International 1 [Weston]

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1 5( 8 ( ,ECO 3330 V ~ Fall 2009

~~~~~;le Choice (3 pts. each) Exam 1 1 1 , 01. Which of the following is not likely to be a co ron y 0 erved aspect of gLobalization?- C a . ) Moyement of goods across inlemati.onaIJ;!.Q. _'es.

b ovel-T-lent-ef-",aPita'I-ae:ress-J,'ntemationai-boendasi es-o em&nt -e f- la nd -a cm s s- in te m ar ro na I- b ( ,) I.1 I:1 a.a Fi & s ..-iltinational ownership of productive facilities.rbiguity about the nationality of manufactured products.

2. One way to quantify the degree of globalization is to calculate world trade as a percentage ofworld GDP. By this measure we know that

here was no globalization until the late 1980s.e,onlY r,ecentlY surpassed a degree of globalization that existed in 1 9 1 4 .lobalization peaked around 1850.

~lobalization has been decreasing since 1 9 4 6 .3. Brad and Angelina are married. Angelina hates to cook, while Brad hates to wash dishes.

~elina agrees to wash the dishes if Brad will cook. This arrangement illustrates?!the Leontief Paradox.(b) the Compensation Principle.

conomies of scale.e gains from trade.e decline of Western civilization.

(p 4. very individual were required to be absolutely self-sufficient(a) living standards would fall.

/. 1 , iving standards would rise.~(c) living standards would fall for some people, but for others, they would rise." ( I T ) living standards would be unchanged,yt is impossible know how living standards would be affected.L } ~ I , X . o . J . ~ : . In Peru on~unit of labor ca? produce 50 units ?f food. or 100 units of.oiL InBrazil ?ne unit' I T ) I / 1 of labor will produce 75 units offood or 25 u~ts of Oil . Wh~ has which advantage 1 I 1 what?JD 3 ( IT O / Y 1 - - ~Peru has absolute advantage and comparative advantage mboth goods.l Brazil has absolute advantage and comparative advantage in both goods.V :1 5 ' 3 / , (c) Peru has the absolute and comparative advantage in oil./ 1 : ; . Brazil has the absolute and comparative advantage in oil.~ Peru has the absolute, but not the comparative advantage in oil.)YfBrazil has the absolute, but not the comparative advantage in oil.

6. In Botswana one unit of labor can produce 60 units of wheat or 200 diamonds. InZimbabweone unit of labor can produce 20 units of wheat or 20 diamonds. Does Zimbabwe havearative advantage in anything?

es, in wheat.es, in diamonds.

(c) Yes, in both goods.(d) No. Botswana bas comparative advantage in both goods.

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/~ 7. Inquestion #6, what is Botswana's opportunity cost of producing a unit of wheat?

((I) 200 diamonds.((b)) 3.33 diamonds." (c5 1 .0 diamonds.(d) .30 diamonds.

8. ~estion #6, can Botswana benefit from trading with Zimbabwe?(a) iY es, if Zimbabwe will sell a unit of wheat for less than 3.33 diamonds.Yes, but only of Zimbabwe will sell a unit of wheat for less than 1 diamond.

(c) Yes, but only if Zimbabwe will sell a unit of wheat for less than 0.30 diamonds.~ Yes but only if Zimbabwe will sell diamonds for less than .30 units of wheat.YNo. Everything costs more in Zimbabwe.

9. How can a nation have comparative advantage inproducing a good, even though they haveno absolute advantage?(a) Because their labor is more efficientbecause of the natural advantages of geography and climate.

ecause they can produce that good at less sacrifice to themselves than can other nations.hey cannot. .

BA:;J9rh.Y is/\a) government by an autocrat.

a free market W.ithno govenunent interference.he absence of any international trade.a tariff on automobiles./e f a steam powered middle-eastern boat.

&According to the Heckscher-Ohlin version of the theory, a nation's comparative advantage isdetermined by(a) labor productivity.(b) the type of policies its govenunent pursues.A_the exchange rate.

~elative factor abundance.12. The nation of Urbano has 100 million workers living on 100 square miles of land. The nation

of El Campo has 1 million workers living on 10 square miles of land. From this we knowUrbano is ( - 1 0 0 ao ~2 l'000 oo/ ,J)elatively land abundant compared to El Campo. . .... I_~_ 'I

. reJat~ve1ylabor. abu.n~ant compared to El Camp'~~ i l~ I, i .Af /~w( ,} !.,j t- E.I C o - " _ ' _~YrelatlvelY land intensive compared to El Campo;'w ~~OOOOOOJJ1~ . > t=: 000 N )"..,sir relatively labor intensive compared to EI Campo. .: )/ L . - " - 1L '/ ' 'u . . \ EICc._~)l)

13. Australia is relatively abundant in land compared ja the Netherlands, while the Netberland~(~relatively rich in skilled labor. Suppose that cattle-raising uses land intensively, whilecomputer manufacturing uses skilled labor intensively. According to Heckscher-Ohlin,which nation will have comparative advantage in producing which good?

