MIDTERM_answers - EC 481/581, Winter 2011 Prof. Anca...

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Unformatted text preview: EC 481/581, Winter 2011 Prof. Anca Cristea NAME: __________________________ ID #: __________________________ Midterm Exam There are 10 multiple ­choice questions worth 2 points each; 5 short answer questions worth 4 points each; and 3 problems involving graphs and/or minor computations, with multiple questions per problem, each questions worth 8 points. The total number of points is 120. Budget your time accordingly. Please write legibly. Questions 1 10: MULTIPLE CHOICE (2 points each) 1. One way to gauge the overall importance and impact of trade on a nation is to measure: a. wage distortions and job loss b. the ratio of total imports and exports expressed as a percent of a nation’s GDP c. shipping costs d. rises in national income due to trade. 2. The focus of the Ricardian model is on: a. how countries’ resource bases explain international trade b. how countries’ different technologies explain international trade c. how transportation costs explain international trade d. how different languages and cultures explain international trade 3. As a nation begins to export, its own relative price of exported goods will _____________________, and as it imports other goods, the relative price of those will ____________________, thus: a. fall; rise; lowering its standard of living b. rise; fall; lowering its standard of living c. rise; fall; raising its standard of living d. fall; rise; raising its standard of living 4. A “specific” factor of production is: a. critical to the production of the good or service b. not transferable to other types of production and can only be used for the product in question c. a set quantity for each unit produced d. the opposite of a general factor, meaning it must fit within certain narrow quality parameters 5. When there are diminishing marginal returns to factors of production, the PPF is: a. a negatively sloped straight line b. bowed out from the origin c. caved in towards the origin d. a positively sloped straight line 6. Because of the “law of diminishing marginal returns” to a factor, as more labor is employed, its marginal product: a. rises b. falls c. stays constant d. rises disproportionately 1 EC 481/581, Winter 2011 NAME: __________________________ Prof. Anca Cristea ID #: __________________________ 7. Suppose that in the two ­sector (manufacturing and agriculture) specific ­factors model, the Home country has a comparative advantage in manufacturing output. After trade occurs, the return on capital will ______________________ than the price of the manufactured good. a. increase faster b. increase slower c. increase at the same rate d. decrease 8. As a general rule, the return to (or rental price of) specific factors tends to: a. rise disproportionately when the product is exported b. fall disproportionately when the product is imported c. benefit its owners when there is an increase in the relative price of that product d. rise disproportionately when the product is exported, fall disproportionately when the product is imported, and benefit its owners when there is an increase in the relative price of that product 9. The Heckscher ­Ohlin model of international trade uses _____________________ and ___________________ to explain trade patterns. a. comparative; absolute advantage b. resource abundance; factor intensity c. factor availability; factor usability d. tariffs; quotas 10. According to the Heckscher ­Ohlin model, international trade for a nation with a relative abundance of skilled labor and a relative scarcity of unskilled labor will tend to: a. widen or aggravate the income disparity between skilled and unskilled labor. b. reduce the income disparity between skilled and unskilled workers. c. lower the wages of both groups. d. raise the wages of both groups of workers. Questions 11 15: SHORT ANSWERS (4 points each) 11. Suppose we are in a Ricardian world made of two countries, the U.S. and Mexico. Wages in the US are $12/ hour while wages in Mexico are $2/hour. Goods manufactured using only labor will be 6 times cheaper in Mexico. A: False. The goods price depends on both productivity (number of workers needed to produce it) and the wage they are paid. The above statement would only be true if productivity were equal in the US and Mexico. But if productivity were equal, wage rates would not be 6 times higher in the US. 12. Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile between sectors. If you know that the nominal income of capital and labor has fallen, then what can you say about the changes in the prices of manufactured goods and agricultural goods? 2 EC 481/581, Winter 2011 NAME: __________________________ Prof. Anca Cristea ID #: __________________________ A: Because the nominal income of capital has fallen, the relative price of manufactured goods has fallen. This means that either the nominal price of manufactured goods has fallen or the nominal price of agricultural goods has risen. Because the nominal wage of the mobile factor has fallen, the price of at least one of the goods must have fallen. This would be consistent with a fall in the price of manufactured goods and no change in the price of agricultural goods. 13. In the Specific Factors model, under free trade, a country will only produce its export good. Is this statement true? A: False. Because the PPF is curved out, increasing production of its export good comes at an increasing opportunity cost. This means that countries generally do not become completely specialized. 14. West Germany is relatively abundant in skilled labor and East Germany is relatively abundant in unskilled labor. After 1990 and the fall of the Berlin Wall, there was a large increase in trade between East and West Germany. Suppose this trade was caused by differences in relative factor abundance as in the Heckscher ­Olin model. What should trade do to wage inequality in West Germany? In East Germany? A: Wage inequality rises when the relative wage of skilled/unskilled workers rises. West Germany has a comparative advantage in skilled labor intensive goods, so trade with the east will cause the skilled/unskilled wage to rise in West Germany, and fall in East Germany. So, wage inequality should rise in the West and should fall in the East. 15. In the Heckscher ­Ohlin model with capital and labor, immigration from Mexico to the US would decrease the quantity of capital ­intensive products produced in the US. Is this statement correct? A: Yes. This is the Rybczynski effect from the textbook, i.e. an increase in a factor of production raises the production of the good that uses that factor intensively and reduces the production of the other good. It is an implication of the Heckscher Ohlin model. Questions 16 19: RICARDIAN MODEL Suppose there are only two countries in the world: Germany and India. There are two goods: motorcycles and silk, which are produced according to the following technology. Germany India Total Labor (millions) 50 100 Marginal Product of Labor (MPL) Motorcycles 2 1 Silk (yards) 6 9 16. Which country has absolute advantage in motorcycles? ____Germany ___________ Which country has absolute advantage in silk? ____India ____________ Which country has comparative advantage in motorcycles? ____Germany __________ Which country has comparative advantage in silk? ____India ____________ 3 ...
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This note was uploaded on 04/27/2011 for the course ECON 481 taught by Professor Ancacristea during the Spring '11 term at University of Oregon.

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