Practice Final: Economics 342
These questions may be discussed in tutorial to help you plan your answering strategies. In this
practice exam, I have asked more questions than will appear on the final, so do not be alarmed!
The questions illustrate the kinds of questions that may be asked. (Not that they necessarily will
be asked.) As a rough guide assume about a point a minute.
I. Define the following. Each question is worth 2 points.
WTO, VER, Leontief paradox, dumping, small country, factor intensity, GATT, trade creation,
Stolper-Samuelson, Rybczynski line
II. Answer the following questions True, False or Uncertain and briefly explain your
answer. If a question is true, explain why; if it is false, explain why; if the answer depends
on the values of parameters, explain the circumstances when it is true or false. Each
question is worth 6 points.
1. Do we care if we have a trade balance surplus or deficit?
2. According to Ricardo, your marginal product determines the pattern of trade.
3. In the specific factor model, an increase in the quantity of one of the specific factors reduces
the return to that factor and raises the return to the factor specific in the other industry.
4. In the H-O model countries will tend to specialize in the good they produce most of in autarky.
5. An increase in the stock of labour will increase output of both industries.
6. If capital is mobile internationally, a tax will raise the return to capital and will consequently
increase domestic income.
7. An increase in immigration will raise home income.
8. If goods are produces in a monopolistically competitive environment, trade will take place
only if autarky prices differ among the countries.
9. If good are produces in a monopolistically competitive environment, opening to trade raises
the number and output of local firms.
10. According to the gravity model, trade increases as you move away from the equator.
11. If markets are competitive, a tariff is the same as a tax on imports and a subsidy to exports.
12. A tariff will raise home income.
13. The GATT replaced the WTO and both do the same thing.
14. A tariff and a quota are equivalent.
15. Dumping by country A raises the income of country B who receives the dumped products.
16. An export subsidy is less damaging than a tariff of the same percentage amount.
17. VER’s are better than quotas.
18. Trade increase growth.
III. Longer Answers. Each question is worth about 15-30 points depending on how many
other questions are asked.
1. Recent experience has taught us that mercantilism is not dead. Discuss.
2. Should Canada prefer the WTO approach to multilateral tariff reduction or regional trade
arrangements?
3. Canada should restrict immigration.
4. Canada should restrict capital exports.
5. Free trade is better than autarky, but some restrictions on trade will benefit both Canada and
the world.
6. Ricardo’s model tells us that failing to pursue comparative advantage will reduce our income.
7. Who gains and who loses if the Canadian milk tariff is abolished?
8. Should countries lower all their impediments to trade?
9. Make the case for subsidizing a particular industry.
10. How might a financial crisis in Europe affect world trade?
11. Growth increases trade and trade increases growth.
12. If the pattern of unit labour costs are:
Home Foreign
Good 1:
Good 2:
12
4
5
20
i) Which country has a comparative advantage in producing good 1?
ii) What are the autarky price ratios in each country?
iii) If both goods are produced in free trade, what are the range of prices that are
possible?
iv) If the world price is unity (1), what is the relative wage between the two countries?
v) If the price of good one rises by 10%, which country gains and by how much?
13. Increasing returns means the lowest cost country will produce the most of a good.
14. Explain why a tariff that raises domestic prices may still raise domestic income. Why is this
not true for a small country?
15. Should countries encourage the mobility of capital? Who gains and who loses if we move
from capital that is immobile to capital that is mobile internationally?