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CHAPTER 4

Who Gains and Who Loses from Trade?


Multiple Choice Questions
1. Which of the following suggests that a nation will
export the commodity in the production of which a great deal of its relatively
abundant and cheap factor is used?
a. The
Linder theory
b. The
product life cycle theory
c. The
MacDougall theory
d. The
Heckscher-Ohlin theory
ANSWER: D
2. According to Staffan Linder, trade
between two countries tends to be most pronounced when the countries:
a. Find
their tastes and preferences to be quite harmonious
b. Experience
economies of large-scale production over large output levels
c. Face
dissimilar relative abundances of the factors of production
d. Find
their per capita income levels to be approximately the same
ANSWER: D
3. Which of the following is a long-run theory, emphasizing changes in
the trading position of a nation over a number of years?
a. Theory
of factor endowments
b. Comparative
advantage theory
c. Theory
of the product cycle
d. Overlapping
demand theory
ANSWER: C
4. The Leontief paradox questioned the
validity of the theory of:
a. Comparative
advantage
b. Factor

endowments
c. Overlapping
demands
d. Absolute
advantage
ANSWER: B
5. Trade occurs because
of _______ in the availability of factor inputs across countries and the
differences in the proportions of those factors that are used in producing
different goods. Trade causes _______ in the export-oriented sector and _______
in the import-competing sector.
a. similarities; expansion; contraction
b. differences; expansion; contraction
c. similarities; contraction; expansion
d. differences; contraction; expansion
ANSWER: B
6. In Country X land is
relatively abundant and labor is relatively scarce. In the short-run after
trade opens, we expect that:
a. landlords
will charge lower rents and farm workers will earn lower wages.
b. landlords will charge lower rents and farm workers will
earn higher wages.
c. landlords will charge higher rents and farm workers will
earn lower wages.
d. landlords will charge higher rents and farm workers will
earn higher wages.
ANSWER: D
7. In Country X land is
relatively abundant and labor is relatively scarce. In the short-run after
trade opens, which of the following groups will not gain:
a. workers
in the agricultural sector.
b. landlords in the agricultural sector.
c. landlords in the cloth-making sector.
d. none of the above.
ANSWER: C
8. In Country X land is
relatively abundant and labor is relatively scarce. In the long-run after trade
opens, we expect that:
a. wages
will fall in both the agricultural and cloth-making sectors.
b. wages will rise in both the agricultural and
cloth-making sectors.
c. wages will fall in cloth-making sector and rise in the
agricultural sector.

d. wages will rise in the cloth-making sector and fall in


the agricultural sector.
ANSWER: A
9. If the domestic country is
labor abundant, which of the following groups will gain in the short-run, but
lose in the long-run?
a. domestic
landowners in the farming sector.
b. domestic landowners in the cloth-making sector.
c. foreign landowners in the farming sector.
d. foreign workers in the cloth-making sector.
ANSWER: B
10. Most
economists maintain that the major factor underlying wage stagnation in the United
States in the 1990s has been:
a. Import competition
b. Technological change
c. Rising real value of
the minimum wage
d. Increasing union
membership
ANSWER: B
11. Assume
the cost of transporting autos from Japan to Canada exceeds the pretrade price difference
for autos between Japan and Canada . Trade
in autos is:
a. Impossible
b. Possible
c. Highly profitable
d. Moderately profitable
ANSWER: A
12. If the price of corn increases
by 15% and the price of shoes remains constant, the Stolper-Samuelson theorem
predicts that:
a. the
rental rate of land increases by 15%.
b the rental rate of land increase by more than 15%.
c. the wage rate will increase.
d. the wage rate will stay the same.
ANSWER: A
13. The price
of each good must equal:
a. its
marginal cost.
b. the price of each factor of production.

c. the price of the relatively abundant factor of


production.
d. the price of the relatively scarce factor of production.
ANSWER: A
14. Which of
the following predicts that the more concentrated a factor is in the production
of a good, the more likely that factor is to gain or lose from a change in the
price of the product?
a. Factor-Price Equalization Theorem
b. Specialized-Factor Pattern
c. Heckscher-Ohlin Theory
d. Leontief Paradox
ANSWER: B
15. Which of the following predicts
that in the long-run following the opening of trade, labor will earn the same
wage in the domestic market and in the foreign market?
a. Factor-Price Equalization Theorem
b. Specialized-Factor Pattern
c. Heckscher-Ohlin Theory
d. Leontief Paradox
ANSWER: A
16. With free trade, if Country X is
relatively land abundant and relatively labor scarce and Country Y is
relatively land scarce and relatively labor abundant, the factor-price
equalization theorem predicts that:
a. wages will rise in Country X and fall in Country Y until
they equalize.
b. wages will rise in Country Y and fall in Country X until
they equalize.
c. wages will rise in Country X and land rents will fall in
Country X until they equalize.
d. wages will fall in Country X and land rents will rise in
Country X until they equalize.
ANSWER: B
17. With free trade, if Country X is
relatively labor abundant and relatively land scarce and Country Y is
relatively labor scarce and relatively land abundant, the factor-price
equalization theorem predicts that:
a. land
rents will rise in Country X and fall in Country Y until they equalize.
b. land rents will fall in Country X and rise in Country Y
until they equalize.
c. wages will rise in Country X and fall in Country Y until
they equalize.
d. both a and c
ANSWER: A

