Study Guide: Midterm 1
Your NOTES! No really, your NOTES. Seriously, study your NOTES!
Your Homework. Please, please study your homework for the love of pete.
Trade under Supply and Demand
Equilibrium Price, Exports/Imports, Consumer and Producer Surplus
Adam Smith and Absolute Advantage
David Ricardo and Comparative Advantage
Trade under different labor productivity
Trade under constant cost (straight) PPFs
Terms of trade/Consumption Possibilities Frontier, Region of Mutual Advantage
Trade under “curvy” PPFs with Supply and Demand
Equilibrium relative prices, production and consumption calculation, gains from
trade
Short run and long run effects of trade
Heckscher-Ohlin model
Stolper-Samuelson theory
Factor Price Equalization
Intra-Industry Trade
Gravity Model
Balanced vs. Biased growth
Rybczynski
Immersizing Growth
Growth and trade in reality, openness to trade
Book Questions and Essay Questions
Ch. 2: #11
Q2.1
Assume that there are only two countries in the world, Pacifica and
Atlantica. Both countries produce and consume surfboards. The pre-trade price of
surfboards in Atlantica is lower than the pre-trade price of surfboards in Pacifica.
Draw a two-graph diagram to depict the Pacifica and Atlantica markets for surfboards
illustrating the pre-trade price difference. Now assume that free trade opens up
between Pacifica and Atlantica. Depict a plausible world price in the graphs. Using
what you have learned about consumer and producer surplus, describe what happens
to consumers and producers in each country as a result of the move to free trade.
What happens to overall economic welfare in the two countries? Be sure to label and
refer to the graphs in your answer.
Q2.2
What is the logic of producing winter clothing in countries whose residents
have very little demand for such clothing?
Ch. 3: #8
Q3.1
Suppose labor productivity in France is such that one hour of labor is
required to produce one gallon of wine while two hours of labor are required to
produce one pound of cheese. Assuming the availability of 1 million labor hours,
draw a constant cost production possibilities curve for France with cheese on the
vertical axis and wine on the horizontal axis. If France has a comparative advantage
in the production of wine, show where France will produce on its production
possibilities curve. If the free trade price of wine is two pounds of cheese per gallon,
draw a trade line and use it to illustrate how France can gain from trade.
Ch. 4: #3
Q4.1
Explain how tastes or preferences can reverse the predictions made by the
Heckscher-Ohlin trade model so that, for example, labor-abundant countries import
labor-intensive goods.
Ch. 5: #9
Q5.1
Hollywoodland, being self-sufficient in most products, trades only two
goods with the Rest of the World (ROW), movies and automobiles. Both of these
goods are produced using skilled labor (L) and capital (K) with the returns to capital
assumed to be the interest rate (r) and the returns to skilled labor being the wage rate
(w). The production of automobiles is capital intensive relative to the production of
movies and Hollywoodland is skilled-labor abundant relative to the ROW.
a. State the Heckscher-Ohlin Theorem and use it to predict the pattern of trade
between Hollywoodland and the ROW.
b. If the price of imports coming into Hollywoodland were to rise, what would
happen to the factor returns in Hollywoodland? State the theorem used to come up
with your answer and briefly, the intuition behind the theorem.
Q5.2
Outsourcing, the exporting of jobs from one country to another, was not an
issue when the factor-price-equalization theory was developed. Does the existence of
outsourcing change the implications of the theory? Why or why not?
Ch. 6: #9 – FYI, the 13th edition of the text and the 14th edition have different questions
that test the same concept.
Q6.1
What is intra-industry trade? Is intra-industry trade consistent with the
predictions of the Heckscher-Ohlin theory? Clearly explain why it is or is not consistent
with Heckscher-Ohlin.
Ch. 7: #9
Q7.1 Explain the connection between openness to trade and economic growth in a
country.
Chapter 2.
