worker: 8 units/day
5th worker: 5 units/day

• If the company can only afford to hire four workers, what is the optimal production target?

Answer 67

The optimal production target is the sum of the units produced by the first four workers:

10 + 15 + 12 + 8 = 45 units/day.
The 5th worker produces fewer units (5), so hiring them would result in diminishing returns.

Question 68

Two countries, A and B, with linear production possibility frontiers (PPFs) = Country A can produce either 100 units of wheat or 50 units of cloth. Country B can produce either 80 units of wheat or 40 units of cloth.

Calculate the opportunity costs for both countries for producing one unit of cloth and determine which country has a comparative advantage in producing cloth.

Answer 68

Country A’s opportunity cost of 1 unit of cloth: 100 units of wheat / 50 units of cloth = 2 units of wheat.

Country B’s opportunity cost of 1 unit of cloth: 80 units of wheat / 40 units of cloth = 2 units of wheat.

Since the opportunity cost is the same for both countries, neither has a comparative advantage in producing cloth.

However, they may benefit from trade based on their absolute advantage (Country A produces more overall).

Question 69

A labor market graph shows the supply and demand for labor in a competitive market. At the equilibrium wage, 1,000 workers are employed. The government introduces a minimum wage that is above the equilibrium level.

Show how this affects the labor market and describe the economic consequences.

Answer 69

When a minimum wage is set above the equilibrium level, the graph will show a surplus of labor, meaning more workers are willing to work at the higher wage than employers are willing to hire.

This results in unemployment, as the quantity of labor supplied exceeds the quantity demanded.

Some workers benefit from higher wages, but others lose jobs due to reduced demand for labor.

Question 70

Discuss Adam Smith’s theory of absolute advantage and how it contrasts with Ricardo’s theory of comparative advantage.

Provide examples to illustrate the differences in terms of trade benefits.

Answer 70

Adam Smith’s theory of absolute advantage states that a country should export goods that it can produce more efficiently than other countries (i.e., with higher labor productivity). This concept focuses on total efficiency gains through specialization.

Ricardo’s comparative advantage theory suggests that even if a country has no absolute advantage in producing any good, it can still benefit from trade by focusing on goods with the lowest opportunity cost.

For example, if the U.S. has higher productivity in both wheat and cloth than another country, it may still benefit by specializing in wheat (where its productivity advantage is greater) and importing cloth, which has a higher opportunity cost.

This allows both countries to exploit relative efficiencies and improve overall welfare.

Question 71

Explain the role of community indifference curves in international trade theory and how they are used in conjunction with the production-possibility curve (PPC) to evaluate trade benefits

Answer 71

Community indifference curves represent the combinations of two goods that provide a society with the same level of well-being or utility. When overlaid with the PPC, which shows the maximum possible output combinations a country can produce, these curves help illustrate the potential benefits of trade.

Without trade, a country operates at a point on the PPC where its production meets domestic consumption needs.

• With trade, the country can shift consumption to a higher indifference curve, as trade enables it to specialize in goods where it has an advantage and trade for other goods.

This shift can lead to increased well-being and overall efficiency.

Question 72

T/F - If a country has no absolute advantage in producing any good, it cannot benefit from international trade.

Answer 72

False. According to Ricardo’s theory of comparative advantage, a country can still benefit from trade by specializing in goods it can produce at a lower opportunity cost, even without any absolute advantage.

Question 73

T/F - In the absence of trade, countries must produce all goods they consume.

Answer 73

True. Without trade, each country is responsible for producing the goods it consumes, limiting its ability to specialize and benefit from efficiency gains.

Question 74

T/F - The terms of trade refer to the price a country pays for its imports relative to the price it receives for its exports.

Answer 74

True. Terms of trade measure the ratio of export prices to import prices, influencing how much a country gains from trade.

Question 75

Define labor productivity and explain its significance in determining a country’s absolute advantage.

Answer 75

Labor productivity refers to the number of units of output a worker can produce in one hour.

It is significant in determining a country’s absolute advantage because a country with higher labor productivity in producing a good can produce more of that good with the same amount of labor, making it more efficient.

Question 76

True or False: The production-possibility curve (PPC) shows all possible combinations of products that can be produced with full employment of resources.

Answer 76

True. The PPC represents the maximum feasible productivity combinations of different products an economy can produce using all available resources efficiently.

Question 77

Explain the concept of increasing marginal costs in the context of international trade. How does this concept affect a country’s production decisions as it shifts resources between industries?

Answer 77

Increasing marginal costs refer to the economic principle that as a country increases its production of one good, it must sacrifice increasing amounts of another good to produce each additional unit.

This is due to the reallocation of resources, which are better suited for certain industries than others.

• For example, if a country focuses more on producing wheat, it will eventually need to pull labor and capital from other industries, making it more costly to expand wheat production. This limits a country’s ability to specialize infinitely in one industry and forces balanced production decisions.

Question 78

Compare and contrast Ricardo’s theory of comparative advantage with the Heckscher-Ohlin theory.

How do the factors that determine trade patterns differ in each theory?

