Questions Practice for Exam #1
1. When a foreign resident purchases a good or service from someone in the United States,
the transaction is:
A) a U.S. export.
B) a U.S. import.
C) a bilateral exchange.
D) a compensating differential.
2. Which of the following entries are considered to be U.S. exports of services?
A) Japanese buying soybeans from the United States
B) Chinese selling iPods to the United States
C) Mexican tourists visiting the Grand Canyon
D) French wine sold to the United States
3. An American tourist buys a ticket to an opera in Paris. How does the U.S. government
classify this transaction?
A) a goods import
B) a service export
C) a service import
D) a goods export
4. A Chinese student pays tuition at a U.S. university. How does the Chinese government
classify this transaction?
A) a goods import
B) a service export
C) a service import
D) a goods export
5. If the value of a nation's imports is more than the value of its exports, then the nation is
experiencing:
A) a trade deficit.
B) a trade surplus.
C) balanced trade.
D) the trade balance.
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6. Recent bilateral trade figures alarm politicians who worry about China's growing trade
imbalance with the United States. What do the authors of your textbook say?
A) The real figures are even more shocking.
B) It is not as bad as the numbers appear because China imports from its other trading
partners a large percentage of the value of the export.
C) It depends on how you count imports and exports and on which currency is used.
D) Irresponsible governments, corruption, and greedy corporations are responsible for
the widening gap.
7. Why do larger countries tend to have lower ratios of international trade to GDP than
smaller countries?
A) Larger countries tend to have more trade between states or provinces within their
borders than smaller countries.
B) Larger countries tend to have higher tariffs than smaller countries.
C) Larger countries tend to trade with other larger countries.
D) Larger countries tend to have larger trade deficits than smaller countries.
8. Economists call factors that influence (reduce) the total volume of goods and services
sold across international borders:
A) business environment.
B) trade barriers.
C) trade conditions.
D) the ratio of total trade to GDP.
9. The first golden age of trade was:
A) the period from 1890 to 1913, when tariffs were increased between countries.
B) the period from 1890 to 1913, when steamships and railroads increased trade.
C) the period between 1919 and 1935.
D) the inter-war period.
10. After 1945, world trade:
A) grew more slowly than in the decade before World War II.
B) grew more rapidly than in the decade before World War II.
C) grew in absolute dollar terms but not as a ratio of GDP.
D) fell both in absolute and relative terms.
11. Which of the following is NOT a reason why countries trade goods with each other?
A) differences in technology used in different countries
B) differences in countries' resources
C) the proximity of countries to one another
D) differences in countries' languages and cultures
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12. David Ricardo's model, which provided an explanation of why nations trade, was based
on differences in:
A) resources.
B) technology.
C) population.
D) government control.
13. In trade, ifdue to technologya nation can produce a good (such as Germany in the
production of snow boards) with fewest resources, it is known as:
A) an absolute advantage.
B) a resource advantage.
C) a comparative advantage.
D) none of the above.
14. Assume the MPLc = 2 cars and the MPLb = 5 boats. There are 150 workers in this
hypothetical economy. What is the maximum number of boats that can be produced?
A) 30
B) 300
C) 750
D) 150
15. International trade makes it possible for countries to:
A) produce outside their PPF.
B) produce inside their PPF.
C) consume inside their PPF.
D) consume outside their PPF.
16. When a nation is in autarky (a no-trade state) and maximizes its living standard, its
consumption point is:
A) along its production possibilities frontier.
B) above its production possibilities frontier.
C) beneath its production possibilities frontier.
D) more information is need to answer this question.
17. Assume a hypothetical economy where cloth and wheat can be produced. What is the
opportunity cost of producing wheat in this economy?
A) the amount of cloth that must be given up to produce one more unit of wheat
B) the amount of money received by selling wheat
C) the number of workers it takes to produce all the wheat
D) More information is needed to answer the question.
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Use the following to answer questions 18-19:
Figure: Indifference Curves
18. (Figure: Indifference Curves) What is the opportunity cost of cloth in terms of wheat in
this example?
A) 1 unit of cloth may be obtained by foregoing 1 unit of wheat.
B) 1 unit of cloth costs 2 units of wheat.
C) 1 unit of cloth costs 1/2 unit of wheat.
D) Not enough information is given.
19. (Figure: Indifference Curves) Which point on the diagram represents the home
equilibrium in the absence of international trade?
A) A
B) B
C) C
D) D
20. A nation will gain from trade if it:
A) produces and consumes along its PPF.
B) produces outside its PPF and consumes along its PPF.
C) consumes outside its PPF and produces along its PPF.
D) produces and consumes outside its PPF.
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Use the following to answer questions 21-24:
SCENARIO: ABSOLUTE AND COMPARATIVE ADVANTAGE
In Poland one hour of labor can produce 1/4 ton of coal or 1 bushel of wheat. In the Czech
Republic one hour of labor can produce 1/6 ton of coal or 1 bushel of wheat.
21. (Scenario: Absolute and Comparative Advantage) Which country has an absolute
advantage in the production of coal?
