Chapter 1: Introduction Multiple Choice Questions 1. Historians of economic thought often describe ___________ written by _______ and published in __________ as the first real exposition of an economic model. A. "Of the Balance of Trade,” David Hume, 1776 B. "Wealth of Nations," David Hume, 1758 C. "Wealth of Nations," Adam Smith, 1758 D. "Wealth of Nations," Adam Smith, 1776 E. "Of the Balance of Trade," David Hume, 1758 Answer: E 2. From 1959 to 2000, A. the U.S. economy roughly tripled in size. B. U.S. imports roughly tripled in size. C. the share of US Trade in the economy roughly tripled in size. D. U.S. Imports roughly tripled as compared to U.S. exports. E. U.S. exports roughly tripled in size. Answer: C 3. The United States is less dependent on trade than most other countries because A. the United States is a relatively large country. B. the United States is a "Superpower.". C. the military power of the United States makes it less dependent on anything. D. the United States invests in many other countries E. many countries invest in the United States. Answer: A 4. Ancient theories of international economics from the 18th and 19th Centuries are: A. not relevant to current policy analysis. B. are only of moderate relevance in today's modern international economy. C. are highly relevant in today's modern international economy. D. are the only theories that actually relevant to modern international economy. E. are not well understood by modern mathematically oriented theorists. Answer: C
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5. An important insight of international trade theory is that when countries exchange goods and services one with the other it A. is always beneficial to both countries. B. is usually beneficial to both countries. C. is typically beneficial only to the low wage trade partner country . D. is typically harmful to the technologically lagging country. E. tends to create unemployment in both countries. Answer: B 6. If there are large disparities in wage levels between countries, then A. trade is likely to be harmful to both countries. B. trade is likely to be harmful to the country with the high wages. C. trade is likely to be harmful to the country with the low wages. D. trade is likely to be harmful to neither country. E. trade is likely to have no effect on either country. Answer: D 7. Benefits of international trade are limited to A. tangible goods. B. intangible goods. C. all goods but not services. D. services. E. None of the above. Answer: E 8. Attempts to explain the pattern of international trade A. have been a major focus of international economists. B. have proven to be hopeless. C. have proven to be a trivial exercise. D. have been the preoccupation of economic development theorists. E. None of the above. Answer: A 9. Which of the following does not belong? A. NAFTA B. Uruguay Round C. World Trade Organization D. None Tariff Barriers
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E.
None of the above.
Answer: D 10. Cost-benefit analysis of international trade A. is basically useless. B. is empirically intractable. C. focuses attention on conflicts of interest within countries. D. focuses attention on conflicts of interests between countries. E. None of the above. Answer: C 11. An improvement in a country's balance of payments means a decrease in its balance of payments deficit, or an increase in its surplus. In fact we know that a surplus in a balance of payments A. is good. B. is usually good. C. is probably good. D. may be considered bad. E. is always bad. Answer: D 12. The study of exchange rate determination is relatively A. difficult. B. new and mathematical. C. old. D. obtuse. E. None of the above. Answer: B 13. The GATT was A. an international treaty. B. an international U.N. agency. C. an international IMF agency. D. a U.S. government agency. E. a collection of tariffs. Answer: A
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14. The international debt crisis of early 1982 was precipitated when _____ could not pay its international debts. A. Russia B. Mexico C. Brazil D. Malaysia E. China Answer: B 15. International economics can be divided into two broad sub-fields: A. macro and micro. B. developed and less developed. C. monetary and barter. D. international trade and international money. E. static and dynamic. Answer: C 16. A primary reason why nations conduct international trade is because of differences in A. historical perspective. B. location. C. resource availabilities. D. tastes. E. incomes. Answer: C 17. International trade is sometimes used as a substitute for all of the following except A. international movements of capital. B. international movement s of labor. C. domestic production of the same goods or services. D. domestic production of different goods and services. E. None of the above. Answer: D
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18. International trade forces domestic firms to become more competitive in terms of A. the introduction of new products. B. product design and quality. C. product reliability. D. product price. E. All of the above. Answer: E 19. The movement to free international trade is most likely to generate short-term unemployment in which industries? A. Industries producing non-tradable goods B. Import-competing industries C. Export industries D. Import sectors E. None of the above. Answer: B 20. International trade is logically associated with which assumption? A. Resources are less mobile internationally than domestically. B. Resources are more mobile internationally than are goods. C. Imports should exceed exports. D. Exports should exceed imports. E. None of the above. Answer: A 21. Arguments for free trade are sometimes disregarded by the political process because A. economists tend to favor highly protected domestic markets. B. economists have a universally accepted decisive power over the political decision mechanism. C. maximizing consumer welfare may not be a chief priority for politicians. D. the gains of trade are of paramount concern to typical consumers. E. None of the above. Answer: C
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22. Increased foreign competition tends to A. increase profits of domestic import-competing industries. B. place constraints on the wages of domestic workers. C. induce falling output per worker for domestic workers. D. intensity inflationary pressures at home E. None of the above. Answer: B 23. ____________ is the ability of a firm to design, produce, and market goods and services that are better and/or cheaper than those of other firms. A. Competitiveness B. Protectionism C Comparative advantage D. Interventionism E. None of the above. Answer: A 24. For a country to maximize its productivity in a global economy, it requires A. only imports. B. only exports. C. both exports and imports. D. neither exports nor imports. E. foreign direct investment. Answer: C 25. Proponents of free trade claim all of the following as advantages except A. relatively high wage levels for all domestic workers. B. a wider selection of products for consumers C. increased competition for world producers. D. the utilization of the most efficient production processes. E. None of the above. Answer: A 26. A firm's ____, relative to that of other firms, is generally regarded as the most important determinant of competitiveness. A. income level B. tastes C. preferences D. productivity E. environmental regulation
