1.

As a result of the North American Free Trade Agreement (NAFTA), the United

States and Canada shifted toward free trade with Mexico. According to the StolperSamuelson theorem, how is this shift affecting the real wage of unskilled labor in
Mexico? (Assume that Mexico is abundant in unskilled labor and scarce in skilled
labor relative to the United States and Canada.)
a. The real wage of unskilled labor in Mexico falls.
b. The real wage of unskilled labor in Mexico rises.
c. The real wage of skilled labor in the U.S. and Canada remains

unchanged.
d. The real wage of skilled labor in the U.S. and Canada falls.
e. Not enough information to determine the impact on the real wage of

Mexican unskilled labor.

Answer: _____

2. 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 lags the U.S. in
technological innovation.
b. The fact the Leontief found no evidence to support the view that

differences in relative labor productivity are essential for understanding the

pattern of trade for the U.S. and the U.K.
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 intensive shortly after WWII.

e. The fact that U.S. imports wer found to be both labor AND capital intenive

shortly after WWII.

Answer: _____

3. According to the factor price equalization theorem, free trade will

lead to an equalization of the real wage earned by labor to the real
rental rate earned by landowners in the United States.
a. True

b. False
Answer: _____

4. Consider our standard model of the economy, with two goods (wheat and cloth)

and two factors (land and labor). Suppose a decrease now occurs in the relative
price of wheat. What are the short run effects on the earnings of labor employed in
the wheat industry and labor employed in the cloth industry?
a. The earnings of labor in both industries rise.
b. The earnings of labor in both industries fall.
c. The earnings of labor in the wheat industry falls and the earnings of labor

in the cloth industry rise.

d. The earnings of labor in the wheat industry rise and the earnings of labor

in the cloth industry fall.

e. Not enough information to answer the question.
Answer: _____

5. Consider our standard model of the economy, with two goods (wheat and cloth)

and two factors (land and labor). Assume that wheat production is land-intensive.
Suppose a decrease now occurs in the relative price of wheat. What are the long
run effects on the earnings of labor employed in the wheat industry and labor
employed in the cloth industry?
a. The earnings of labor in both industries rise.
b. The earnings of labor in both industries fall.
c. The earnings of labor in the wheat industry falls and the earnings of labor

in the cloth industry rise.

d. The earnings of labor in the wheat industry rise and the earnings of labor

in the cloth industry fall.

e. Not enough information to answer the question.
Answer: _____

6. Answer questions 6-8 using the following information: The U.S., a land abundant

nation, has decided to open up to trade. Wheat production in the U.S. is land-

intensive and cloth production is labor intensive. 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.
Answer: _____

7. Now assume that land can shift easily among the two industries. What are the

Medium-run effects on earnings due to the opening of trade?

a. The earnings of Lw rise, of Lc fall, and the effect on those of Tw and Tc

are unclear.
b. The earnings of Lw and Tw decline, while the earnings of Lc and Tc rise.
c. The earnings of Lw and Tw rise, while the earnings of Lc and Tc decline.
d. The earnings of Tw decline, of Tc rise, and the effect on those of Lc and

Lw are unclear.
Answer: _____

8. Assume that we are now 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 will rise, and the earnings of Lc
and Lw will fall.
Answer: _____

9. Use the information listed below to answer questions 9-11. Below is 2009 data on

Japanese exports (Ei) and imports (Zi). What is the value of the Grubel-Lloyd Intraindustry Trade index (Bi) for each product?
Product
perfumes
cosmetics
home washing
machines
electronic microcircuits
automobiles
large civilian aircraft
photographic cameras

Ei
($millions)
2
968

Zi ($millions)
223
919

15

618

24,381
62,146
0
12

16,238
4,576
2991
35

a. 1.8;97.4;4.7;2;17;0;51.9
b. 1.8;97.4;4.7;80;13.7;0;51.9
c. 1.8;97.4;12;2;17;0;51.9
d. 20;13;5;2;17;0;51.9
e. 120;13;5;2;17;0;51.9
Answer: _____

10. Using the data on Japanese imports and exporters presented in the last

question, which product is characterized by the highest degree of intra-industry

trade? What explains this? Product differentiation or scale economies?
a. cosmetics; product differentiation
b. cosmetics; scale economies
c. large civilian aircraft; scale economies
d. automobiles; scale economies
e. home washing machines; product differentiation
Answer: _____

11. Use the data presented in the previous two questions to answer this question.

The Overall or Weighted Grubel-Lloyd index for U.S. import and export data for the
same seven product categories is 54.5. Which country has relatively more intraindustry trade in these seven products? [HINT--the Weighted index is calculated
using two additional steps: First, multiply each Bi by Si, where Si is the individual
product categories share of TOTAL intra-industry trade. Si = (Xi+Zi)/(sum of Xi+Zi
over the 7 products). Second, after each Bi is weighted by its respective Si, then add
the BiSi together.]
a. The Overall or Total Grubel-Lloyd index for Japan in these seven products

is 68.5. Thus the U.S. has relatively more intra-industry trade in these seven
products.
b. The Overall or Total Grubel-Lloyd index for Japan in these seven products

is 68.5. Thus the U.S. has relatively less intra-industry trade in these seven
products.
c. The Overall or Total Grubel-Lloyd index for Japan in these seven products

is 38.5. Thus the U.S. has relatively less intra-industry trade in these seven
products.
d. The Overall or Total Grubel-Lloyd index for Japan in these seven products

is 38.5. Thus the U.S. has relatively more intra-industry trade in these seven
products.
e. There is insufficient information to answer this question.
Answer: _____