18. The factor-price equalization


theorem predicts that even without the migration of factors between countries,
free trade will cause:
a. workers
with the same skill levels to earn the same wage rate in both countries.
b. land of comparable quality will earn the same rent in
both countries.
c. both a and b.
d. none of the above.
ANSWER: C
19. Which of
the following was tested by Leontief?
a. comparative advantage
b. Stolper-Samuelson Theorem
c. absolute advantage
d. Heckscher-Ohlin Theory
ANSWER: D
20. The realization that more
factors of production than just land and labor need to be considered when
attempting to predict trade patterns is a result of the work of:
a. Stolper
and Samuelson.
b. Heckscher and Ohlin.
c. Adam Smith.
d. Leontief.
ANSWER: D
21. The United States is not a net exporter of:
a. oil.
b. soybeans.
c. coal.
d. aircraft.
ANSWER: A
22. The United States is:
a. relatively
abundant in skilled labor.
b. relatively abundant in land.
c. a net exporter of temperate-zone agricultural products.
d. all of the above.
ANSWER: D
23. The United States is a net importer of:
a. shoes.
b. temperate-zone agricultural products.
c. coal.
d. none of the above.
ANSWER: A

24. Which
nation has sometimes been characterized as being a pollution haven due to its
lenient environmental standards that encourage the production of
pollution-intensive goods?
a. Japan
b. Canada
c. Germany
d. Mexico
ANSWER: D
25. During the 1980s through 1990s,
Boeing Inc. criticized Airbus Industries competitiveness on the grounds that
Airbus benefitted from:
a. Import tariffs
protecting Airbus in the European market
b. Import quotas
protecting Airbus in the European market
c. Lenient environmental
standards of European governments
d. Production subsidies
supplied by European governments
ANSWER: D
26. Intraindustry
trade can be explained in part by:
a. Adam Smiths principle
of absolute advantage
b. Perfect competition in
product markets
c. Diseconomies of large
scale production
d. Transportation costs
between and within nations
ANSWER: D
27. The United States and Canada are both net exporters of:
a. the
services of farmland.
b. the services of mineral rights.
c. labor overall.
d. skilled labor and net importers of unskilled labor.
ANSWER: D

True/False Questions
28. Factor-price equalization theory
predicts that the price of labor and land within a country will equalize.
ANSWER: FALSE
29. The United States is a net exporter of skilled labor.
ANSWER: TRUE

30. Trade
patterns for steel are consistent with Heckscher-Ohlin theory.
ANSWER: FALSE
31. Leontief
found evidence that supports Heckscher-Ohlin theory.
ANSWER: FALSE
32. In the short-run after trade
opens, wages and land rents can be expected to rise in the expanding sector.
ANSWER: TRUE
33. If Country
X is labor abundant, in the long-run after trade opens, wages will rise.
ANSWER: TRUE
34. If owners of a factor of
production gain in the short-run as a result of free trade, then those owners
can be expected to also gain in the long-run.
ANSWER: FALSE
35. Free trade can be expected to
cause a decrease in the real incomes of the owners of the factor used
intensively in the import-competing industry.
ANSWER: TRUE
36. The Stolper-Samuelson Theorem
predicts that the real return to the factor used intensively in the
rising-price industry will increase while the real return to the factor used
intensively in the falling-price industry will decrease.
ANSWER: TRUE
37. The factor-price equalization
theorem predicts that, given free trade, workers will earn the same wage rate
in all countries only if there is migration.
ANSWER: FALSE

Essay Questions
38. Explain the framework of
Leontief's tests. What did he find? What were the implications of Leontief's
findings for international trade theory?
39. Country X is relatively labor
abundant and relatively land scarce. Country Y is relatively labor scarce and
relatively land abundant. What does the Stolper-Samuelson predict will happen
to the real income of workers and of land in these two countries as a result of
free trade? What does the factor-price equalization theorem predict will happen
to the wages and land rents in these two countries?
4 0 . What are the primary
export-oriented and import-competing factors of the United States ? Canada ? Oil-exporting
countries?
Oil-importing developing countries?