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Answer: D 27. One likely effect of moving to free international trade is that A. a monopoly in the home market becomes an oligopoly in the world market. B. an oligopoly in the home market becomes a monopoly in the world market. C. a purely competitive firm becomes an oligopolist. D. a purely competitive firm becomes a monopolist. E. None of the above. Answer: A 28. International trade in goods and services tends to A. increase all domestic costs and prices. B. keep all domestic costs and prices at the same level. C. lessen the amount of competition facing home manufactures. D. increase the amount of competition facing home manufacturers. E. None of the above. Answer: D 29. The real income of domestic producers and consumers may be increased by A. technological progress, but not international trade. B. international trade, but not technological progress. C. neither technological progress nor international trade. D. both technological progress and international trade. E. None of the above. Answer: D 30. A sudden shift from import tariffs to free trade may cause short-term unemployment in A. import competing industries. B. exporting industries. C. industries that neither import nor export. D. service industries E. None of the above. Answer: A
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31. Empirical studies indicate that productivity performance is A. directly related to globalization of industries. B. inversely related to globalization of industries. C. not related to globalization of industries. D. Any of the above. E. None of the above. Answer: A 32. A closed economy is one in which A. imports exactly equal exports. B. domestic firms invest in foreign countries. C. the home economy is isolated from foreign trade or investment. D. All of the above. E. None of the above. Answer: C 33. The dominant trading nation in the world market since World War II was A. the United Kingdom. B. the United States. C. Japan. D. Germany. E. China. Answer: B 34. Empirical studies indicate that _______________ best enhances productivity growth for local industries A. local competition B. cut-throat competition C. destabilizing competition D. global competition E. None of the above. Answer: D 35. High levels of openness are most likely associated with a country's A. political orientation. B. size. C. resource availability. D. historical association with foreign entangling alliances. E. None of the above.
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Answer: B
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Essay Questions 1.
It is argued that small countries tend have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities. Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country. 2.
It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters. 3.
Some patterns of international trade are easier to explain than others. Give several examples and explain.
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious. 4.
International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book. 5.
It is argued that small countries tend have more open economies than large ones. Is this empirically verified? What are the logical underpinnings of this argument?
Answer: Yes. They do not have sufficient resources to satisfy consumption needs; and also do not have a sufficiently large market to enable their industries to avail themselves of scale economy possibilities.
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Another answer would rely on a location argument. Assume that the "natural" market for any given plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country, then the probability that the typical circular market will encompass some foreign country is greater the smaller is the country. 6.
It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?
Answer: The student may think anything. The purpose of the question is to set up a discussion, which will lead to the models in the following chapters. 7.
Some patterns of international trade are easier to explain than others. Give several examples and explain.
Answer: Historical circumstance can explain some patterns such as the relatively large trade flows from West Africa to France. The relatively sparse trade between countries within South America seems curious. 8.
International trade tends to prove that international trade is beneficial to all trading countries. However, casual observation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: Like question 2, this is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book. 9.
International Trade theory is one of the oldest areas of applied economic policy analysis. It is also an area for which data was relatively widely available very early on. Why do you suppose this is the case?
Answer: In ancient times, public finance was not well developed. Most of the population was not producing and consuming within well-developed market economies, so that income and sales taxes were not efficient. One of the most convenient ways for governments to obtain resources was to set up custom posts at borders and tax. Hence international trade was of great policy interest to princes and kings, as was precise data of their main tax base.
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Quantitative/Graphing Problems
1.
The figure above is the Production Possibility Frontier (PPF) of Baccalia, where only two products are produced, clothing and wine. In fact Baccalia is producing on its PPF at point A. By and large the people of Baccalia are content, as both their external and internal needs for warmth are satisfied in the most economically efficient manner possible, given their available productive resources (and known technology). How much wine is being produced? How much cloth? If a person in this country wanted to purchase a liter of wine, what would be the price he or she would have to pay? Judging from what you learned in the previous paragraph, can you indicate at which point (if at all) the Community Indifference Curve is tangent to the Production Possibility Frontier? Explain your reasoning.
Answer: 6 million liters of wine are being produced. 3 million square yards of cloth are being produced. The price of 1 liter of wine is one half of a square yard of cloth. The tangency is at point A. We know this because otherwise the country would not be producing at the point of maximum economic efficiency.
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2.
One day, Baccalia joined the WTO and joined the Global Village. They discovered that in the LWE (London Wine Exchange), 1 liter of wine is worth 1 square yard of cloth. What is the logical production point they should strive for?
Answer: 10 million liters of wine.
3.
They wish to enjoy to the fullest from the gains from trade, but are not willing to give up imbibing even one drop of wine from the 6 million liters they consumed in their original autarkic state. If their new consumption point is a point we shall designate as point b, describe where this point would be found.
Answer: Vertically above point a 4.
Where is the Community Indifference Curve family of curves tangent to their new Consumption Possibility Frontier?
Answer: At point b. 5.
How can you prove that Baccalia has in fact gained from the availability of trade, and that their new situation is superior to the pre-trade situation (with which they were quite content)?
Answer: The country was consuming at point a before trade. It is now consuming at point b with trade. Point b represents a superior welfare combination of goods as compared to point a, since at b the country has more of each of the goods.
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