International Economics
Homework 2
Theories of trade
1. __________ is the ability of a firm/industry, under free and fair market conditions, to design, produce, and
market goods and services that are better and/or cheaper than those of other firms/industries.
a.
Competitiveness
b.
Protectionism
c.
Comparative advantage
d.
Absolute advantage
2. The trade model of the Swedish economists Heckscher and Ohlin maintains that:
a. Absolute advantage determines the distribution of the gains from trade
b. Comparative advantage determines the distribution of the gains from trade
c. The division of labor is limited by the size of the world market
d. A country exports goods for which its resource endowments are most suited
3.
According to the factor endowment model, countries heavily endowed with land will:
a. Devote excessive amounts of resources to agricultural production
b. Devote insufficient amounts of resources to agricultural production
c. Export products that are land-intensive
d. Import products that are land-intensive
4. Suppose Argentina has 10 units of capital and 100 units of labor, and Brazil has 50 capital and 200 labor.
Which country is relatively more labor-abundant? Which country is relatively more capital-abundant?
5. Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital. In both countries
the production of shirts is relatively more labor intensive than the production of computers. According to the
factor endowment theory, Hong Kong will have a (an):
a. Absolute advantage in the production of shirts and computers
b. Absolute advantage in the production of computers
c. Comparative advantage in the production of shirts
d. Comparative advantage in the production of computers
6. In the question above, suppose Hong Kong and Canada begin to specialize and trade according to their
comparative advantage. According to the factor price equalization theory,
a. wages will rise in Hong Kong and fall in Canada
b. wages will fall in Hong Kong and rise in Canada
c. wages will rise in both countries
d. wages will fall in both countries
7.
According to the specific factors trade theory:
a. Owners of factors specific to export industries suffer from trade, while owners of factors specific to
import-competing industries gain
b. Owners of factors specific to export industries gain from trade, while owners of factors specific to
import-competing industries suffer
c. Both owners of factors specific to export industries and owners of factors specific to import-competing
industries gain from trade
d. Both owners of factors specific to export industries and owners of factors specific to import-competing
industries suffer from trade
8. A product will be internationally traded as long as the pre-trade price differential between the trading partners
is:
a. Greater than the cost of transporting it between them
b. Equal to the cost of transporting it between them
c. Less than the cost of transporting it between them
d. None of the above
9. Which of the following suggests that by widening the market’s size, international trade can permit longer
production runs for manufacturers, which leads to increasing efficiency?
a. Economies of scale
b. Diseconomies of scale
c. Comparative cost theory
d. Absolute cost theory
10. Should international transportation costs decrease, the effect on international trade would include:
a. An increase in the volume of trade
b. A smaller gain from trade
c. A decline in the income of home producers
d. A decrease in the level of specialization in production.
11. The simultaneous import and export of computers by Germany is an example of:
a. Intraindustry trade
c. Perfect competition
b. Interindustry trade
d. Imperfect competition
12. Legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote:
a. Higher production costs and an increase in output
b. Higher production costs and a decrease in output
c. Lower production costs and an increase in output
d. Lower production costs and a decrease in output
Short answer questions:
13. Describe briefly the three phases of the product cycle.
14. Comparing US trade with Canada and Mexico, is trade with Canada more likely to be based on comparative
advantage or on economies of scale? Why?
15. List winners and losers under NAFTA, including individuals/companies/industries in all three countries.
16. When US signed a free trade agreement with Canada, there was no opposition to it. When a similar agreement
with Mexico was signed, there was significant opposition. Why?
17. List winners and losers from outsourcing the production of computers by US companies to China.
18. Why do governments sometimes subsidize development of certain industries?
Petroleum
CANADA
Petroleum
US
40
30
20
Corn
50 Corn
a. The opportunity cost of 1 unit of corn is _________ units of petroleum in Canada and _________ units of
petroleum in the US.
b. The US has comparative advantage in _______ , Canada’s comparative advantage is in _________
c. If the United States and Canada are negotiating to trade corn for petroleum, they will agree on a price between
____ and ____ units of petroleum for a unit of corn.
d. Suppose that in absence of trade both countries consume 20 units of petroleum. After opening up for trade, will
both countries completely specialize in the production of the good of their comparative advantage? Why?