Prof. Dr.

Hagen Krmer
Faculty for Management Sciences
and Engineering

International Economics

Study Questions International Economics

Type: Multiple choice, True/False, and Short Answer Questions

Study Questions International Economics

Content

Chapter 1: Introduction - The Global Economy

Dimensions of Globalisation / The International Economy
What is International Economics about?
The Principle Distinction in International Economics: Trade and Money

Chapter 2: International Economic Institutions Since World War II

What is an institution?
The IMF, the World Bank and the WTO
The Role of International Economic Institutions
International Economic Institutions and the End of the Cold War

Chapter 3: Comparative Advantage and Gains from Trade

Labour Productivity and Comparative Advantage
The Difference between Comparative Advantage and Competitive Advantage

Chapter 4: Comparative Advantage and Factor Endowments

The Heckscher-Ohlin Model
International Factor Movements
Intrafirm Trade, Outsourcing

Chapter 5: Beyond Comparative Advantage

Intraindustry Trade
Trade and Economies of Scale (internal and external EOS)

Chapter 9 Trade and the Balance of Payments

National Income Accounting and the Balance of Payments
Current Account and Capital Account
Policies to eliminate a Current Account Deficit
The International Investment Position

Chapter 10: Exchange Rates and Exchange Rate Systems

The Foreign Exchange Market
Exchange Rates in the medium and short run

Study Questions International Economics

Chapter 1
Introduction - The Global Economy

Chapter 1 The United States in a Global Economy

1.1 Multiple Choice Questions
1) The index of openness for a nation that had $600 million in exports, $400 million in imports,
and GDP of $2,000 million would be
A) 0.1.
B) 0.2.
C) 0.5.
D) -0.1.
2) An important factor that increased international capital flows in the second half of the
nineteenth century was
A) the creation of the International Monetary Fund.
B) the creation of numerous regional trade agreements.
C) the rapid rate of East Asian economic growth.
D) technological innovations.
E) the creation of the World Bank.
3) A major impact of the transatlantic telegraph was
A) a reduction in time required to obtain market information and conclude a transaction between
New York and London
B) an increase in labor flows across the Atlantic.
C) a decrease in trade barriers between the United States and Europe.
D) an increase in trade conflicts between the United States and Europe.
E) None of the above.
4) Transaction costs include the costs of
A) wages paid to labor.
B) buying materials to be used as inputs.
C) electricity and other utilities used in production.
D) hiring a lawyer to go over all the contracts.
E) All of the above.
5) Economists overwhelmingly support more open markets because trade
A) creates jobs.
B) directly benefits everyone in the country.
C) increases the profit margins of firms.
D) leads to a better allocation of resources inside countries.
E) All of the above.

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6) According to the text, which of the following would NOT be a reason to convince economists
that the benefits of trade outweigh the costs?
A) The casual empirical evidence of historical experience
B) The evidence of statistical comparisons of countries
C) Trade benefits consumers in terms of lower prices and increased variety of goods.
D) Trade makes possible increased innovation, access to new technology, and economies of
scale.
E) The associated costs are minor and negligible.

1.2 True/False Questions

1) Capital flows between countries are smaller than in past decades in absolute terms.

2) Since the end of World War II, world trade has grown much faster than world output.

3) Multilateral international organizations help resolve disputes but they may also reduce
national sovereignty.

4) Most economists support open trade because it increase our choices as consumers, lowers
costs for producers, increases competition and innovation, and leads to greater diffusion of
technological change.

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Study Questions International Economics

Chapter 2
International Economic Institutions snce World War II

Chapter 2 International Economic Institutions Since World War II

2.1 Multiple Choice Questions
1) The international organization that serves as a forum for trade discussions and the
development of trade rules is called
A) the WTO.
B) the World Bank.
C) the IMF.
D) Bretton Woods.
E) the United Nations.
2) One of the strongest motivations for holding the Bretton Woods Conference was to design
new international institutions that would
A) contain communism.
B) help countries avoid the mistakes of the 1920s and 1930s.
C) provide a collective defense security for Western Europe and North America.
D) ensure that world prices were not rising too rapidly.
E) create a single currency in Western Europe.
3) One of the most important and most visible roles of the IMF is to
A) hold regular negotiations over tariff reductions.
B) investigate countries that are charged with being unfair traders.
C) provide loans to countries that need capital to develop their economies.
D) intercede by invitation when countries cannot pay their international debts.
E) serve as a forum for negotiating free trade agreements between groups of nations.
4) The primary mission of the World Bank today is to
A) provide capital to underdeveloped countries.
B) provide capital to firms around the world.
C) provide financial assistance for the reconstruction of war-damaged nations.
D) provide a safe place for people around the world to put their money.
E) help countries manage their exchange rates.
5) Most favored nation (MFN) status means that a country treats another country
A) better than its other trading partners.
B) the same as its other trading partners.
C) worse than its other trading partners.
D) any way it chooses since it is the "most favored nation."
E) None of the above.

