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Sample/practice exam 12 May 2015, questions
International Trade (York University)
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YORK UNIVERSITY
FACULTY OF LIBERAL ARTS AND PROFESSIONAL STUDIES
DEPARTMENT OF ECONOMICS
International Trade - AP/ECON 3150 3.00 N
Practice Midterm 1 Exam
________________________________________________________
Course director: Tsvetanka Karagyozova Allotted time: 75 minutes Total marks: 100 marks Instructions: • The exam is worth 100 points. The exam consists of 2 sections: I. Multiple Choice Questions (50 % of your
grade); II. Short Answers (50 % of your grade).
• Section I Instructions: There are 20 multiple-­‐choice questions, each worth 2.5 points. Identify the letter of the choice that best completes the statement or answers the question. • Section II Instructions: Answer any 2 of the 3 questions. Each question is worth 25 points. Provide a brief explanation to your answer for complete credit. Use proper terminology. •
You must answer the multiple-­‐choice questions on the provided Scantron sheet. •
Please answer the short-­‐answer questions in the provided examination answer book. •
Please submit the examination answer book together with your Scantron sheet and these instructions. • You can write in pen or pencil but please note that I will not consider regrading the short answers if they are written in pencil. •
No cell phones please. Only non-­‐programmable calculators are allowed. •
Please write legibly. Work independently. GOOD LUCK! YORK ID______________________ NAME:__________________________________________________ 1 Downloaded by Dheeraj Handa (dheeraj.coolravi.handa@gmail.com)
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I.
MULTIPLE-­‐CHOICE QUESTIONS Identify the letter of the choice that best completes the statement or answers the question. Record your answers on the provided Scantron sheet. These are the only answers that will be considered towards your grade. Each question has only ONE correct answer. If two answers are selected, you will get zero credit on the question. 1) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
2) International economics does not use the same fundamental methods of analysis as other branches of
economics, because
A) the level of complexity of international issues is unique.
B) the interactions associated with international economic relations is highly mathematical.
C) international economics takes a different perspective on economic issues.
D) international economic policy requires cooperation with other countries.
E) None of the above.
Answer: E
3) 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
4) "Trade is generally harmful if there are large disparities between countries in wages."
A) This is generally true.
B) This is generally false.
C) Trade theory has nothing to say about this issue.
D) This is true if the trade partner ignores child labor laws.
E) This is true if the trade partner uses prison labor.
Answer: B
5) The gravity model explains why
A) trade between Sweden and Germany exceeds that between Sweden and Spain.
B) countries with oil reserves tend to export oil.
C) capital rich countries export capital intensive products.
D) intra-industry trade is relatively more important than other forms of trade between neighbouring countries.
E) None of the above.
Answer: A
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6) Why does the gravity model work?
A) Large economies became large because they were engaged in international trade.
B) Large economies have relatively large incomes, and hence spend more on government promotion of trade
and investment.
C) Large economies have relatively larger areas which raises the probability that a productive activity will take
place within the borders of that country.
D) Large economies tend to have large incomes and tend to spend more on imports.
E) None of the above.
Answer: D
7) In the pre-World War I period, the United Kingdom exported primarily
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) None of the above.
Answer: A
Answer the question below based on the following diagram.
8) Refer to the figure above. In autarky, the relative price of S (in terms of T) is
A) 2.
B) 1/2.
C) 500.
D) 1000.
E) Cannot be determined
Answer: B
9) In order to know whether a country has a comparative advantage in the production of one particular
product we need information on at least ________ unit labor requirements
A) one
B) two
C) three
D) four
E) five
Answer: D
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10) Assume the cost of transporting computers from US to Japan is greater than the pre-trade price difference
for computers between US and Japan. Trade in computers between US and Japan will
A) be very profitable for both parties
B) be a breakeven proposition for both parties
C) occur
D) not occur
E) increase the welfare of both parties
Answer: D
11. Japan is more efficient in the production of rice, and the United States is more efficient in the production of
oranges. In the production of rice, Japan is said to have a(n):
A) comparative advantage
B) absolute disadvantage
C) absolute advantage
D) comparative disadvantage
E) none of the above
Answer: C
Answer the question below based on the following diagram of a country in international trade equilibrium.
12) Refer to the figure above. This country has comparative advantage in
A) Z.
B) Y.
C) both Y and Z.
D) Neither Y nor Z.
E) Can't tell without more information.
Answer: A
13) If a very small country trades with a very large country according to the Ricardian model, then
A) the small country will suffer a decrease in economic welfare.
