Chapter 1: Introduction Multiple Choice Questions 1.

Historians of economic thought often describe ___________ written by _______ and published in __________ as the first real exposition of an economic model. A. "Of the Balance of Trade ! "a#id Hume 1$$% B. "&ealth of 'ations " "a#id Hume 1$() *. "&ealth of 'ations " Adam +mith 1$() ". "&ealth of 'ations " Adam +mith 1$$% ,. "Of the Balance of Trade " "a#id Hume 1$() Answer- , .. /rom 10(0 to .111 A. the 2.+. economy roughly tripled in si3e. B. 2.+. imports roughly tripled in si3e. *. the share of 2+ Trade in the economy roughly tripled in si3e. ". 2.+. 4mports roughly tripled as compared to 2.+. exports. ,. 2.+. exports roughly tripled in si3e. Answer- * 5. The 2nited +tates is less dependent on trade than most other countries because A. the 2nited +tates is a relati#ely large country. B. the 2nited +tates is a "+uperpower.". *. the military power of the 2nited +tates ma6es it less dependent on anything. ". the 2nited +tates in#ests in many other countries ,. many countries in#est in the 2nited +tates. Answer- A 7. Ancient theories of international economics from the 1)th and 10th *enturies areA. not rele#ant to current policy analysis. B. are only of moderate rele#ance in today8s modern international economy. *. are highly rele#ant in today8s modern international economy. ". are the only theories that actually rele#ant to modern international economy. ,. are not well understood by modern mathematically oriented theorists. Answer- *

(. An important insight of international trade theory is that when countries exchange goods and ser#ices one with the other it A. is always beneficial to both countries. B. is usually beneficial to both countries. *. is typically beneficial only to the low wage trade partner country . ". is typically harmful to the technologically lagging country. ,. tends to create unemployment in both countries. Answer- B %. 4f there are large disparities in wage le#els between countries then A. trade is li6ely to be harmful to both countries. B. trade is li6ely to be harmful to the country with the high wages. *. trade is li6ely to be harmful to the country with the low wages. ". trade is li6ely to be harmful to neither country. ,. trade is li6ely to ha#e no effect on either country. Answer- " $. Benefits of international trade are limited to A. tangible goods. B. intangible goods. *. all goods but not ser#ices. ". ser#ices. ,. 'one of the abo#e. Answer- , ). Attempts to explain the pattern of international trade A. ha#e been a ma9or focus of international economists. B. ha#e pro#en to be hopeless. *. ha#e pro#en to be a tri#ial exercise. ". ha#e been the preoccupation of economic de#elopment theorists. ,. 'one of the abo#e. Answer- A 0. &hich of the following does not belong: A. 'A/TA B. 2ruguay ;ound *. &orld Trade Organi3ation ". 'one Tariff Barriers

,.

'one of the abo#e.

Answer- " 11. *ost<benefit analysis of international trade A. is basically useless. B. is empirically intractable. *. focuses attention on conflicts of interest within countries. ". focuses attention on conflicts of interests between countries. ,. 'one of the abo#e. Answer- * 11. An impro#ement in a country8s balance of payments means a decrease in its balance of payments deficit or an increase in its surplus. 4n fact we 6now that a surplus in a balance of payments A. is good. B. is usually good. *. is probably good. ". may be considered bad. ,. is always bad. Answer- " 1.. The study of exchange rate determination is relati#ely A. difficult. B. new and mathematical. *. old. ". obtuse. ,. 'one of the abo#e. Answer- B 15. The =ATT was A. an international treaty. B. an international 2.'. agency. *. an international 4>/ agency. ". a 2.+. go#ernment agency. ,. a collection of tariffs. Answer- A

17. The international debt crisis of early 10). was precipitated when _____ could not pay its international debts. A. ;ussia B. >exico *. Bra3il ". >alaysia ,. *hina Answer- B 1(. 4nternational economics can be di#ided into two broad sub<fieldsA. macro and micro. B. de#eloped and less de#eloped. *. monetary and barter. ". international trade and international money. ,. static and dynamic. Answer- * 1%. A primary reason why nations conduct international trade is because of differences in A. historical perspecti#e. B. location. *. resource a#ailabilities. ". tastes. ,. incomes. Answer- * 1$. 4nternational trade is sometimes used as a substitute for all of the following except A. international mo#ements of capital. B. international mo#ement s of labor. *. domestic production of the same goods or ser#ices. ". domestic production of different goods and ser#ices. ,. 'one of the abo#e. Answer- "

