International Trade: Theory and Policy
Texas A&M University
Summer 2007
ECON 452-200
Instructor: Danilo Trupkin
Name: ______________________________________________
Second Midterm Exam
Multiple Choice Questions (12 questions, 3 points each)
1. According to the Heckscher-Ohlin model, the source of comparative advantage is a
country’s
(a) technology.
(b) advertising.
(c) human capital.
(d) factor endowments.
(e) Both (a) and (c).
2. In international-trade equilibrium in the Heckscher-Ohlin model,
(a) the capital rich country will charge less for the capital intensive good than the
price paid by the capital poor country for the capital intensive good.
(b) the capital rich country will charge the same price for the capital intensive good as
that paid for it by the capital poor country.
(c) the capital rich country will charge more for the capital intensive good than the
price paid by the capital poor country for the capital intensive good.
(d) the workers in the capital rich country will earn more than those in the poor
country.
(e) the workers in the capital rich country will earn less than those in the poor
country.
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The United States is abundant in labor to land compared to Canada. Cloth
production intensively uses labor compared to food. The countries have the same
technology and relative demand.
3. Under free trade, the United States exports
(a) food
(b) cloth
(c) food and cloth
(d) food and sometimes cloth
(e) cloth and sometimes food
4. The United States produces more _____ than Canada.
(a) cloth
(b) food
(c) cloth relative to food
(d) food relative to cloth
(e) cannot tell from the information provided
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5. The Leontief Paradox
(a) refers to the finding that U.S. exports were more labor intensive than its imports.
(b) refers to the finding that U.S. exports were more capital intensive than its exports.
(c) refers to the finding that the U.S. produces outside its PPF.
(d) still accurately applies to today’s pattern of U.S. international trade.
(e) refers to the fact that world exports does not equal world imports.
6. If PC/PF were to increase in the international marketplace, then
(a) all countries would be better off.
(b) the terms of trade of cloth exporters improve.
(c) the terms of trade of food exporters improve.
(d) the terms of trade of all countries improve.
(e) None of the above
7. When the production possibility frontier shifts out relatively more in one direction,
we have
(a) biased growth.
(b) unbiased growth.
(c) immiserizing growth.
(d) balanced growth.
(e) imbalanced growth.
8. Export-biased growth in Country H will
(a) improve the terms of trade of Country H.
(b) trigger anti-bias regulations of the WTO.
(c) worsen the terms of trade of Country F (the trade partner).
(d) improve the terms of trade of Country F.
(e) decrease economic welfare in Country H.
9. A large country experiencing import-biased economic growth will tend to experience
(a) positive terms of trade.
(b) deteriorating terms of trade.
(c) improving terms of trade.
(d) immiserizing terms of trade.
(e) None of the above.
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10. If the U.S. has a higher marginal propensity to consume (MPC) imports as compared
to both its MPC for exportables and nontradables, then an aid from the U.S. to a poor
country will
(a) worsen the U.S. terms of trade.
(b) improve the U.S. terms of trade.
(c) leave the world terms of trade unaffected.
(d) worsen the terms of trade of both donor and recipient countries.
(e) None of the above.
11. After WWI, Germany was forced to make large reparations—transfers of real
income- to France. If the marginal propensity to consume was equal in both countries,
and if France’s demand was biased toward food (relative to Germany’s demand
pattern) then we would expect to find
(a) the world’s relative price for food remains unchanged.
(b) the world’s relative price for food increase.
(c) the world’s relative price for food decrease.
(d) the world relative price for both food and non-food rise.
(e) None of the above.
12. If we add to Question 11 that France exported manufactures, whereas Germany
exported food, then the reparations from Germany to France would
(a) improve France’s international terms of trade.
(b) cause France’ terms of trade to deteriorate.
(c) cause both France’ and Germany’s terms of trade to deteriorate.
(d) cause both France’ and Germany’s terms of trade to improve.
(e) None of the above.
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Problems
13.
(40 points) Producing one yard of cloth requires 6 workers and 2 acres of land,
while producing one pound of food requires 2 workers and 4 acres of land. Both
countries have 180 workers; the United States has 160 acres of land, while Chile
has 260. The price of food is always $32/pound; the price of cloth is $36/yard in the
United States in autarky and $66/yard in both countries under free trade.
a. Determine and compare the relative abundance of factors across countries.
Determine and compare the relative intensity of factor use across goods. Determine
the pattern of comparative advantage and the pattern of trade.
b. Construct the labor constraint (same for both countries). Construct the U.S. land
constraint. Determine the U.S. production bundle that fully employs both factors.
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c. Construct the Chilean land constraint. Determine the Chilean production bundle that
fully employs both factors. Compare the relative production of cloth to food across
countries. In the same graph, draw factor constraints for each country, with food on
the vertical axis, labeling all the relevant points.
d. Construct the pricing equation for food (same always for both countries). Construct
the U.S. pricing equation for cloth in autarky. Determine U.S. factor prices in autarky
that allow both goods to be priced at cost.
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e. Construct the pricing equation for cloth under free trade (same for both countries).
Determine the factor prices under free trade that allow both goods to be priced at cost.
Compare the U.S. relative factor prices (wage relative to rent) under free trade to
autarky. In the same graph, draw pricing equations under autarky and free trade,
with rent on the vertical axis, labeling all the relevant points.
f. Calculate and compare the proportional changes in the wage, rent, price of cloth, and
price of food. In the United States, owners of which factor would oppose a free trade
agreement? How can this group be identified in terms of relative abundance?
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14. (24 points) Consider the following information on technology and factor endowments
for the Home country:
Factor Requirements (for one unit of good)
Labor
Land
Digital Camera
aLC = 10
aTC = 4
Set of furniture
aLF = 6
aTF = 8
Home country factor endowments
Labor
Land
L = 400
T = 240
(a)
Suppose that a severe financial crisis hit the country, so that 100 citizens decide to
leave (the amount of labor decreases by this outflow of people). Calculate the
original amount of digital cameras and sets of furniture produced, and the final
amount of digital cameras and sets of furniture produced (after change takes place).
(b)
Which theorem describes the main findings in (a)? Explain briefly this theorem, and
compare the proportional changes in the quantities produced of both goods, and in
the supply of both factors of production (no any calculation is required; show only
the qualitative relationship).
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(c)
Suppose now that this country has a curved PPF (i.e., substitution between factors is
allowed), and “new lands” ready to be used are discovered. How would you
describe, graphically, the consequences of this discovery on the quantities produced
of each good? (No any calculation is required, just a graphical description)
(d)
Suppose now that the Home country opens up to trade with the Foreign country
which is land-abundant compared with Home. In the following graph, draw the
relative supply curve of cloth for the Foreign country and locate the free trade
equilibrium. Explain briefly. (Hint: remember that the free trade equilibrium lies
between Home RS and Foreign RS)
PC /PF
Home RS
World RD
QC + Q*C
QF+ Q*F
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