1. An increase in the imports of clothing into the United States will benefit _____
and hurt ____.
a. U.S clothing producers; foreign clothing producers
b. foreign clothing producers; foreign clothing consumers
c. U.S clothing consumers; foreign clothing producers
d. U.S clothing consumers; U.S. clothing producers
Chapter 3
Table 3.2
Labor hours to make:
1 umbrella
1 unit of corn
In the United Kingdom
In the Rest of the World
3.00
1.00
2.00
0.25
1. Refer to Table 3.2. The United Kingdom has an absolute advantage in the
production of _______ and the Rest of the World has an absolute advantage in the
production of _______.
a. neither good; corn
b. neither good; both goods
c. both goods; neither goods
d. corn; umbrellas
2. Refer to Table 3.2. The United Kingdom has a comparative advantage in the
production of _______ and the Rest of the World has a comparative advantage in
the production of _______.
a. neither good; corn
b. neither good; both goods
c. umbrellas; corn
d. corn; umbrellas
3. Refer to Table 3.2. The opportunity cost of producing a unit of corn in the United
Kingdom is _______ umbrellas and the opportunity cost of producing a unit of
corn in the Rest of the World is _______ umbrellas.
a. 1/8; 1/3
b. 1/3; 1/8
c. 3; 8
d. 8; 3
4. Refer to Table 3.2. The opportunity cost of producing an umbrella in the United
Kingdom is _______ units of corn and the opportunity cost of producing an
umbrella in the Rest of the World is _______ units of corn.
a. 1/8; 1/3
b. 1/3; 1/8
c. 3; 8
d. 8; 3
5. Refer to Table 3.2. Once trade is opened, we can anticipate that the international
price of umbrellas will lie between _______ and _______.
a. 1/3 of a unit of corn; 3 units of corn
b. 8 units of corn; 3 units of corn
c. 1/8 of a unit of corn; 1/3 of a unit of corn
d. 8 units of corn; 1/8 of a unit of corn
6. Refer to Table 3.2. Once trade is open, we can anticipate that the international
price of corn will lie between _______ and _______.
a. 1/3 of an umbrella; 3 umbrellas
b. 8 umbrellas; 3 umbrellas
c. 1/8 of an umbrella; 1/3 of an umbrella
d. 8 umbrellas; 1/8 of an umbrella
Chapter 4
Figure 4.1
Wheat
80
60
50
.
S1
I1
I2
. .
C1
C0
S0
International Price =
0.25W/C
Price = 1W/C
25
65
Cloth
Canada
1. Refer to figure 4.1. In autarky Canada will produce at point _____ and consume at
point ____.
a. S1; C1
b. S0; C0
c. S1; C0
d. S0; C1
2. Refer to figure 4.1. After the opening up of international trade, Canada will produce
at point _____ and consume at point ____.
a. S1; C1
b. S0; C0
c. S1; C0
d. S0; C1
3. Refer to figure 4.1. Canada a comparative advantage in which good?
a. Wheat.
b. Cloth.
c. Both wheat and cloth.
d. Neither wheat nor cloth.
4. Refer to figure 4.1. After the opening up of international trade, Canada will export
_____ units of wheat and import _______ units of cloth.
a. 0; 0
b. 20; 80.
c. 20; 5.
d. 60; 15.
5. Refer to figure 4.1. After the opening up of international trade, Canada will import
_____ units of wheat and export _______ units of cloth.
a. 0; 0
b. 25; 25.
c. 30; 65.
d. 65; 65.
6. Refer to figure 4.1. Before the opening up of international trade, 1 unit of wheat will
trade for _____ units of cloth. After the opening up of international trade 1 unit of
wheat will trade for _____ units of cloth.
a. 1; 0.25
b. 4; 1.
c. 1; 4.
d. 0; 2.5.
The following cost data is for the mythical land of Painduvin where they produce nothing
but bread and wine using only land and labor as inputs.
