Spring 2014 ECN 306: Survey of International Economics Dr.

Mendez
EXAM 1Version A


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Spring 2014 ECN 306: Survey of International Economics Dr. Mendez
EXAM 1Version A


Answer the next four questions using the following data:

The U.S. and the RoW have 120 hours of labor and the following production technologies for
wheat (W) and cloth (C): U.S. RoW
a
W
= 4 hrs a*
W
= 3 hrs
a
C
= 4 hrs a*
C
= 2 hrs

1. What is the maximum amount of wheat each nation can produce in autarky?
a. 30 W in the U.S. and 30 W in the RoW.
b. 60 W in the U.S. and 40 W in the RoW.
c. 40 W in the U.S. and 60 W in the RoW.
d. 30 W in the U.S. and 40 W in the RoW.
e. 40 W in the U.S. and 30 W in the RoW.

2. Consider the RoW. Suppose that initially all RoW labor is employed in wheat production. With
this labor allocation, the marginal cost of a unit of cloth (MCc) is ______? Now suppose the
labor allocation is 90 workers in wheat production and 30 in cloth production. The MCc with
this allocation of labor is ______.
a. MCc = 1 W/C; MCc = 2/3 W/C.
b. MCc = 1 C/W; MCc = 1 W/C.
c. MCc = 2/3 W/C; MCc = 2/3 W/C.
d. MCc = 1 1/3 C/W; MCc = C/W.
e. MCc = 2/3 C/W; MCc = 2/3 C/W.

3. Suppose the U.S. and RoW now engage in free trade. Which below is a potential terms of trade?
a. Pc/Pw = C/W.
b. Pc/Pw = W/C.
c. Pc/Pw = 2 C/W.
d. Pc/Pw = 2 W/C.
e. All of the above.

4. What would Adam Smith say when asked to predict the pattern of trade between the U.S. and
the RoW?
a. The U.S. would export wheat and import cloth.
b. The U.S. would import wheat and export cloth.
c. The U.S. would export both products.
d. The U.S. would import both products.
e. This situation is not possible.

5. Listed below are five reasons why autarky prices could be different between nations. The
Ricardo Trade Model focuses on which explanation?
a. Differences in demand due to differences in tastes or preferences.
b. Differences in supply due to differences in production technologies.
c. Differences in supply due to differences in the relative supplies of the factors of
production.
d. Differences in prices due to government policies such as import taxes and export
subsidies.
e. Differences in prices due to shipping costs between markets.

Use the data in the following table to answer the next four questions.


6. Suppose all that you have is the data in the middle column. What can you say about the
pattern of trade?
a. The U.S. will export all the products.
b. The U.S. will export pig iron and import all the rest of the goods.
c. The U.S. will export pig iron, motor cars, machinery, glass containers, paper and beer
and import all the rest.
d. The U.S. will export pig iron and the U.K. will export cement.
e. There is not enough information to answer the question.

7. Suppose all that you have is the data in the middle column. Which nation has the higher
standard of living?
a. The U.S.
b. The U.K.
c. There is not enough information to answer the question.

8. True or False. The data in the above table provide strong support for Adam Smiths conjecture
that absolute productivity is a primary determinant of the pattern of trade.
a. True
b. False.

9. Suppose that the wage in the U.S. is 2.5 times higher than the wage in the UK. If so, which of
the products listed below will the U.S. export?
G.D.A. MacDougalls 1951 Data

U.S. Exports to
Output per Third Market
U.S. Worker (Market Share)
Industry ------------------- --------------------
U.K. Exports to
Output per Third Market
U.K. Worker (Market Share)


Pig Iron 3.6 5.1
Motor Cars 3.1 4.3
Machinery 2.7 1.5
Glass Containers 2.4 3.5
Paper 2.2 1.0
Cigarettes 1.7 .47
Leather Footwear 1.4 .32
Hosiery 1.8 .30
Cotton Spinning 1.5 .11
Beer 2.0 .056
Cement 1.1 .091
Wool 1.35 .004
Apparel 1.25 .044

a. apparel
b. pig iron, motor cars, machinery
c. pig iron, motor cars, machinery, glass containers, beer
d. glass containers, cigarettes, beer
e. None of the above.

Use the data listed below to answer the question below. Sudan has six potential producers, three
located in the northern part of the nation and three in the southern part. The technology for these
producers is listed below.


10. Which statement below is correct? (HINT: Recall the discussion in lecture that labor and goods
are perfectly mobile within nations.)
a. The industries in the north will produce all of the output of the three goods.
b. The industries in the south will produce all of the output of the three goods.
c. The North will produce cloth and the South will produce wheat and shoes.
d. The North will produce cloth and wheat and the South will produce shoes.
e. There is not enough information to answer the question.