Answer 78

Ricardo’s theory of comparative advantage focuses on opportunity costs and relative efficiencies in production. It suggests that countries should specialize in producing goods they can produce at a lower opportunity cost compared to others, even if they have no absolute advantage.

The Heckscher-Ohlin theory emphasizes the role of factor endowments (such as labor, land, and capital) in determining trade patterns. It predicts that countries will export goods that intensively use their abundant factors and import goods that intensively use their scarce factors.

• While Ricardo’s model is primarily based on productivity differences, Heckscher-Ohlin focuses on the availability and intensity of factor resources.

Question 79

T/F - A country always benefits more from trade when its terms of trade improve, meaning it receives a higher price for its exports relative to the price it pays for imports.

Answer 79

True. When a country receives a higher price for its exports relative to the cost of its imports, it can obtain more imports for a given amount of exports, thus improving its overall welfare.

Question 80

T/F - According to the Heckscher-Ohlin theory, a labor-abundant country will always export capital-intensive products.

Answer 80

False. The Heckscher-Ohlin theory predicts that a labor-abundant country will export labor-intensive goods and import capital-intensive goods because labor is the relatively abundant factor in that country.

Question 81

Identify the incorrect statement regarding indifference curves:

A. Indifference curves represent combinations of goods that provide the same level of satisfaction.
B. The further out an indifference curve is from the origin, the higher the level of utility it represents.
C. Points inside an indifference curve provide a higher level of satisfaction than points on the curve.

Answer 81

Answer: C is incorrect. Points inside an indifference curve provide a lower level of satisfaction than points on the curve, as they represent lower consumption levels of both goods.

Question 82

T/F - Both countries always benefit equally from trade according to the theory of comparative advantage.

Answer 82

False. While both countries can benefit from trade by specializing in goods where they hold a comparative advantage, the gains from trade are not necessarily equal. The extent of the benefits depends on the terms of trade, or the rate at which goods are exchanged between countries.

Question 83

Identify which statement is correct about the gains from trade:

The gains from trade are always equally distributed among the trading countries.

The gains from trade depend on the relative efficiency and terms of trade between the countries.

Answer 83

• The correct statement is 2.

The gains from trade depend on the relative efficiency and terms of trade between the countries. The benefits are influenced by how much more efficiently countries can produce goods compared to one another and the rate at which they agree to exchange these goods.

Question 84

Country M and Country N both produce electronics and textiles. Country M is rich in capital and can produce 100 units of electronics or 50 units of textiles with the same resources. Country N is labor-rich and can produce 30 units of electronics or 60 units of textiles with the same resources.

Based on the Heckscher-Ohlin theory, which product should each country specialize in? Explain why.

Answer 84

According to the Heckscher-Ohlin theory, countries will export goods that make intensive use of locally abundant factors and import goods that make intensive use of factors that are locally scarce.

• Country M, being capital-rich, should specialize in the production of electronics, a capital-intensive product. The opportunity cost of producing one unit of electronics in terms of textiles for Country M is 0.5 units of textiles (50/100).
• Country N, being labor-rich, should specialize in the production of textiles, a labor-intensive product. The opportunity cost of producing one unit of textiles in terms of electronics for Country N is 0.5 units of electronics (30/60).

Question 85

If Country Q can produce 80 units of clothing using the same resources needed to produce 40 units of machinery, and Country R can produce 60 units of clothing using the same resources needed to produce 30 units of machinery, calculate the opportunity costs for each country for one unit of machinery and determine which country has a comparative advantage in machinery production.

Answer 85

• Q : The opportunity cost of one unit of machinery in terms of clothing is 2 units of clothing (80/40).
• R : The opportunity cost of one unit of machinery in terms of clothing is 2 units of clothing (60/30).

Both countries have the same opportunity cost for producing machinery

*In this scenario, no definitive comparative advantage exists based solely on the provided data.

Question 86

Using the H-O model, if Country S (capital-abundant) requires 5 units of capital and 3 units of labor to produce one smartphone, and Country T (labor-abundant) requires 3 units of capital and 5 units of labor to produce one smartphone, calculate the capital-to-labor ratio for each country and determine which country should export smartphones according to the H-O theory.

Answer 86

S : Capital-to-labor ratio = 5/3 ≈ 1.67

T : Capital-to-labor ratio = 3/5 = 0.6.

According to the Heckscher-Ohlin theory, Country S, having a higher capital-to-labor ratio, should specialize and potentially export smartphones, as this product is more capital-intensive relative to the production scenario in Country T. Country S’s greater abundance of capital relative to labor makes it more efficient at producing capital-intensive goods like smartphones.

Question 87

Using the information from Chapter 3 regarding productivity and wages, calculate the change in productivity if the output per hour increases from 100 units to 150 units while the input remains constant.

Answer 87

Change in output = Finaloutput−Initialoutput=150−100=50units

Percentageincrease= New prod - Initial prod. divided by initial prod. X 100%

150 - 100 ÷ 100 X 100% = 50%

Productivity increases by 50%.