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6) IMF conditionality refers to the

A) technical assistance the IMF gives.
B) minimum size of a national debt problem that a country must have before the IMF gets
involved.
C) minimum-sized loan the IMF will make.
D) maximum-sized loan the IMF will make.
E) changes a country must make in order to receive IMF financial assistance.
7) A free trade agreement plus a common set of tariffs toward non-members is called
A) a common market.
B) a customs union.
C) a free trade area.
D) an economic union.
E) a partial trade agreement.
8) Which of the following is FALSE about the International Monetary Fund (IMF)?
A) The IMF was created after the Bretton Woods Conference to help to maintain the
international fixed exchange rate system that was introduced.
B) The IMF lends to national governments, initially to maintain the fixed exchange rate system,
and today to deal with debt or currency crises.
C) Multinational corporations can get IMF loans if they agree to invest in economies that are
internationally perceived as risky and otherwise unlikely to receive direct foreign investment.
D) One of the criticisms of the IMF and other international governmental organizations that deal
with the global economy is that their decision making may be biased toward policies that favor
industrialized nations.

2.2 True/False Questions

1) Because of the recognition internationally of the principles of national sovereignty, nations
cannot be affected by the policies of other nations and international governmental organizations.
2) A country experiencing a debt or currency crisis would contact the World Bank.
3) The World Bank was created as a result of the Bretton Woods conference and was originally
focused on the reconstruction of Europe after World War II.
4) The IMF, because it can force nations to take loans and bail out packages, has more power
than other international governmental organizations dealing with the global economy.

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Study Questions International Economics

Chapter 3
Comparative Advantage and Gains from Trade

Chapter 3 Comparative Advantage and the Gains from Trade

3.1 Multiple Choice Questions
Use the data in the table below to answer the following question(s):
Table 3.1
Output per Hour Worked

1) Based on Table 3.1, the opportunity cost of a pair of shoes in the United States is
A) three computers.
B) two computers.
C) one computer.
D) one-half computer.
E) None of the above.
2) Based on Table 3.1, the pre-trade relative price of a computer in Mexico is
A) three pairs of shoes.
B) one pair of shoes.
C) one-half pair of shoes.
D) one-third pair of shoes.
E) None of the above.
3) Based on Table 3.1, trade between the United States and Mexico will occur as long as the
relative price of shoes is between
A) three computers and one computer.
B) three computers and two computers.
C) one-half computer and one-third computer.
D) six computers and three computers.
E) None of the above.
4) The economic philosophy that favors strict limits on imports and strong support for exports is
called
A) zero sum.
B) autarky.
C) mercantilism.
D) comparative advantage.
E) absolute advantage.
5) If a nation has no absolute advantage, then it
A) cannot gain from trade.
B) still gains from trade.
C) can only gain from trade if it raises its productivity levels.
D) can only gain from trade if it reduces wages paid.
E) can only gain from trade if it produces outside its production possibilities curve.
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6) The slope of the trade line is equal to the

A) average of all possible trading prices.
B) world price of the good on the horizontal axis.
C) world price of the good on the vertical axis.
D) productivity of labor in producing the good on the horizontal axis.
E) opportunity cost of the good on the vertical axis.
7) If a country has lower overall productivity levels than its trading partners, then it will
A) be unable to export.
B) have a trade deficit.
C) not be able to obtain gains from trade.
D) have a lower standard of living than its trading partners.
E) All of the above.
8) Competition between the United States and Mexico is
A) equivalent to the competition between two giant corporations.
B) a struggle over which country will get the best jobs.
C) unfair if wages in Mexico are lower than in the United States.
D) a struggle over which country will keep the most advanced technology.
E) not a meaningful way to analyze trade.
9) All of the following are true except
A) trade between two nations reduces their opportunity costs.
B) trade makes nations dependent on each other.
C) trade between nations will not benefit all citizens.
D) the principle of comparative advantage does not apply to countries with extremely limited
resources.
E) specialization according to comparative advantage can make both countries better off.
10) Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3
film. Suppose that opportunity costs are constant. Which of the following is FALSE?
A) Canada has an absolute advantage in timber production.
B) Mexico has a comparative advantage in film production.
C) The opportunity costs for producing timber are lower in Canada than in Mexico.
D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to
six units of timber.
3.2 True False Questions
1) Mercantilists perceived trade as a zero sum game.
2) All individuals and firms in a country must gain from trade in order for it to be beneficial to
the nation.
3) Comparative advantage can change over time.
4) Adam Smith created the theory of comparative advantage.
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Study Questions International Economics