11. Based on mercantilist thinking, governments should
a. subsidize and encourage imports.
b. subsidize and encourage exports.
c. allow for free trade unencumbered by government regulations and restrictions.
d. both (a) and (b).

12. Despite the elegance of the Ricardo Model, what are criticisms of the model?
a. it predicts that the opening to trade will lead to sizeable changes in the composition of
production with entire industries shutting down.
b. it does not tell us much about the impact of trade on the distribution of income.
listed by
c. it ignores the fact that increasing opportunity cost is a dominant feature of real world
economies.
d. all of the above.
e. Only a and b.

13. Use the following to answer the next 5 questions: Assume a two-country, two-good, two-factor
of production world where the following relationships hold:

(K/L)US > (K/L)ROW
(K/L)auto > (K/L)shoes

where (K/L)US is the capital-labor ratio in the U.S., (K/L)ROW is the capital-labor ratio in the
ROW, (K/L)auto is the capital-labor ratio in the production of autos, and (K/L)shoes is the
capital-labor ratio in the production of shoes. Assume further that technology and tastes are
the same in the U.S. and the ROW.

14. The relationships shown above indicate that the United States is:
a. A capital-intensive country.
b. Scarce in land.
c. A labor-abundant country.
d. A capital-abundant country.

15. The relationships shown above indicate that the production of shoes is:
a. Capital-intensive.
b. Labor-intensive.
c. Labor-abundant.
d. Capital-abundant.

16. The relationships shown above indicate that in the U.S. the price of autos relative to shoes is:
a. Higher than in the Rest of the World.
b. Lower than in the Rest of the World.
c. The same as in the Rest of the World.
d. It is impossible to compare the prices with the information provided.

17. The relationships shown above indicate that the United States has a comparative advantage in
the production of ______ while the Rest of the World has a comparative advantage in the
production of _______.
a. Both goods; neither good.
b. Shoes; automobiles.
c. Automobiles; shoes.
d. Neither good; both goods.

18. According the Heckscher-Ohlin model, the opening of trade between the United States and the
Rest of the World should cause the United States to export _______ and import _______.
a. Both goods; neither good.
b. Shoes; automobiles.
c. Automobiles; shoes.
d. Neither good; both goods.
Use the information in following figures to answer the question below.

19. Which below is the ratio of the GFT in the U.S. relative to the GFT in the RoW?
a. 3 1/3
b. 3/10
c. 1 1/6
d. 6/7
e. There is not enough information to answer the question.

20. Study the figures below for two nations that have Ricardo-type economies. Which of the
dashed lines (A, B, C, or D) represents the correct Consumption Possibility Set for the ROW after
it has opened up to trade with the U.S.?
a. Line A
b. Line B
c. Line C
d. Line D

Wheat United States Wheat Rest of World (ROW)

60



A


20 B


20 Cloth 30 Cloth
D C




$2000
$1000
15 40
50 65
75 25 50
$1000
$1000
$700
Df
Rest of World
United States
21. What is the Leontief Paradox?
a. The fact that the Russian economy was found to export high technology-intensive
products to the U.S. even though Russia has lagged the U.S. in technology innovation
since the Sputnik program put the worlds first satellite into orbit.
b. The fact that Leontief found almost no evidence that relative labor productivity
differences help shape the pattern of trade for the U.S. and the United Kingdom.
c. The fact that U.S. imports were found to be capital-intensive and its exports labor
intensive shortly after WWII.
d. The fact that U.S. imports were found to be labor abundant and its exports capital
abundant shortly after WWII.
e. The fact that U.S. imports were found to be both labor AND capital intensive shortly
after WWII.

22. Which below are problems in testing the Heckscher-Ohlin (HO) model
a. A product is identified as capital intensive yet it is being exported by a labor abundant
nation. This may simply be due to the fact that producers in the labor abundant nation
are only carrying out the final assembly of the product. They did not make the capital
intensive components.
b. A product is classified as technology- or human capital-intensive, yet it is being exported
by a low-skill labor abundant nation. This may simply be due to the fact that a
significant amount of time has passed since the product was originally developed and
there is no longer any R&D associated with its production.
c. A capital intensive product appears to be exported by a labor abundant nation. This
may be due to the fact that the exporting nation is misclassified. Its factor endowments
have evolved and it is now capital abundant.
d. All of the above.
e. Only a and b.