~Australia in ~oth goods. A'1Af,4I,'A. _ UV\J A 'b u " ve ) . { ;< ,, , , - , ~ ' . Cot-tl-LLetherlan?s 11 1 both goods. . N , ( _ - f 1 . , v ; J 1 & I . .. . o l ~ _ ( . . . " " l - . > t . I " ' - A 'h IA VL".L .."I"T " '_ C o " " " " p , - " . f - t . _ r Sustralia in cattle, Netherlands 111 computers.

) etherlands in cattle, Australia in computers.~npossible to tell from this information. (~ ) )

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~Y'"'blem #13 what will happen when Australia and the Netherlands enter into free trade?7r~~ents an.d..wages will rise in both nations. ( t \ . ( . c~~) /ents and wages will fall in both nations. ~)!_ . - - >C9'~ents will rise and wages. W . il l fall in both nations. ..;J A - v . . . , l W ) Nt-l '"l--/ " U ; ents will fall and wages will rise in both nations.

ustra1ian land rents will rise, while Dutch rents will fall.~ustralian land rents will fall, while Dutch rents will rise.)gYnothing will happen to rents in either nation, since land is a non-traded good.

1 5 . How does the average citizen have the knowledge to buy things from the nations that havecomparative advantage in producing those things?(a) He doesn't. That's why it is important for governments to regulate trade and direct

industries into desirable directions.~BY comparing the prices of goods of comparable quality.~~ By looking up the comparative advantage tables on the WTO website.yrShe wouldn't; this is why everyone needs to take courses in International Economics.

16. The Stolper-Samuelson theorem says that after two nations move from autarky to free trade~ every citizen of both nations becomes better off.~ every citizen of both nations becomes worse off.

wners of the scarce factor in both nations become better off.ners of the abundant factor in both nations become better off.pitalists in both nations become better off.

(f) laborers in both nations become better off.17. The US imports a large amount of clothing from Asia. International trade theory would

predict that as a result o f this in the USclothing price have fallen, while wages in t.be clothing sector have fallen.clothing price have risen, while wages in the clothing sector have fallen.clothing price have fallen, while wages in the clothing sector have risen.(d) clothing price have risen., while wages in the clothing sector have risen.

~he Leontief paradox is_.I'CaYtl1e theoretical result that workers can get poorer as a result of free trade, even though the/>~ation as a whole gets richer.(b) the theoretical result that a nation may have a comparative advantage in producing a

good, even though it is a high cost producer.(c) tbe empirical observation that it costs more per year to consumers to save jobs by

ocking free trade than the jobs pay.e empirical observation that the U.S .. is a net importer of goods that are produced

capital-intensively.~ famous mathematical puzzle that was thought unsolvable until Chinese students wereallowed into Russian universities; this demonstrates the benefits of allowing the free flow

of know ledge.

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_ .. ./ PVoJ_ (..I .(AY 4 =s ~Vl.-c.-k. . c..S r d ~ l . A ~ I " " " " " uj ( L~&t- ccrPt-@;;conomies of scale are an a'ilvantage to a firm because firms having economies of scale%an always monopolize their market.(b) will receive higher prices than firms without economies of scale.

: can take advantage of cheap labor.- _ , , _ . - . . . . . . . . .(d) \\ 11 have average costs that decrease as production increases; this gives them an edge inrice competition., FALSE. Economies of scale are a disadvantage to firms, since they cause average costs toincrease as production increases.

~2 r.u - main significance of economies of scale for international trade theory is that_. (a) t helps to ex.plain the large volume of trade among nations that are similar in resource

endowments.~ provides an argument against free trade.(c) it shows why, when trade is opened up among nations, a few large firms take overeverything.

~t shows why nations with low wages end up producing products developed in the richworld.

~it explains the compensation principle.21. Which of the following trade patterns is best explained by increasing returns to scale?~01~duras exports bananas to the US, while the US exports airplanes to Honduras.%Pakistan exports clothing to the US while the US exports airplanes to Pakistan.

. Mexico exports b.eef to the US while the US exports airplane to M.exico.Japan exports sare-to the US while the US exports airplanes to Japan.

e_({{,)22. A tariff is,}. a chewy Turkish candy.~ a tax on imported goods.\ _ _ _ _ t c 5 a quantity restriction on exported goods.(d) a quantity restriction on imported goods.

23. What is the biggest difference between a tariff and a quota in terms of their economic impacton a nation?

~ Tariffs transfer consumer surplus from consumers to producers, while quotas transfer,. ~roducer surplus to consumers.ffi)ere are no deadweight losses with quotas.