Chapter 4
Comparative Advantage and Factor Endowments

Chapter 4 Comparative Advantage and Factor Endowments

4.1 Multiple Choice Questions
1) A production possibilities curve that is a straight line represents the case of
A) constant costs.
B) increasing costs.
C) decreasing costs.
D) constant opportunity costs but increasing real costs.
E) constant opportunity costs but decreasing real costs.
Use the below mentioned table for the following question(s).
Suppose that all goods are made with two factors labor and capital. The table below shows the
total endowments of each factor in the United States and Canada.
Table 4.1
Endowment of Labor and Capital

2) Based on Table 4.1, relative to the United States, Canada is

A) labor abundant.
B) labor scarce.
C) capital scarce.
D) None of the above.
E) Not enough information to tell.
3) Based on Table 4.1, according to the Stolper-Samuelson Theorem, the income distribution
effects of free trade in the United States are likely to favor
A) capital.
B) labor.
C) either capital or labor, depending on U.S. productivity.
D) neither capital nor labor.
E) Not enough information to tell.
4) The Heckscher-Ohlin Theorem predicts
A) who benefits and who loses from trade.
B) which factors are abundant.
C) the income distribution effects of trade.
D) which goods will be exported.
E) the importance of intraindustry trade.

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5) The Stolper-Samuelson Theorem predicts

A) the level of productivity in export industries.
B) which factors are abundant.
C) the income distribution effects of trade.
D) which goods will be exported.
E) the importance of intraindustry trade.
6) If the trade line that passes through the production point on the PPC has a slope that is
shallower than the slope of the PPC at the same point, then
A) the country can get greater gains from trade if it moves production away from the vertical
axis.
B) the country can get greater gains from trade if it moves production toward the vertical axis.
C) the country cannot improve on its gains from trade.
D) There are no gains from trade in this example.
E) There is not enough information to tell how it can improve its gains from trade.
7) After trade opens, the short run impact on the income of the variable factor will be
A) a decrease.
B) an increase.
C) zero.
D) indeterminate, depending on the consumption pattern of the owners of the variable factor.
E) indeterminate, depending on the productivity of the variable factor.
8) Which of the following is NOT a proposition of the Heckscher-Ohlin model?
A) A country has a comparative advantage in the production of that commodity which uses more
intensively the country's more abundant resource.
B) The effect of international trade is to tend to equalize factor prices between the trading
nations.
C) If Mexico is an unskilled labor abundant country, then Mexico has a comparative advantage
in the production of goods that use unskilled labor more intensively.
D) If the United States is a skilled labor abundant country, then the United States has a
comparative advantage in the production of goods that use skilled labor more intensively.
E) Countries will completely specialize in the product in which they have a comparative
advantage if free trade is allowed to occur.

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9) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is
natural resource intensive and computers are capital intensive, then according to the StolperSamuelson Theorem, the incomes of the owners of __________ are likely to rise in Brazil after
trade with Chile begins.
A) capital
B) labor
C) natural resources
D) It is impossible to determine which will be favored.
10) Which of the following would NOT be associated with the LATE PHASE of the product
cycle?
A) Consumption in high income countries begins to exceed production.
B) Increasing share of output is moving to developing countries where abundant low skilled and
semi-skilled labor keep production costs low.
C) Consumption continues to grow in low income countries.
D) There is experimentation and improvement in design and manufacturing.

4.2 True/False Questions

1) The opportunity cost of producing in low-income, developing countries rises over the product
cycle, according to theory.
2) Chinese exports of toys and footwear can be explained by factor endowments, while Chinese
exports of telecommunications equipment and computers and accessories can be explained by
product-cycle analysis.
3) According to OLI theory, a firm might be unwilling to license its production to a foreign firm
for fear that its technology may be stolen or its brand name harmed, which leads the firm to
internalize control over its asset and set up its own foreign subsidiary.
4) Offshoring by domestic firms causes job losses not job expansion in the home market.