12. What are the benefits of international trade according to the new trade theory

presented in lecture?
a. Lower prices.
b. Increased product variety.
c. Rising incomes or wages in trade-related industries.
d. All of the above.
e. Only a and b.
Answer: _____

13. Why does the presence of product differentiation make it more likely that a

country will have more winners and fewer losers when it opens up to free trade?

a. With product differentiation, domestic production of a product does not

necessarily fall with trade. This in turn means that workers in an industry
exposed to trade may not experience layoffs or be forced to search for work
outside their industry of employment.
b. With product differentiation, domestic production of a product does not

necessarily fall with trade. This in turn means that workers in an industry
exposed to trade may not experience a reduction in wages. In other words,
there may not be any Stolper-Samuelon effects.
c. With product differentiation, governments can use trade barriers

selectively to protect segments of an industry that might be harmed by the

move to freer trade.
d. All of the above.
e. Only a and b.
Answer: _____

14. The emergence of vertical intra-industry trade -- both imports and

exports in a given sector of the economy at different stages of
processing -- buttresses the view that comparative advantage is no
longer useful in explaining trade patterns.
a. True
b. False
Answer: _____

15. True of False. According to your text, the more disaggregated are the trade data

-- say, they are presented at the 6 digit rather than the 2 digit, the less the amount of
measured intra-industry trade. (Suggestion: Google 'Harmonized tariff schedule' to
see what is meant by 6 digit versus 2 digit.)
a. True.
b. False.
Answer: _____

16. Consider the diagram shown in the PDF listed below. This question is

challenging and has two parts. First, which diagonal demand curve, OA or OD,
indicates that society has a relatively stronger preference towards rice than to

motorcycles? Second, if the nation is in autarky, does this stronger preference

translate into a higher relative price of rice?
GraphQuestion16.pdf
a. Diagonal demand curve OA indicates a relatively stronger preference

towards rice than to motorcycles. No, the slope of the production possibility
curve at B (where OA intersects the PPC) is flatter indicating the price of rice
is lower at B than at C.
b. Diagonal demand curve OA indicates a relatively stronger preference

towards rice than to motorcycles. Yes, the slope of the production possibility
curve at B (where OA intersects the PPC) is steeper indicating the price of
rice is lower at B than at C.
c. Diagonal demand curve OD indicates a relatively stronger preference

towards rice than to motorcycles. No, the slope of the production possibility
curve at C (where OD intersects the PPC) is flatter indicating the price of rice
is lower at C than at B.
d. Diagonal demand curve OD indicates a relatively stronger preference

towards rice than to motorcycles. Yes, the slope of the production possibility
curve at C (where OD intersects the PPC) is steeper indicating the price of
rice is higher at C than at B.
e. None of the above.
Answer: _____

17. A nation's initial or starting production possibility curve is denoted by E in the

diagram contained in the PDF. It produces rice and motorcycles with labor and land.
Suppose that both resources increase but that land grows at a faster rate than labor.
If motorcycles are labor-intensive, which is likely to be the new production possiblity
curve?
GraphQuestion17.pdf

a. A.
b. B.
c. C.
d. D.
e. All four are possibilities.

Answer: _____

18. In the diagram depicted in the PDF listed below is a small nation in international

trade that is currently engaged in free trade. Prior to free trade, what was true about
the relationship between the autarky relative price of rice in comparison to the world
price of rice? Assume that its relative endowments ratio differs from that of the rest
of the world.
GraphQuestions18and19(1).pdf

a. autarky Pr/Pm > world Pr/Pm

b. autarky Pr/Pm < world Pr/Pm
c. autarky Pr/Pm = world Pr/Pm
d. free trade Pr/Pm = world Pr/Pm
Answer: _____

19. In the diagram contained in the PDF listed below is a small economy in

international trade that is engaged in free trade. Which is the trade triangle?
(Triangles are identified by the letter at their corners.)
GraphQuestions18and19.pdf
a. triangle abc
b. triangle cde
c. triangle fgh
d. triangle jkr
e. triangle mnr
Answer: _____

20. The data in the table listed below indicates that Japan is

Share of
world's
capital
stock

share of
world's
labor
stock

share of
world's
unskilled
labor

share of
Share of
world's
world's
arable
GDP
land

US
24
Canada 1
Japan 16

29
3
23

1
1
1

a. capital intensive
b. labor intensive
c. capital abundant
d. Low skill labor abundant
e. None of the above.
Answer: _____

30
3
0.8

28
2
20