Midterm Exam – International Trade Theory (30 points)
(2nd Semester, 2005)
Name:
Student Number:
I. Answers to the multiple choice questions: (1 points each)
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III. Essay type questions (5 points each)
1. What is meant by economies of scale? How can they be the basis for international trade?
2. What is meant by intra-industry trade? What are the key characteristics of intra-industry
trade? (Answer in the back page.)
1. What is meant by the equilibrium-relative commodity price in isolation? How is this price
determined in each nation?
3. What does the Heckscher-Ohlin theorem postulate? Prove the theorem.
4. What does the factor-price equalization theorem postulate? Prove the theorem intuitively.
I. Multiple choice questions
1. International trade can be based on economies of scale even if both nations have identical:
a. factor endowments
b. tastes
c. technology
d. all of the above
e. none of the above
2. The marginal rate of transformation (MRT) of X for Y refers to:
a. the absolute slope of the community indifference curve at the point of production
b. amount of Y that a nation must give up for one extra unit of X and still remain on the
same indifference curve
c. amount of X that a nation must give up for one extra unit of Y to reach higher
indifference curve
d. the amount of Y that a nation must give up to produce each additional unit of X
e. the opportunity cost of Y
3. The opening or expansion of international trade usually affects all members of society:
a. positively
b. negatively
c. most positively but some negatively
d. most negatively but some positively
e. half positively but half negatively
4. In the Recardian model, if with one hour of labor time nation 1 can produce either 3X or 3Y
while nation 2 can produce either 1X or 3Y (and labor is the only input):
a. Nation 1 has a comparative disadvantage in commodity X
b. Nation 2 has a comparative disadvantage in commodity Y
c. Nation 1 has a comparative advantage in commodity X
d. Nation 1 has a comparative advantage in neither commodity
e. None of the above
5. Which of the following is not a reason for increasing opportunity costs:
a. technology differs among nations
b. factors of production are not homogeneous
c. factors of production are not used in the same fixed proportion in the production of all
commodities
d. for the nation to produce more of a commodity, it must use resources that are less and
less suited in the production of the commodity
e. all of the above
6. If the internal Px/Py is greater in nation 1 than in nation 2 without trade:
a. nation 1 has a comparative advantage in commodity X
b. nation 2 has a comparative disadvantage in commodity X
c. nation 1 has a comparative disadvantage in commodity X
d. nation 2 has a comparative advantage in commodity Y
e. none of the above
7. Mutually beneficial trade can occur if production frontiers are:
a. equal but tastes are not
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b.
c.
d.
e.
different but tastes are the same
different and tastes are also different
the same and tastes are also same
all of the above
8. Export prices must rise for a nation to increase its exports because the nation:
a. incurs increasing opportunity costs in export production
b. faces decreasing opportunity costs in producing import substitutes
c. faces increasing marginal rate of technical substitution of export production in terms of
producing import substitutes
d. none of the above
e. all of the above
9. A difference in relative commodity prices between nations can Not be based on a difference
in:
a. technology
b. factor endowments
c. tastes
d. economies of scale
e. none of the above
10. According to the H-O model, international trade will:
a. reduce international differences in absolute and relative factor prices
b. increases international differences in absolute and relative factor prices
c. increase or reduce international differences in absolute and relative factor prices
d. increase international difference in absolute but not relative factor prices
e. increase international difference in relative but not absolute factor prices
11. From empirical studies, we concluded that the H-O theory:
a. must be rejected
b. must be accepted without reservation
c. can be accepted while awaiting further testing
d. explains all international trade
e. explains none of international trade
12. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed, require
new trade theories?
a. Constant returns to scale
b. Perfect competition
c. Similar tastes in both nations
d. a and b
e. All of the above
13. The Heckscher-Ohlin theory explains relatively well the most the trade:
a. among developed countries
b. between developed and developing countries
c. in industrial goods
d. in identical goods
e. all of the above
14. Intra-Industry trade takes place:
a. because products are differentiate
b. in order to take advantage of economies of scale
c. because perfect competition is the prevalent form of market organization
d. among the countries which are similar
e. all of the above
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15. If a nation exports twice as much of a differentiated product that it imports, its intraindustry(T) index is equal to:
a. 1.00
b. 0.75
c. 0.50
d. 0.25
e. 0.00
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