Labor Input
Land Input
1 unit of Bread
5 dollars
4 dollars
1 unit of Cheese
20 dollars
10 dollars
7. In Painduvin, bread is ________ and cheese is _______.
a. Labor-intensive; land-intensive
b. Land-intensive; labor-intensive
c. Labor-abundant; land-abundant
d. Land-abundant; labor-abundant
8. If Painduvin were land-abundant, the opening up of free trade would cause the price
of bread relative to cheese to ________ :
a. Rise.
b. Fall.
c. Stay the same.
d. Unable to answer with the information provided.
9. If Painduvin were land-abundant, the opening up of free trade would cause the
production of bread to ______ and the production of cheese to ________ :
a. Rise; rise
b. Rise; fall
c. Fall; fall
d. Fall; rise
Chapter 5
1. According to the Stolper-Samuelson theorem, in the short-run, following the
opening of trade:
a. Workers can change jobs but will receive the same wage.
b. Workers will suffer from lower wages but land owners will benefit from
higher rents.
c. All groups tied to declining sectors of the economy will suffer from lower
returns.
d. Output remains constant.
2. Given the assumptions of the Heckscher-Ohlin model, the opening of trade in a
land-abundant country will cause the domestic price of wheat to:
a. Fall.
b. Rise.
c. Be unaffected.
d. At first rise but then fall back to its original level.
3. According to the factor-price-equalization theorem, free trade equalizes:
a. Product prices as well as the prices of individual factors of production
between two countries.
b. Product prices between two countries but not the prices of individual
factors of production.
c. Product prices between two countries but and factor prices within each
country but not between countries.
d. Product prices and factor prices within each country but not between
countries.
Chapter 6
1. Which of the following is the formula for the intra-industry trade (IIT) share?
a. 1 – sum of x - m
b. 1 - sum of (x + m)
c. 1 – [sum of x-m/ sum of (x + m)]
d. 1 – [sum of x + m/ sum of (x - m)]
2. Which of the following statements about intra-industry trade is accurate?
(1) Intra-industry trade occurs primarily between developed countries.
(2) Intra-industry trade is less prevalent where trade barriers are low.
(3) Intra-industry trade has become more prominent over the last 50 years.
a. (1) and (2)
b. (1) and (3)
c. (1), (2), and (3)
d. (2) and (3)
3. Which trade model posits that trade flows between countries will be larger as the
economic sizes of the two countries are larger and the geographic distance between
the two countries is smaller?
a. The Heckscher-Ohlin model.
b. The product differentiation model.
c. The gravity model.
d. The Stolper-Samuelson model.
Chapter 7
1. The Rybczynski theorem asserts that in a two-good world, and assuming that product
prices stay constant, growth in the endowment of one factor of production, with the
other factor unchanged, will lead to:
a. An equal percentage increase in the output of both goods.
b. An increase in the output of the good that uses the growing factor intensively
and a decrease in the output of the other good.
c. An increase in the output of both goods but a greater percentage increase in
the output of the good that uses the growing factor intensively.
d. An increase in the output of the good that uses the growing factor intensively
and no change in the output of the other good.
2. When economic growth expands a country's willingness to trade it can result in such
a large decline in that country's terms of trade that the country can be worse off. This
is called:
a. Dutch Disease
b. Biased growth
c. Immiserizing growth
d. Diffusion
3. Which of the following explains that the production of a good moves from invention
through the perfection of production methods to standardization and that the country
that initially exports the good likely becomes the importing country?
a. Immiserizing growth.
b. Diffusion.
c. Product cycle hypothesis.
d. Research and development.
Multiple Choice Answers
Chapter 2
ANSWERS:
1= D OR B
Chapter 3
ANSWERS:
1=B, 2=C, 3=B, 4=C, 5=B, 6=C
Chapter 4
ANSWERS:
1=B, 2=A, 3=A, 4=B, 5=A, 6=C, 7=B, 8=A, 9=B
Chapter 5
ANSWERS:
1=C, 2=B, 3=A
Chapter 6
ANSWERS:
1=C, 2=B, 3=C
Chapter 7
ANSWERS:
1=B, 2=C, 3=C