B) the large country will suffer a decrease in economic welfare.
C) only the small country will enjoy gains from trade.
D) only the large country will enjoy gains from trade.
E) None of the above.
Answer: C
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14) Given the information in the table above, if it is ascertained that Foreign uses prison-slave labour to produce
its exports, then economic theory predicts that 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
15) In the Ricardian model, comparative advantage is not likely to be due to
A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) All of the above.
E) None of the above.
Answer: D
16) Terms of trade refers to
A) what goods are imported.
B) what goods are exported.
C) the volume of trade.
D) the prices at which trade occurs.
E) None of the above.
Answer: D
17) If two countries with diminishing returns and different marginal rates of substitution between two products
were to engage in trade, then
A) the shapes of their respective production possibility frontiers would change.
B) the marginal rates of substitution of both would become equal.
C) the larger of the two countries would dominate their trade.
D) the country with relatively elastic supplies would export more.
E) None of the above.
Answer: B
18) In the specific factors model, a 5% increase in the price of food accompanied by a 5% increase in the price
of cloth will cause wages to ________, the production of cloth to ________, and the production of food to
________.
A) increase by 5%; remain unchanged; remain unchanged
B) increase by less then 5%; decrease; increase
C) increase by more then 5%; increase; remain unchanged
D) remain constant; increase; increase
E) remain constant; decrease; decrease
Answer: A
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19) In the specific factors model, a country's production possibility frontier is ________ because of ________.
A) a straight line; diminishing marginal returns
B) a curved line; diminishing marginal returns
C) a straight line; constant marginal returns
D) a curved line; constant marginal returns
E) a curved line; a limited supply of labor
Answer: B
20) The slope of a country's production possibility frontier with cloth measured on the horizontal and food
measured on the vertical axis in the specific factors model is equal to ________ and it ________ as more cloth is
produced.
A) -MPLF/MPLC; becomes steeper
B) -MPLF/MPLC; becomes flatter
C) -MPLF/MPLC; is constant
D) -MPLC/MPLF; becomes steeper
E) -MPLC/MPLF; is constant
Answer: A
II. SHORT ANSWERS Answer any 2 of the 3 questions below. If you answer all 3 questions, the first two will count towards your grade. Each question is worth 25 points. For complete credit, provide an explanation to your answers. 1. There are two countries in the world: Home and Foreign. Home has 1,200 units of labor available while
Foreign has 800 units of labor available. Suppose that Home and Foreign have the unit labor requirements
shown below:
Unit labor
requirements
Home
Foreign
Apples
3
5
Bananas
2
1
a) Which country has an absolute advantage in producing apples? In producing banana? Explain.
b) Which country has a comparative advantage in producing apples? In producing bananas? Explain.
c) Graph the production possibilities frontier for each country.
d) Construct the world relative supply curve. In your answer, specify clearly which good(s) a country is
producing at any given relative price (or relative price range). Show your answer graphically.
e) The world relative demand takes the following form: Demand for apples/demand for bananas = price of
bananas/price of apples. Graph the relative demand curve along with the relative supply curve.
f) Find the equilibrium relative price of apples. Describe the pattern of trade.
Answer: See the answers to end-of-chapter questions, Chapter 3.
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2. Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor
and land). Initially, both countries are identical in the sense that they have the same supply of labor, capital, and
land and the same production technologies. The capital stock in Home then grows.
a) Show graphically how the increase in the supply of capital for Home affects its production possibility
frontier.
b) Draw another graph that shows the relative supply curve for Home. On the same graph, draw the relative
supply curve for the Foreign economy.
c) If those two economies open up to trade, what will be the pattern of trade (i.e. which country exports which
good)?
d) Describe how opening to trade affects all three factors (labor, capital, land in both countries).
See answer to end-of-chapter Problem 4, Textbook.
3. Some argue that countries with high wages cannot export to low-wage countries while countries with low
wages will always be able to export to countries with high wages. Do you agree or disagree with this claim? Use
what you have learned in the class to support your argument.
This argument is false. The argument (called the “pauper labour argument” in the book) is a particular
favourite of labour units seeking protection from foreign competition. According the Ricardian model of trade,
the source of comparative advantage could be either higher productivity or lower cost of production. Thus, a
country with lower productivity can still have a comparative advantage in a product if labour costs are
sufficiently low to compensate for the productive inefficiency. Similarly, a country with high wages can have a
comparative advantage in a product if the output per worker or productivity is sufficiently high. (you can also
have look at p. 38 in your book).
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