Topic 5: Standard Trade Model, Terms of trade, International Factor Mobility

Question 1

The terms of trade:

Answer 1

The terms of trade refers to the price of exports relative to the price of imports

Question 2

Export-biased growth …….. a country’s terms of trade, ………. its welfare and ………. the welfare of foreign countries

Answer 2

Reduces/reducing/increasing

Question 3

Import-biased growth …….. a country’s terms of trade, ………. its welfare and ………. the welfare of foreign countries

Answer 3

Increases/increasing/decreasing

Question 4

In the standard trade model which differences between countries cause differences in production possibility frontiers?

Answer 4

• Labour services
• Labour skills
• Physical capital
• Land
• Technology

Question 5

In the standard trade model each country’s PPF is a ……. …….

Answer 5

Smooth curve

Question 6

We produce at the point where

Answer 6

The PPF is tangent to the isovalue line

Question 7

Relative supply of cloth to food increases with the relative price of ….. .. …..

Answer 7

Cloth to food

Question 8

The value of the economy’s consumption must equal the value of the

Answer 8

Economy’s production

Question 9

Relative demand for cloth to food falls as the relative price of cloth to food …..

Answer 9

Rises

Question 10

If an economy cannot trade then then the relative price of cloth to food is determined by:

Answer 10

The intersection of relative demand and relative supply for that country/economy.

Question 11

In the longer run, additional labour will be:

Answer 11

absorbed entirely by the labour intensive industry

Question 12

Movement of Labour - Main Findings: Short Run

Answer 12

• Holding the amount of capital and land fixed in both industries, as in the specific-factors model, immigration leads to a fall in wages.
• As labour increases in both sectors, the marginal products of the specific factors (capital and land) rise, and therefore their rentals also increase.

Question 13

Main Findings: Long Run

Answer 13

• In the longer run, additional labour will be absorbed entirely by the labour intensive industry
• The labour-intensive industry will also absorb additional capital and labour from the capital-intensive industry, so its capital–labor ratio does not change!
• Magnification effect: output of the labour intensive good rises more than proportionally to the labour increase
• The capital intensive sector contracts
• w and r remain unchanged –“factor price insensitivity”

Question 14

Rybzcynski Theorem

Answer 14

At constant prices, an increase in one factor endowment will increase the output of the good intensive in that factor by a larger proportion, and reduce the output of the other good

Question 15

FDI

Answer 15

Foreign Direct investment - movement of capital between countries

Question 16

When a country imposes an import tariff, its terms of trade …….. and its welfare may ……….

Answer 16

increase

Question 17

When a country imposes an export subsidy, its terms of trade ………. and its welfare …………

Answer 17

decrease/decreases

Question 18

Import tariffs

Answer 18

Import tariffs are taxes levied on imports

Question 19

Export subsidies

Answer 19

Export subsidies are payments given to domestic producers that export

Question 20

If the home country imposes a tariff on food imports, the price of food relative to the price of cloth ….. for domestic consumers

Answer 20

rises

Question 21

When the home country imposes an export subsidy, the terms of trade …………. and the welfare of the country ………. to the benefit of the foreign country

Answer 21

decrease/decreases

Question 22

The terms of trade

Answer 22

the ratio of export prices to import prices

Question 23

Export subsidies on a good ……….. the relative world price of that good by …………. relative supply of that good and ……….. relative demand of that good

Answer 23

decrease/increasing/decreasing

Question 24

Import tariffs on a good ………… the relative world price of that good (and ……….. the relative world price of other goods) by ………… the relative supply of that good and decreasing the relative demand of that good

Answer 24

decrease/increase/increasing

Question 25

Growth is usually biased: it occurs in one sector more than others, causing ……… ……. to change

Answer 25

relative supply

Question 26

Biased growth in the food industry will ….. the terms of trade for cloth exporters

Answer 26

raise

Question 27

The relative price goes down for the product that the growth is biased towarsd.

E.g. for cloth and food. When their is cloth-biased growth, the relative price of …… goes down

Answer 27

cloth

Question 28

Export-biased growth is growth that expands a country’s production possibilities disproportionately in that country’s …… sector

Answer 28

export

Question 29

Import-biased growthis growth that expands a country’s production possibilities disproportionately in that country’s ……. sector

Answer 29

import

Question 30

Export-biased growth …….. a country’s terms of trade, ……….. its welfare and ………… the welfare of foreign countries

Answer 30

reduces/reducing/increase

Question 31

Import-biased growth ……….. a country’s terms of trade, ………… its welfare and …………. the welfare of foreign countries

Answer 31

increases/increasing/decreasing

Question 32

if a country typically imports electronics but develops a domestic electronics industry, this growth would be considered ……..-biased.

Answer 32

import

Question 33

China has gone from ..-50% of the economy directly controlled by the state to over ..%

Answer 33

45 and 78%

Question 34

An increase in the terms of trade ……….. a countries welfare. A decline in TOT decreases countries welfare.

Answer 34

increases