Quotas do not cause domestic prices to rise.here are no~overmnen~ revenues from a quota.. . .~There 1S no difference, smce a quota can always be designed that IS mathematically

equivalent to a given tariff.~he effective rate of protection on the domestic value added to a good wiII be greater than the~~ominal tariff rate if(a) the product being protected is made entirely with domestic inputs.

(b) the product being protected is subject to economies of scale.(c) the product being protected is made with a large portion of imported inputs that areUbject to the same tariff as that product.re product being protected is made with a large portion of imported inputs that are notubject to a tariff.(e) FALSE. The effective rate of protection refers to how a quota can be made

mathematically equivalent to a tariff.

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~. . hich of the following best expresses the "infant industry" argument?

(a ve.n when a nation has a potential comparative a..dvantag.e in some are.a, a young firmlay need to go through a costly "learning by doing" stage, during which it needs to beprotected if it is to survive.

(b) Most new businesses are profitable in the first few years, and this can be guaranteed by aprotective tariff.(c) Infant industries appear to be innocent, but they are really instruments of exploitationused by intemational capitalists that grow to be multinational conglomerates.

(d) It is a good idea to focus on producing products used by infants because this willguarantee future markets for all sorts of goods as these infants grow to be adults.

~iCh .. of the following best sums up the effects of a subsidy compared to the effects of a~;i'ff? .(a) Subsidies encourage domestic producers to be inefficient, while tariffs do not.(b) Subsidies increase the world price of the good, while tariffs have no effect on the world

nee.her.e IS no dea~weight loss due to lost con~umption with subsidies, but the subsidyequires expenditure by the government which must be financed by taxpayers.(d) Subsidies have no trade distorting impact.

(e) There is no difference.27. U.S. trade restrictions limiting the sale of clothing from low-wage nations such as Bangladesh

and Haiti~elps protect the high wages of U.S. workers; and at the same time help promote

economic prosperity in the low-wage nations. ~Apr?tects U.S. consumers a~t~e expense of fore!gn producers. .. .(c) raises the US standard of living., even though It Will harm the standard of living In the

low-wage nations.(d) increases per capita income in the U.S. by allowing specialization to the areas of

comparative advantage.duces the standard of living in the U.S. and in the low-wage nations by interfering withpecialization to the areas of comparative advantage.

@):he US experience with voluntary export restraints (YERs) on Japanese car makers in the1980s suggests that trade restrictions

ignificantly increase the number of jobs available in the importing nation.re effective in protecting certain selected jobs, but at a high cost ta consumers.re effective in protecting certain selected jobs, and the cost to consumers is insignificant.

(d) are completely ineffective in protecting jobs.(e) benefit the importing nation as a whole, even if all individuals within the nation lose from

them.

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@Tarifj escalation refers to(a) the frequently observed pattern of increasing retaliatory tariffs that occurs during a tradewar.

(b) the fact that tariffs increase not only the price of imports but also the price of domesticoods that compete with imports. .riff structures in which the nominal tariff rate is greater the more processed is the good;lis has the impact of giving a high effective rate of protection to domestic processors ofimported raw materials.

(d) the fact that ad valorem tariffs increase automatically when the price of an importincreases, since ad valorem tariffs are a percentage of the value of the import.

@ ~at is the connection between domestic farm price supports and agricultural trade barriers?(a) They both protect domestic consumers from lower quality foreign food.. They both increase the average real income of Americans.

f you have ~omestic price sUPP0l1~you ~lso need tra~e barriers; otherwi~e foreignproducers w111be attracted by the high pnces, and the increased supply will defeat thegoal of higher farm prices.

~ There is no connection. Fan11 price supports are domestic policy, while trade barriers arepart of foreign policy.

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(0Indicate whether the following statements are TRUE or FALSE (I pt. each) and EXPLAIN\VIIY (4 pts.each) (What is the relevant concept or principle? How does it apply?)

I. According to international trade theory US labor unions are unwittingly actingagainst the interests of their members when they oppose free trade, because thetheory says unambiguously that everyone in a nation gains from trade.

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For Possible Partial Credit (up to 2 pts. per question)Choose up to-ten multiple choice questions and justify your answer.Suggested strategy: (1) Choose questions that you are not very sure of. This is not extra credit.If you get a question right you get the full four points but no more. (2) Some questions revolvearound the definition of a concept or an application of a concept. In these questions try toidentify the relevant concept. State the definition. Show how it applies or does not apply. (3) Ifyou cannot defend you answer positively, use a negative approach, i.e., explain why youeliminated the other possibilities. (4) If the question seems unclear or ambiguous, explain whyyou think this is so.

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International 1 [Weston]

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