338x9911 10/29/99
R. E. Bove
ECO 338 INTERNATIONAL ECONOMICS
FIRST EXAM
NOVEMBER 6, 1999
NAME: __________________
Part I. Identify or Explain (18 Points)
Mercantilism (2)
Leontief Paradox (2)
External Economies of Scale (2)
Linder Representative Demand hypothesis (3)
Offer curve (3)
Terms of Trade(2)
Rate of product transformation (marginal rate of transformation) (2)
Autarky (1)
Appreciation (1)
Currency swap (2)
Marginal propensity to import (1)
Simplified Marshall-Lerner conditions (2)
SDR (1)
Distinguish the following:
Options vs. forward transactions (2)
Fundamental vs. technical analysis (2)
Capital account in balance of payments (before and after 1999) (2)
Part II. Multiple Choice (12 Points)
Country
Korea
Japan
Output per worker per day
Tons of Steel
VCRs
80
40
20
20
Questions 1-3 refer to the above table.
1. (I-16) According to the principle of absolute advantage, Japan should:
a. Export steel
b. Export VCRs
c. Export both steel and VCRs
d. None of the above; there is no basis for gainful trade.
2. According to the principle of comparative advantage:
a. Korea should export steel
b. Korea should export steel and VCRs
c. Japan should export steel
d. Japan should export steel and VCRs
3. With international trade, what is the maximum amount of steel that Korea would be willing to export to
Japan in return for one VCR?
a. ½ ton of steel
b. 1 ton of steel
c. 1½ tons of steel
d. 2 tons of steel
4. If International terms of trade settle at a level that is between each country’s opportunity cost:
a. There is no basis for gainful trade for either country.
b. Both countries would gain from trade
c. Only one country gains from trade
d. One country gains from trade and the other country loses from trade.
5. (I-27) In autarky, the equilibrium relative price of one product in terms of another for a country is
determined by the:
a. Transformation (production possibilities) curve
b. Transformation curve and the highest (community) indifference that can be reached through
international trade.
c. Community indifference curves
d. transformation curve and (community) indifference curves.
6. Trade between two nations would not be possible if they have:
a. Identical (community) indifference curves but different transformation curves
b. Identical transformation curves but different (community) indifference curves
c. Different (community) indifference curves and different transformation curves
d. Identical (community) indifference curves and identical transformation curves
e. All of the above
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7. (W-113) An increase in Canadian demand for Japanese automobiles would cause:
a. A decrease in the supply of Japanese yen to Canada
b. An increase in the supply of Japanese yen to Canada
c. An decrease of Canadian demand for Japanese yen
d. An increase of Canadian demand for Japanese yen
8. (W-121) Relative purchasing-power-parity theory would predict that if inflation is 10% in Britain and
4% in the United States:
a. The dollar would appreciate against the pound by 4%
b. The dollar would depreciate against the pound by 4%
c. The dollar would appreciate against the pound by 6%
d. The dollar would depreciate against the pound by 6%
9. (W129) Under the 19th century gold standard a nation with a balance of payments surplus would acquire
reserves and would experience:
a. An appreciating exchange rate.
b. a depreciating exchange rate.
c. An increased money supply, rising prices and a diminishing surplus
d. An increased money supply, falling prices and a growing surplus
10. If investment increased by $100 in a nation with a marginal propensity to import of 0.05 and a
marginal propensity to consume of 0.8 (Don’t worry about repercussions):
a. Income would rise by $500 and imports would rise by $25
b. Income would rise by $100 and imports would rise by $5
c. Income would rise by $400 and imports would rise by $20
d. Income would rise by $400 and the trade deficit would fall by $20
11. (W148) Under the Bretton Woods (Gold exchange) system of the mid 20 th century, a country whose
currency fell 3% below par value would be expected to:
a. Sell more of its own currency on the foreign exchange markets, acquiring additional reserves
for its exchange stabilization fund
b. Sell reserves from its exchange stabilization fund.
c. Immediately devalue its currency
d. Use exchange controls to ration scarce foreign exchange.
12. (I42) Assume that Western Rumelia, in the absence of trade, finds itself relatively abundant in labor
and relatively scarce in land. Under Heckscher-Ohlin-Samuelson theory free trade will change the
internal distribution of income in Western Rumelia in favor of:
a. Labor
b. Land
c. Both labor and land
d. Neither labor or land
e. No conclusion is possible
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Part III. Do two of the four following problems.(20 Points)
1. Mexico is a labor abundant country compared to the United States, which is comparatively capital
abundant. Clothing production is relatively labor intensive compared to automobiles.
a. In the diagrams below, label the production-possibility (transformation) curves as to which is
the US and which is Mexico.
b. Using the indifference curves supplied and any that you wish to add (neatly),
(i) show the pre-trade production for each country using an isorevenue (price) line in
each country. And explain how the relative price of automobiles differs between the two
countries.
(ii) show a possible new isorevenue (terms of trade) line if free trade occurs between the
two countries (Don’t worry too much about quantities exactly balancing). Explain ()
how the relative price of autos moves in each country and () how the diagram shows that
one or both countries benefit from trade. (It is conventional to label production points
with an x and consumption points with a y.)
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2. Suppose that Western Rumelia devalues its currency (Answers to the first 3 parts should make a readable
short essay.):
a. Explain how the J-curve predicts the balance of payments situation will change.
b. The text talks about the extent of currency pass-through . Why is this important in
discussing the effects of devaluation?
c. According to the absorption approach, how would the presence of unemployment affect
the results of devaluation?
d. The Eastern Rumelian currency, the Balalaika, trades at B1=$10 before the
devaluation. Draw conventional straight line supply and demand curves for exports with
Balalaikas on the y-axis, showing effects on export revenues, before and after the
devaluation to B1=$5.
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3. Assume that the spot exchange rate is DM1.6=$1 and that yearly interest rates are 4% in the US (2% for
180 days) and 10% (5% for 180 days) in Germany . A US investor wishes to buy a 180 day bill in Germany.
If the investor uses covered interest arbitrage, what 180 day forward rates (above or below what numbers of
marks to the dollar) would be required to make the transaction profitable? Show your reasoning.
4. Multiple choice question 10 is repeated here. If investment increased by $100 in a nation with a marginal
propensity to import of 0.05 and a marginal propensity to consume of 0.8 (Don’t worry about
repercussions), income would rise by………
Now, assume that there are repercussions – make up numbers for m 2 and c 2 ( k1 , k 2 and A are
implied by the problem) and show, using the formula below, how repercussions would change your answer.
1  c 2  m2 k1  m2 k 2
Y 1 
A
1  c1  m1 1  c 2  m2   m1m2
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