A) the Poland
B) Czech Republic
C) neither country
D) both countries
22. (Scenario: Absolute and Comparative Advantage) Which country has a comparative
advantage in the production of wheat?
A) Poland
B) the Czech Republic
C) neither country
D) both countries
23. (Scenario: Absolute and Comparative Advantage) The international price of wheat must
fall between which two prices below?
A) between 1 6 ton and 1 4 ton of coal per bushel of wheat
B) between 1 2 3 ton and 2 1 2 tons of coal per bushel of wheat
C) between 1 6 hour and 1 4 hour of labor per bushel of wheat
D) between 4 tons and 6 tons of coal per bushel of wheat
24. (Scenario: Absolute and Comparative Advantage) Suppose that Poland has 1,000 hours
of labor and that it completely specializes according to its comparative advantage. How
many units of which product will it produce?
A) 250 tons of coal
B) 1,000 bushels of wheat
C) 100 bushels of wheat
D) 4,000 tons of coal
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25. The Heckscher-Ohlin model of international trade uses _____ and ______ to explain
trade patterns.
A) comparative; absolute advantage
B) factor abundance; factor intensity
C) factor availability; factor usability
D) technology; proximity
Use the following to answer questions 26-27:
Figure: Home and Foreign Autarky Equilibria
26. (Figure: Home and Foreign Autarky Equilibria) According to the shapes of the two
PPFs, which nation has a comparative advantage in the production of computers?
A) Home
B) Foreign
C) not enough information to determine
27. (Figure: Home and Foreign Autarky Equilibria) At which point will the Home nation
find its no-trade equilibrium consumption and production point?
A) A
B) B
C) C
D) U
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28. Which is the correct ranking of the value chain by level of skill of the labor force
(lowest to highest skill levels)?
A) component production, assembly, marketing and sales, R&D
B) assembly, component production, marketing and sales, R&D
C) assembly, marketing and sales, component production, R&D
D) component production, marketing and sales, assembly, R&D
29. If there is an increase in activities of a firm offshored to a foreign nation, the demand for
higher-skilled labor in the U.S. market will:
A) decrease, and its relative wage decrease.
B) increase, and its relative wage increase.
C) be unaffected.
D) become more elastic, and the relative wage will decrease.
30. Wages generally:
A) are higher in labor-abundant countries than in capital-abundant countries.
B) are lower in labor-abundant countries than in capital-abundant countries.
C) are the same in both labor-abundant and capital-abundant countries.
D) have no relationship to labor abundance.
31. LCD TVs are capital intensive, and tennis rackets are labor intensive. Suppose Canada
has $100 billion of capital and 2 million workers and Mexico has $10 billion of capital
and 20 million workers. According to the HO model:
A) Canada will specialize in and export LCD TVs.
B) Mexico will specialize in and export LCD TVs.
C) Canada will specialize in and export tennis rackets.
D) Mexico will import tennis rackets.
32. Suppose that Home is a labor-abundant country. When trade occurs with Foreign, a
capital-abundant country, the HO model predicts that:
A) the price of the labor-intensive good will rise in Home.
B) the price of the labor-intensive good will rise in Foreign.
C) the price of the capital-intensive good will fall in Foreign.
D) the price of the capital-intensive good will rise in Home.
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Use the following to answer questions 33-34:
Figure: A Country's Before and After Trade Equilibria
33. (Figure: A Country's Before and After Trade Equilibria) What is the equilibrium posttrade point of production?
A) A
B) B
C) C
D) D
34. (Figure: A Country's Before and After Trade Equilibria) How many shoes will this
nation export?
A) 0
B) 125
C) 350
D) 500
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35. Suppose Portugal has 700 workers and 26,000 units of capital, and France has 18,000
workers and 700 units of capital. Technology is identical in both countries. Assume that
wine is the capital-intensive good and cloth is the labor-intensive good. Which of the
following statements is correct if the nations start trading with each other?
A) Wages will increase in Portugal.
B) Rental rates in France will increase.
C) Wages in France will decrease.
D) Rental rates in Portugal will increase.
36. The Mariel boatlift of Cuban immigrants into Miami caused the:
A) supply of labor to increase, leading to a decline in the wages.
B) population of skilled workers in Miami to decline.
C) supply of labor to increase, but it did not decrease the wages.
D) wages of all workers to decline.
37. The ____________ model best explains intra-industry trade.
A) Ricardian
B) Heckscher-Ohlin
C) monopolistic competition
D) none of the above
38. When countries specialize in different varieties of the same type of product and trade
them, it is called:
A) comparative advantage.
B) the Heckscher-Ohlin model.
C) intra-industry trade.
D) increasing returns to scale.
39. NAFTA benefited Canadian consumers because of:
A) higher wages and more travel opportunity.
B) lower wages but also lower taxes.
C) lower prices but lower quality.
D) lower prices and increased variety.
40. To analyze intra-industry trade, we must bring in imperfect competition, and we change
our assumptions about our trade models to allow:
A) price-conscious consumers.
B) short-run unemployment.
C) differentiated products.
D) perfect competition.
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Answer Key
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