1). 4nternational trade forces domestic firms to become more competiti#e in terms of A. the introduction of new products. B. product design and ?uality. *. product reliability. ". product price. ,. All of the abo#e. Answer- , 10. The mo#ement to free international trade is most li6ely to generate short<term unemployment in which industries: A. 4ndustries producing non<tradable goods B. 4mport<competing industries *. ,xport industries ". 4mport sectors ,. 'one of the abo#e. Answer- B .1. 4nternational trade is logically associated with which assumption: A. ;esources are less mobile internationally than domestically. B. ;esources are more mobile internationally than are goods. *. 4mports should exceed exports. ". ,xports should exceed imports. ,. 'one of the abo#e. Answer- A .1. Arguments for free trade are sometimes disregarded by the political process because A. economists tend to fa#or highly protected domestic mar6ets. B. economists ha#e a uni#ersally accepted decisi#e power o#er the political decision mechanism. *. maximi3ing consumer welfare may not be a chief priority for politicians. ". the gains of trade are of paramount concern to typical consumers. ,. 'one of the abo#e. Answer- *

... 4ncreased foreign competition tends to A. increase profits of domestic import<competing industries. B. place constraints on the wages of domestic wor6ers. *. induce falling output per wor6er for domestic wor6ers. ". intensity inflationary pressures at home ,. 'one of the abo#e. Answer- B .5. ____________ is the ability of a firm to design produce and mar6et goods and ser#ices that are better and@or cheaper than those of other firms. A. *ompetiti#eness B. Arotectionism * *omparati#e ad#antage ". 4nter#entionism ,. 'one of the abo#e. Answer- A .7. /or a country to maximi3e its producti#ity in a global economy it re?uires A. only imports. B. only exports. *. both exports and imports. ". neither exports nor imports. ,. foreign direct in#estment. Answer- * .(. Aroponents of free trade claim all of the following as ad#antages except A. relati#ely high wage le#els for all domestic wor6ers. B. a wider selection of products for consumers *. increased competition for world producers. ". the utili3ation of the most efficient production processes. ,. 'one of the abo#e. Answer- A .%. A firm8s ____ relati#e to that of other firms is generally regarded as the most important determinant of competiti#eness. A. income le#el B. tastes *. preferences ". producti#ity ,. en#ironmental regulation

Answer- " .$. One li6ely effect of mo#ing to free international trade is that A. a monopoly in the home mar6et becomes an oligopoly in the world mar6et. B. an oligopoly in the home mar6et becomes a monopoly in the world mar6et. *. a purely competiti#e firm becomes an oligopolist. ". a purely competiti#e firm becomes a monopolist. ,. 'one of the abo#e. Answer- A .). 4nternational trade in goods and ser#ices tends to A. increase all domestic costs and prices. B. 6eep all domestic costs and prices at the same le#el. *. lessen the amount of competition facing home manufactures. ". increase the amount of competition facing home manufacturers. ,. 'one of the abo#e. Answer- " .0. The real income of domestic producers and consumers may be increased by A. technological progress but not international trade. B. international trade but not technological progress. *. neither technological progress nor international trade. ". both technological progress and international trade. ,. 'one of the abo#e. Answer- " 51. A sudden shift from import tariffs to free trade may cause short<term unemployment in A. import competing industries. B. exporting industries. *. industries that neither import nor export. ". ser#ice industries ,. 'one of the abo#e. Answer- A

51. ,mpirical studies indicate that producti#ity performance is A. directly related to globali3ation of industries. B. in#ersely related to globali3ation of industries. *. not related to globali3ation of industries. ". Any of the abo#e. ,. 'one of the abo#e. Answer- A 5.. A closed economy is one in which A. imports exactly e?ual exports. B. domestic firms in#est in foreign countries. *. the home economy is isolated from foreign trade or in#estment. ". All of the abo#e. ,. 'one of the abo#e. Answer- * 55. The dominant trading nation in the world mar6et since &orld &ar 44 was A. the 2nited Bingdom. B. the 2nited +tates. *. Capan. ". =ermany. ,. *hina. Answer- B 57. ,mpirical studies indicate that _______________ best enhances producti#ity growth for local industries A. local competition B. cut<throat competition *. destabili3ing competition ". global competition ,. 'one of the abo#e. Answer- " 5(. High le#els of openness are most li6ely associated with a country8s A. political orientation. B. si3e. *. resource a#ailability. ". historical association with foreign entangling alliances. ,. 'one of the abo#e.

Answer- B

Essay Questions 1. 4t is argued that small countries tend ha#e more open economies than large ones. 4s this empirically #erified: &hat are the logical underpinnings of this argument:

Answer- Des. They do not ha#e sufficient resources to satisfy consumption needsE and also do not ha#e a sufficiently large mar6et to enable their industries to a#ail themsel#es of scale economy possibilities. Another answer would rely on a location argument. Assume that the "natural" mar6et for any gi#en plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country then the probability that the typical circular mar6et will encompass some foreign country is greater the smaller is the country. .. 4t is argued that if a rich high wage country such as the 2nited +tates were to expand trade with a relati#ely poor and low wage country such as >exico then 2.+. industry would migrate south and 2.+. wages would fall to the le#el of >exico8s. &hat do you thin6 about this argument:

Answer- The student may thin6 anything. The purpose of the ?uestion is to set up a discussion which will lead to the models in the following chapters. 5. +ome patterns of international trade are easier to explain than others. =i#e se#eral examples and explain.