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Study Questions International Economics

Chapter 5
Beyond Comparative Advantage

Chapter 5 Beyond Comparative Advantage

5.1 Multiple Choice Questions
1) Intraindustry trade relies on
A) economies of scale.
B) the product cycle.
C) differences in factor endowments.
D) government industrial policies.
E) monopoly pricing.

2) Which of the following is NOT true about the Grubel-Lloyd (GL) index given by the
Xi - Mi
?
equation: GLi = 1 i i

A) If either X < M or M < X, then this necessarily implies that GL > 1.

B) If either X or M is equal to zero, then this implies that none of the industry's trade is
intraindustry.
C) If X = M, then this implies that all of the industry's trade is intraindustry.
D) If goods are classified together and a narrow definition is used, the index tends to be higher.
E) The index is, in general, greater in high technology industries.

3) An internal economies of scale is defined as

A) one whose size or scale effects are not located in the firm, but in the industry.
B) one with falling costs over a specific level of output.
C) one with falling costs over a relatively large range of output.
D) one with falling costs over a relatively large range of output, but definite declining profits.

4) Which of the following is TRUE about monopolistic competition?

A) One firm serves as the entire industry.
B) A small number of firms serve the entire market.
C) It is competition among many firms producing similar but differentiated products.
D) The pattern of production and trade is difficult to predict.
E) It enjoys no economies of scale.

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5) Internal economies of scale means that

A) firms are experiencing lower average production costs due to a geographical concentration of
firms in their industry that make it cheaper and easier to hire highly specialized workers and
inputs.
B) firms will have lower profits after international trade begins, because costs will be higher than
when they just focused on the domestic market.
C) consumers will have less choices once trade begins, because firms will be squeezed out of the
market.
D) simply expanding the size of the market the firm serves reduces overall per unit costs, since
the firm can spread costs over more output.

6) Market failures occur whenever

A) private returns may be greater than social returns.
B) social returns may be greater than private returns.
C) the free market produces less than what is socially optimal.
D) monopolies exist in a market.
E) All of the above.

7) Which of the following is an example of intraindustry trade?

A) Trading peanut oil for tractors
B) Trading crude oil for automobiles
C) Trading Nokia smartphone for Apple iPhones
D) Trading jeans for cotton

5.2 True/False Questions

1) Comparative advantage cannot account for a significant portion of world trade.

2) Interindustry trade is not based on comparative advantage since it consists of the export and
import of similar countries and mostly between countries that have similar productivity,
technology, and factor endowments.

3) Economies of scale are an important determinant of comparative advantage based trade.

4) Intraindustry trade can lead to lower prices and job creation in both the exporting and the
importing nation.

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5.4 Short Answer Questions

1) Intraindustry trade is characterized by what two features ?

_____________________________________________________________________________
2) If the United States and Canada trade hydro-powered electricity for Hollywood films, what
type of trade does this represent?

_____________________________________________________________________________

3) If the United States and Mexico trade Budweiser for Modelo beer, what type of trade does this
represent?

_____________________________________________________________________________

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Study Questions International Economics

Chapter 9
Trade and the Balance of Payments

Chapter 9 Trade and The Balance of Payments

9.1 Multiple Choice Questions

1) If the residents of a country receive income from their foreign investments, it is counted as a
A) credit in the current account.
B) debit in the current account.
C) credit in the capital account.
D) debit in the capital account.
E) debit in either the capital or current account, depending on the type of investment income.
2) Which of the following is NOT part of the current account?
A) Dividends received on a foreign investment
B) Purchase of a plane ticket on a foreign airline
C) Shipment of food aid to a poor country
D) Purchase of a foreign bond
E) All of the above.
3) If a country runs a current account surplus and national private savings equals domestic
investment, then the combined governmental accounts
A) must be balanced.
B) must be positive.
C) must be negative.
D) could be either negative or positive, depending on the capital account.
E) could be either negative or positive, depending on the net international investment position.
4) If all government budgets are balanced, and S is greater than I, then
A) the net international investment position must be positive.
B) the financial account must be positive.
C) the financial account must be negative.
D) the net international investment position must be negative.
E) Both A and B.
5) The difference between GNP and GDP is
A) GNP includes income received from abroad and excludes income paid abroad.
B) GNP excludes income received from abroad and includes income paid abroad.
C) GNP includes exports and imports.
D) GNP excludes exports and imports.
E) GNP includes capital flows received from abroad and excludes capital flows to foreign
countries.

