The Standard trade model Flashcards
The meaning of “terms of trade” is
A) the amount of exports sold by a country.
B) the tariffs in place between two trading countries.
C) the quantities of imports received in free trade.
D) the price of a country’s exports divided by the price of its imports.
E) the price conditions bargained for in international markets.
D) the price of a country’s exports divided by the price of its imports
A country cannot produce a mix of products with a higher value than where A) the isovalue line is above the production possibility frontier.
B) the isovalue line is below the production possibility frontier.
C) the isovalue line is tangent with the indifference curve.
D) the isovalue line is tangent to the production possibility frontier.
E) the isovalue line intersects the production possibility frontier.
The isovalue line is tangent to the production possibility frontier.
Tastes of individuals are represented by A) isovalue lines. B) production possibility frontiers. C) production functions. D) indifference curves. E) the terms of trade.
D) indifference curves.
If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then
A) the terms of trade of food exporters will improve.
B) the terms of trade of all countries will improve.
C) the terms of trade of cloth exporters will worsen.
D) all countries would be better off.
E) the terms of trade of cloth exporters will improve.
E) the terms of trade of cloth exporters will improve.
If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the
international marketplace, then
A) the country would import more cloth.
B) the food exporter will increase the quantity of food exported.
C) the cloth exporter will increase the quantity of cloth produced.
D) the cloth exporter will increase the quantity of cloth exported.
E) the cloth exporter will decrease the quantity of cloth exported.
C) the cloth exporter will increase the quantity of cloth produced.
If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the international marketplace, then
A) world relative quantity of cloth demanded will decrease.
B) world relative quantity of cloth supplied will increase.
C) world relative quantity of cloth supplied and demanded will decrease.
D) world relative quantity of cloth supplied and demanded will increase.
E) world relative quantity of food will increase.
B) world relative quantity of cloth supplied will increase.
A country will be able to consume a combination of goods that is NOT attainable solely from domestic production if
A) the country avoids international trade.
B) the country specializes in one product.
C) the world terms of trade equal the domestic relative costs.
D) the world terms of trade differ from its domestic relative costs.
E) the country’s domestic production value equals world relative value.
D) the world terms of trade differ from its domestic relative costs.
Terms of trade refers to A) what goods are exported. B) the volume of trade. C) the relative price at which trade occurs. D) the tariffs applied to trade. E) what goods are imported.
C) the relative price at which trade occurs.
If points A and B are two locations on a country’s production possibility frontier, then
A) at any point in time, the country could produce both.
B) both bundles must have the same relative cost.
C) consumers are indifferent between the two bundles.
D) the country could produce either of the two bundles.
E) producers are indifferent between the two bundles.
D) the country could produce either of the two bundles.
If the economy is producing at point a on its production possibility frontier, then
A) all of its capital is used, but not efficiently.
B) all of the country’s capital is used for one product.
C) all of the country’s workers are employed.
D) all of the country’s workers are specialized in one product. E) all of the country’s exports are produced in equal amounts.
C) all of the country’s workers are employed.
(f1) which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at \_\_\_\_\_\_\_\_, then moving to \_\_\_\_\_\_\_\_ will cause utility to \_\_\_\_\_\_\_\_. A) point c; point b; decrease B) point b; point c; remain unchanged C) point a; point b; increase D) point a; point c; remain unchanged E) point c; point b; increase
B) point b; point c; remain unchanged
When the production possibility frontier shifts out relatively more in one direction, we have A) immiserizing growth. B) unbiased growth. C) imbalanced growth. D) biased growth. E) balanced growth.
D) biased growth.
Suppose that a country experiences growth strongly biased toward its export, cloth, A) this will tend to leave the country’s terms of trade unchanged.
B) this will tend to improve the country’s terms of trade.
C) this will increase the price of cloth relative to the imported good.
D) this will tend to worsen the terms of trade for the country’s trading partner.
E) this will tend to worsen the country’s terms of trade.
E) this will tend to worsen the country’s terms of trade.
Other things being equal, a rise in a country’s terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?