Answer- Historical circumstance can explain some patterns such as the relati#ely large trade flows from &est Africa to /rance. The relati#ely sparse trade between countries within +outh America seems curious. 7. 4nternational trade tends to pro#e that international trade is beneficial to all trading countries. Howe#er casual obser#ation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts:

Answer- Fi6e ?uestion . this is meant to allow students to offer preliminary discussions of issues which will be explored in depth later in the boo6. (. 4t is argued that small countries tend ha#e more open economies than large ones. 4s this empirically #erified: &hat are the logical underpinnings of this argument:

Answer- Des. They do not ha#e sufficient resources to satisfy consumption needsE and also do not ha#e a sufficiently large mar6et to enable their industries to a#ail themsel#es of scale economy possibilities.

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Another answer would rely on a location argument. Assume that the "natural" mar6et for any gi#en plant is a circle with a radius of n miles with the plant at its center. Assuming that the production plants are located randomly throughout the country then the probability that the typical circular mar6et will encompass some foreign country is greater the smaller is the country. %. 4t is argued that if a rich high wage country such as the 2nited +tates were to expand trade with a relati#ely poor and low wage country such as >exico then 2.+. industry would migrate south and 2.+. wages would fall to the le#el of >exico8s. &hat do you thin6 about this argument:

Answer- The student may thin6 anything. The purpose of the ?uestion is to set up a discussion which will lead to the models in the following chapters. $. +ome patterns of international trade are easier to explain than others. =i#e se#eral examples and explain.

Answer- Historical circumstance can explain some patterns such as the relati#ely large trade flows from &est Africa to /rance. The relati#ely sparse trade between countries within +outh America seems curious. ). 4nternational trade tends to pro#e that international trade is beneficial to all trading countries. Howe#er casual obser#ation notes that official obstruction of international trade flows is widespread. How might you reconcile these two facts:

Answer- Fi6e ?uestion . this is meant to allow students to offer preliminary discussions of issues which will be explored in depth later in the boo6. 0. 4nternational Trade theory is one of the oldest areas of applied economic policy analysis. 4t is also an area for which data was relati#ely widely a#ailable #ery early on. &hy do you suppose this is the case:

Answer- 4n ancient times public finance was not well de#eloped. >ost of the population was not producing and consuming within well<de#eloped mar6et economies so that income and sales taxes were not efficient. One of the most con#enient ways for go#ernments to obtain resources was to set up custom posts at borders and tax. Hence international trade was of great policy interest to princes and 6ings as was precise data of their main tax base.

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Quantitative/Graphing Problems

1.

The figure abo#e is the Aroduction Aossibility /rontier GAA/H of Baccalia where only two products are produced clothing and wine. 4n fact Baccalia is producing on its AA/ at point A. By and large the people of Baccalia are content as both their external and internal needs for warmth are satisfied in the most economically efficient manner possible gi#en their a#ailable producti#e resources Gand 6nown technologyH. How much wine is being produced: How much cloth: 4f a person in this country wanted to purchase a liter of wine what would be the price he or she would ha#e to pay: Cudging from what you learned in the pre#ious paragraph can you indicate at which point Gif at allH the *ommunity 4ndifference *ur#e is tangent to the Aroduction Aossibility /rontier: ,xplain your reasoning.

Answer% million liters of wine are being produced. 5 million s?uare yards of cloth are being produced. The price of 1 liter of wine is one half of a s?uare yard of cloth. The tangency is at point A. &e 6now this because otherwise the country would not be producing at the point of maximum economic efficiency.

1.

..

One day Baccalia 9oined the &TO and 9oined the =lobal Iillage. They disco#ered that in the F&, GFondon &ine ,xchangeH 1 liter of wine is worth 1 s?uare yard of cloth. &hat is the logical production point they should stri#e for:

Answer- 11 million liters of wine.

5.

They wish to en9oy to the fullest from the gains from trade but are not willing to gi#e up imbibing e#en one drop of wine from the % million liters they consumed in their original autar6ic state. 4f their new consumption point is a point we shall designate as point b describe where this point would be found.

Answer- Iertically abo#e point a 7. &here is the *ommunity 4ndifference *ur#e family of cur#es tangent to their new *onsumption Aossibility /rontier:

Answer- At point b. (. How can you pro#e that Baccalia has in fact gained from the a#ailability of trade and that their new situation is superior to the pre<trade situation Gwith which they were ?uite contentH:

Answer- The country was consuming at point a before trade. 4t is now consuming at point b with trade. Aoint b represents a superior welfare combination of goods as compared to point a since at b the country has more of each of the goods.

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