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Use the following table to answer the next question(s). All values are measured as a percent of
GNP.
Table 9.2

6) Based on Table 9.2, total savings, private plus public, is equal to

A) 3 percent of GNP.
B) 18 percent of GNP.
C) 16 percent of GNP.
D) 20 percent of GNP.
E) None of the above.
7) Based on Table 9.2, the current account balance is
A) -2 percent of GNP.
B) +2 percent of GNP.
C) +4 percent of GNP.
D) -4 percent of GNP.
E) None of the above.
8) Which of the following is NOT true about this national income equation:
A) For the current account, CA, to improve, we may have to invest less than otherwise would be
the case.
B) For the current account, CA, to improve, we may have to save more to maintain the same
amount of investment that includes foreign saving.
C) For the current account, CA, to improve, the government may have to run budget surplus.
D) A reduction in the trade deficit with one country will simply show up as an increase in a trade
deficit with another country.
E) None of the above.
9.2 True/False Questions
1) It is important to compare debt levels of low- and middle-income countries to exports because
countries must earn foreign exchange in order to service their debts.
2) Total debt is more important in figuring out the ability of a country to service its debt than are
debt to GDP and debt to export ratios.
3) Capital inflows that take the form of direct investment may be particularly beneficial if they
bring new technologies, new management techniques, and new ideas to the host country.

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Study Questions International Economics

Chapter 10
Exchange Rates and Exchange Rate Systems

Chapter 10 Exchange Rates and Exchange Rate Systems

10.1 Multiple Choice Questions

1) Suppose the dollar is subject to a floating exchange rate system and that R is the number of
dollars per unit of foreign exchange. If R increases, then the dollar
A) depreciates.
B) appreciates.
C) is devalued.
D) is revalued.
E) Both A and C.

2) In order to protect against foreign exchange risk, firms can use

A) the spot market for foreign exchange.
B) interest rate arbitrage.
C) purchasing power parity.
D) the forward market for foreign exchange.
E) the J-curve.

3) All else equal, if Canada raises its interest rates,

A) the dollar depreciates.
B) the U.S. demand for Canadian dollars increases.
C) the Canadian supply of Canadian dollars increases.
D) Both A and B.
E) Both A and C.

4) Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is
0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate
is 10 percent, then the real exchange rate for the U.S. dollar will
A) appreciate by about 9 percent.
B) appreciate by 10 percent.
C) depreciate by about 9 percent.
D) depreciate by 10 percent.
E) None of the above.

5) The Bretton Woods exchange rate system was an example of a

A) target zone.
B) managed float.
C) pure gold standard.
D) modified gold standard.
E) floating exchange rate system.

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6) A single currency area requires

A) mobile labor and synchronized business cycles.
B) immobile labor and synchronized business cycles.
C) immobile labor and mobile capital.
D) a political union.
E) mobile labor and unsynchronized business cycles.

7) An increase in the U.S. demand for the Mexican peso

A) causes an increase in the U.S. dollar price of a Mexican peso.
B) causes the Mexican peso to appreciate.
C) causes the U.S. dollar to depreciate.
D) causes Mexican goods to be relatively more expensive.
E) All of the above.

10.2 True/False Questions

1) A weak U.S. dollar leads to a higher volume of U.S. imports.

2) If inflation in the rest of the world is lower than inflation in Brazil, Brazil's currency (the real)
would tend to appreciate.

3) If Mexicans increasingly lose confidence in their domestic financial markets and move their
assets to other countries, the peso will depreciate.

4) A forward exchange market contract obligates the owner to make a trade at a specified
exchange rate a fixed number of days in the future.

5) If more European and Japanese firms want to build factories and expand their offshore
investments in the United States, the supply of U.S. dollars on foreign exchange markets will
increase as a result of this investment activity.

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10.3 Short Answer Questions

1) What is the largest center for currency trading?
____________________________________________________________

2) How does the growth in the daily volume of foreign currency transactions compare with the
growth rate of the global economy?
____________________________________________________________

3) Which currency is most commonly traded?

____________________________________________________________

4) If the forward rate is greater than the spot rate, what are markets signaling about their
expectations for the future spot rates for the home currency?
____________________________________________________________
5) If inflation is higher in the home market, what is expected to happen to the real value of the
home currency as time passes?
____________________________________________________________
8) When did major currencies begin floating against each other, ending the Bretton Woods
system?
____________________________________________________________
9) The most important participants in foreign exchange markets are ____________________

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Study Questions International Economics