Let us assume that the terms of trade (or technically the net commodity terms of trade) improve, thus the relative price of a country’s exports increase. This would, logically, lead to a shift away by world consumers to substitute goods. If the demand for a country’s exports is elastic, the quantity decrease would be proportionally larger than the per unit price increase. This term of trade effect would actually lower the country’s real income and economic welfare.
(f2) Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above? Suppose the PA/PB at point a was equal to 1. Given this information, in which
good (A or B) does Albania enjoy a comparative advantage?
Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. The relevant international relative price is PA/PB = 2. Albania would therefore choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparative advantage?
Albania would choose to produce at point a. With no reference to world terms of trade, one cannot establish Albania’s comparative advantage.
Later, when Albania discovers that the relative price of A equals twice the price of B, it knows that it has a comparative advantage in A. Therefore Albania would produce at production point b.
(f2) Now, suppose that the relative price of A is actually not higher than Albania’s autarkic level of 1, but quite the opposite (e.g., PA/PB = 0.5). Would Albania still be
able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania’s comparative advantage?
Yes. As long as the world’s terms of trade differed from those of Albania, that country stands to gain from international trade. In this particular case, its point of production with trade would be at point c.
(f3) which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at \_\_\_\_\_\_\_\_, then moving to \_\_\_\_\_\_\_\_ will cause utility to \_\_\_\_\_\_\_\_. A) point c; point b; remain unchanged B) point a; point b; increase C) point c; point b; increase D) point c; point b; decrease E) point a; point c; remain unchanged
A) point c; point b; remain unchanged
(f3) which shows a country's possible production possibility frontiers and indifference curves. If the country is producing at \_\_\_\_\_\_\_\_, then moving to \_\_\_\_\_\_\_\_ will cause utility to \_\_\_\_\_\_\_\_. A) point b; point a; increase B) point a; point b; increase C) point c; point b; increase D) point c; point b; decrease E) point a; point c; remain unchanged
A) point b; point a; increase
(f4) Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania’s economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point c, would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania’s terms of trade? Its real income?
If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. This ceteris paribus would tend to worsen Albania’s terms of trade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, the growth itself acts in the opposite direction.
(f4) Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania’s economy grew, and is now represented by the rightmost production possibility frontier in the figure above. If its point of production with trade was point b, would you consider this growth to be export-biased or import biased? If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania’s terms of trade? Its real income? What if Albania were a small country?
If the production with trade point was point b, then the observed growth is a case of import-biased growth, and would improve Albania’s terms of trade. If Albania were a small country, the world’s terms of trade would not change at all. In such a case, economic growth (with no induced change in income distributions) would always increase its real income.
(f4) Suppose Albania is exporting product B, and experienced economic growth biased in favor of product B as seen in the figure above. We are also told that Albania’s new consumption point is at point d. Would you still consider the economic growth, which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?
This is a relatively difficult case. On the one hand, the growth is still technically export biased. However, Albania’s consumption clearly shifted in favor of its import product, A. In this case, the deterioration in the terms of trade would be much more pronounced than before, and may lead to a case of immiserizing growth. However, for this to occur, there must have been a major shift in the taste patterns (the old community indifference map is not longer applicable). Therefore, when we try to judge the direction and magnitude of the welfare change, we are comparing the old versus new taste preferences, which raises the classic index number problem.
An increase in a country’s net commodity terms of trade will
A) not always guarantee positive changes in the country’s economy.
B) always increase the country’s economic welfare.
C) always increase the country’s real income.
D) never increase the country’s quantity of exports.
E) always increase the country’s production of its import competing good.
A) not always guarantee positive changes in the country’s economy.
If the U.S. (a large country) imposes a tariff on its imported good, this will tend to
A) cause a deterioration of U.S. terms of trade.
B) have no effect on terms of trade.
C) improve the terms of trade of all countries.
D) raise the world price of the good imported by the United States.
E) improve the terms of trade of the United States.
E) improve the terms of trade of the United States.
If Slovenia is a small country in world trade terms, then if it imposes a large series of tariffs on many of its imports, this would
A) decrease its marginal propensity to consume.
B) deteriorate its terms of trade.
C) increase its exports.
D) have no effect on its terms of trade.
E) improve its terms of trade.
D) have no effect on its terms of trade.