Answer the next two questions using the following information where T is land, L is labor, C is
cloth and W is wheat:
Factor endowments: T/L > T*/L*
Factor intensities: Tw/Lw > Tc/Lc

23. In the SHORT RUN, opening up to trade is expected to have what impact on the earnings of U.S.
land owners (Tc, Tw) and laborers (Lc, Lw)?
a. The earnings of Tc, Lc, Tw, and Lw will decline.
b. The earnings of Tc, Lc, Tw, and Lw will rise.
c. The earnings of Tc and Lc will decline, and those of Tw and Lw will rise.
d. The earnings of Tc and Lc will rise, and those of Tw and Lw will decline.
e. The earnings of Tc and Tw will rise, and the earnings of Lc and Lw will fall.

24. In the LONG RUN. The opening up to trade is expected to have what impact on the earnings of
the U.S. factors of production?
a. The earnings of land owners (Tc and Tw) will fall and the earnings of workers (Lw and Lc)
will rise.
b. The impact on the earnings of landowners is uncertain, but the earnings of Lw and Lc
will rise.
c. The earnings of Tc and Lc will decline, and those of Tw and Lw will rise.
d. The earnings of Tc and Lc will rise, and those of Tw and Lw will decline.
e. The earnings of landowners (Tc and Tw) will rise, and the earnings of workers (Lc and
Lw) will fall.

25. SKIP Drawn below is a well-behaved series of Social Indifference Curves. Which of the
statements below are true about point A?
a. Society values point A more than it values point B.
b. Society values point A the same as it values point D.
c. Society Values point A less than it values point C.
d. All of the above are correct.
e. Only a and c.

Wheat I
1
I
2


I
0



A

B
C
D Cloth

26. SKIP Drawn above is a well-behaved series of Social Indifference Curves. Which below is
correct regarding the relationship between points A and D?
a. MCc/MCw at A is greater than the MCc/MCw at D.
b. MCc/MCw at A is less than the MCc/MCw at D.
c. MUc/MUw at A is greater than the MUc/MUw at D.
d. MUc/MUw at A is less than the MUc/MUw at D.
e. None of the above.

Use the following information to answer the next four questions.
The domestic supply and demand curves for skateboards in the U.S. are represented by
QS = -60 + 3P
QD = 390 2P

27. If the U.S. could trade skateboards freely with the ROW at a price of $75, how many skateboards
will be purchased in the United States?
a. 165
b. 240
c. 285
d. It depends on foreign supplies of skateboards.

28. If the United States could trade skateboards freely with the ROW at a price of $75, the United
States would import ____ skateboards and export ______ skateboards.
a. 240; 165
b. 0; 165

c. 75; 0
d. 240; 0

29. The opening of free trade with an international price for skateboards of $75 will lead to a
change in U.S. consumer surplus of ____ and U.S. producer surplus
a. +$3,375; -$2,812.50
b. -$3,375; -$2,812.50
c. +$2,812.50; +$3,375;
d. -$2,812.50; +$3,375;

30. The opening of free trade with an international price for skateboards of $75 led to a change in
U.S. production. What is the DOMESTIC RESOURCE COST only of the output that has changed?
a. $2,812.50
b. $3,812.50
c. $3,712.50
d. $3,375.50
e. Concept not in course material.

Use the data in the following table to answer the question below.

-----------Share of World Factor Endowments and GNP----------
Capital Skilled Labor Unskilled Labor Arable Land GNP
US 24 29 1 30.0 28
Canada 1 3 1 3.0 2
Japan 16 23 1 0.8 20

31. From the table above, Japan is
a. Capital intensive
b. Labor intensive
c. Capital abundant
d. Low skill labor abundant
e. None of the above.


32. Study the figures on the next page. Using the letter A to label the Consumption Possibility Set
under autarky and the letter B to label the Consumption Possibility Curve under free trade,
which figure correctly labels the two curves when we are using the Factor Endowments or
Heckscher-Ohlin trade model.
a. Figure A
b. Figure B
c. Figure C
d. Figure D
e. The concept of the Consumption Possibility Curve only applies to the Ricardo model.

Wheat

Figure A



A

F
Cloth


Wheat

Figure B



F

A
Cloth


Wheat

Figure C
A




F
Cloth


Wheat

F Figure D





A
Cloth

ANSWER KEY
1. D
2. C
3. B
4. E
5. B
6. D
7. A
8. B
9. B
10. A
11. B
12. D
13. No question
14. D
15. B
16. B
17. C
18. C
19. A
20. A
21. C
22. D
23. C
24. E
25. D
26. C
27. B
28. C
29. A
30. C
31. E
32. B