International Trade Assignment #1

By Prof. Bo CHEN I. Multiple Choice 1) Which of the following is not a major concern of international economic theory? A) protectionism B) the balance of payments C) exchange rate determination D) Bilateral trade relations with China E) None of the above Answer: D 2) The gravity model offers a logical explanation for the fact that A) trade between Asia and the U.S. has grown faster than NAFTA trade. B) trade in services has grown faster than trade in goods. C) trade in manufactures has grown faster than in agricultural products. D) Intra-European Union trade exceeds International Trade of the European Union. E) None of the above. Answer: D 3) Since World War II (the early 1950s), the proportion of most countries production being used in some other country A) remained constant. B) increased. C) decreased. D) fluctuated widely with no clear trend. E) both A and D above. Answer: B 4) In the present, most of the exports from China are in A) manufactured goods. B) services. C) primary products including agricultural. D) technology intensive products. E) None of the above. 5) Trade between two countries can benefit both countries if A) each country exports that good in which it has a comparative advantage. B) each country enjoys superior terms of trade. C) each country has a more elastic demand for the imported goods.

D) each country has a more elastic supply for the exported goods. E) Both C and D. Answer: A 6) A country engaging in trade according to the principles of comparative advantage gains from trade because it A) is producing exports indirectly more efficiently than it could alternatively. B) is producing imports indirectly more efficiently than it could domestically. C) is producing exports using fewer labor units. D) is producing imports indirectly using fewer labor units. E) None of the above. Answer: B 7) Given the information in the table above, if the Home economy suffered a meltdown, and the Unit Labor Requirements doubled to 30 for cloth and 60 for widgets then home should A) export cloth. B) export widgets. C) export both and import nothing. D) export and import nothing. E) All of the above. Answer: A 8) In a two product two country world, international trade can lead to increases in A) consumer welfare only if output of both products is increased. B) output of both products and consumer welfare in both countries. C) total production of both products but not consumer welfare in both countries. D) consumer welfare in both countries but not total production of both products. E) None of the above. Answer: B 9) If one countrys wage level is very high relative to the others (the relative wage exceeding the relative productivity ratios), then if they both use the same currency A) neither country has a comparative advantage. B) only the low wage country has a comparative advantage. C) only the high wage country has a comparative advantage. D) consumers will still find trade worth while from their perspective. E) None of the above. Answer: E 10) The slope of a countrys PPF reflects A) the opportunity cost of product S in terms of product T. B) the opportunity cost of T in terms of money prices.

C) the opportunity cost of S or T in terms of S. D) Both A and B. E) Both A and C. Answer: A II. Discussions and Problems 1) The Services sector has been steadily rising in relative importance in GDP of the United States, as well as elsewhere around the world. Since services have been identified as non-tradables (e.g. it is difficult to export haircuts), it may be argued that this trend will likely slow the rapid growth in international trade. Discuss. Answer: T his argument stands on questionable logical foundations. The past half century has seen a steady growth in the absolute and relative importance of international trade. This trend has been reversed only by global conflicts, i.e. the two World Wars. This trend has remained steady and robust despite major compositional shifts (e.g. from primary to manufacturing), and location shifts (e.g., the sudden rise of NICs as significant group of exporters). The trend will probably continue into the reasonable future, fueled by both super-regional preferential trade regions and a growing impact of the multilateral forces, represented institutionally by the World Trade Organization (WTO)-as illustrated by the recent abolishment of the epitome cartelized trade, the world trade in textiles. Driven by technology-especially in the areas of communication and transportation-a reversal of the growing trade trend is not likely in the near future. In any case, many services are in fact quite tradable. Examples would be financial services, long-distance teaching, help-desk outsourcing, consulting and management services and others. In fact, when a tourist gets a haircut, we see that even haircuts become a tradable service. 2) Given the following information:

(a) What is the marginal cost of a toy in each country? (b) How might you demonstrate (quantitatively) that a country with absolute productivity advantage in a product may find that its production is more costly than in the other (unproductive) country? (c) Demonstrate the fact that trade produces imports (indirectly) cheaper, even in the relatively unproductive country. Answer: ( a) 3 units of Soy in the U.S., and 1 Soy unit in Croatia. (b) The U.S. have absolute productivity advantage in toys. Nevertheless, toys are three times more costly than they are in Croatia. (c) In Croatia, one unit of soy will cost one toy. However, if the terms of trade fall between the two autarkic price ratios (a condition necessary for both countries to

enjoy gains from trade), say at 2 Soy units per toy, then Croatia will gain each Soy unit with less of a sacrifice of toy production. 3) No country is abundant in everything. Discuss. Answer: T he concept of relative (country) factor abundance is (like factor intensities) a relative concept. When we identify a country as being capital intensive, we mean that it has more capital per worker than does the other country. If one country has more capital worker than another, it is an arithmetic impossibility that it also has more workers per unit capital.