Midterm answers - YORK UNIVERSITY AP/ECON 3150:...

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Unformatted text preview: YORK UNIVERSITY AP/ECON 3150: International Trade Summer I 2011 Midterm Exam Time Allowed: 90 Miniutes M. Anam MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Each question is worth 1 point. Total points 20. 1) According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is A) the distance between them. B) the number of different product varieties produced by their industries. C) the average weight/value of their traded goods. D) their cultural affinity. E) their colonial-historical ties. 2) Why does the gravity model work? A) Large economies have relatively larger areas which raises the probability that a productive activity will take place within the borders of that country. B) Large economies tend to have large incomes and tend to spend more on imports. C) Large economies have relatively large incomes, and hence spend more on government promotion of trade and investment. D) Large economies became large because they were engaged in international trade. E) Large economies tend to avoid trading with small economies. 3) The Ricardian model attributes the gains from trade associated with the principle of comparative advantage result to A) differences in preferences. B) differences in labor productivity. C) differences in technology. D) differences in resources. E) gravity relationships among countries. 4) If the world terms of trade for a country are somewhere between the domestic cost ratio of H and that of F, then A) country F but not country H will gain from trade. B) neither country H nor F will gain from trade. C) only the country whose government subsidizes its exports will gain. D) country H and country F will both gain from trade. E) country H but not country F will gain from trade. Unit Labor Requirements Cloth Widgets Home 4 3 Foreign 1 2___ 5) Given the information in the table above A) Foreign has a comparative advantage in widgets. B) neither country has a comparative advantage in widgets. C) Home has a comparative advantage in widgets. D) neither country has a comparative advantage in cloth. E) Home has a comparative advantage in both cloth and widgets. 6) Given the information in the table above, Homeʹs opportunity cost of cloth is: A) 1.5 B) 3.0 C) 1.33 D) 0.75 E) 4.0 7) Given the information in the table above, Foreignʹs opportunity cost of widgets is: A) 2.0 B) 1.5 C) 6.0 D) 3.0 E) 0.5 8) Given the information in the table above, if the world equilibrium price of widgets were 1 cloth, then A) neither country could benefit from trade with each other. B) each country will want to import the good in which it enjoys comparative advantage. C) both countries will want to specialize in cloth. D) neither country will want to export the good in which it enjoys comparative advantage. E) both countries could benefit from trade with each other. 9) In the specific factors model, a countryʹs production possibility frontier is ________ because of ________. A) a straight line; constant marginal returns B) a curved line; a limited supply of labor C) a curved line; diminishing marginal returns D) a straight line; diminishing marginal returns E) a curved line; constant marginal returns 10) Under perfect competition, the equilibrium price of labor used to produce cloth will be equal to A) the average product of labor in the production of cloth times the price of cloth. B) the slope of the production possibility frontier. C) the price of cloth divided by the marginal product of labor in the production of cloth. D) the marginal product of labor in the production of cloth times the price of cloth. E) the ratio of the marginal product of labor in the production of cloth to the marginal product of labor in the production of food times the ratio of the price of cloth. to the price of food. 11) In the specific factors model, which of the following will increase the quantity of labor used in cloth production? A) an increase in the price of cloth relative to that of food B) an increase in the price of food relative to that of cloth C) an equal percentage decrease in the price of food and cloth D) an equal percentage increase in the price of food and cloth E) a decrease in the price of labor 12) In the specific factors model, a 5% increase in the price of food accompanied by a 1% increase in the price of cloth will cause ________ in the welfare of labor, ________ in the welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed factor in the production of cloth. A) an ambiguous change; an ambiguous change; an ambiguous change B) an increase; a decrease; an increase C) an ambiguous change; a decrease; an increase D) a decrease; an ambiguous change; an ambiguous change E) an ambiguous change; an increase; a decrease 13) In the specific factors model, the effects of trade on welfare overall are ________ and for fixed factors used to produce the exported good they are ________. A) negative; positive B) positive; positive C) positive; negative D) ambiguous; positive E) positive; ambiguous 14) In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of ________ will have a production possibility frontier that is biased toward production of the ________ good. A) labor; capital intensive B) labor; labor intensive C) capital; land intensive D) land; capital intensive E) land; labor intensive 15) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a countryʹs ________ factor and will ________ the good that uses that factor intensively. A) benefit; abundant; export B) benefit; scarce; export C) harm; abundant; import D) harm; scarce; export E) benefit; scarce; import 16) In the Heckscher-Ohlin model, when two countries begin to trade with each other A) the relative prices of traded goods in the two countries converge. B) all factors in both countries will gain from trade. C) relative factor prices in the two countries diverge. D) all factors in one country will gain, but there may be no gains in the other country. E) benefits from trade are evenly distributed between the two countries. Assume that only two countries, A and B, exist. 17) Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory, A) both countries will export good S. B) trade will not occur between these two countries. C) both countries will import good S. D) country B will export good S. E) country A will export good S. 18) Refer to the table above. If you are told that Country B is very much richer than Country A, then the correct answer is A) both countries will import good S. B) country B will export good S. C) both countries will export good S. D) trade will not occur between these two countries. E) country A will export good S. 19) In the Heckscher-Ohlin model, when there is international-trade equilibrium A) the workers in the capital rich country will earn less than those in the poor country. B) the capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good. C) the capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive good. D) workers in the capital rich country will earn more than those in the poor country. E) the relative price of the capital intensive good in the capital rich country will be the same as that in the capital poor country. 20) Suppose that there are two factors, capital and land, and that the United States is relatively land endowed while the European Union is relatively capital-endowed. According to the Heckscher-Ohlin model, A) the U.S. should compensate European countries once trade commences. B) European capitalists should support U.S.-European free trade. C) all landowners should support free trade. D) all capitalists in both countries should support free trade. E) European landowners should support U.S.-European free trade. Short Answer/Problem: Do any two. Each question is worth 10 points. 1. Suppose the unit labor requirements for goods X and Y are 3 and 6 at home and 1 and 3 in the foreign country respectively. Assume that home has 120 and foreign has 90 units of labor. a. With X on the horizontal and Y on the vertical axis, draw the production possibility frontiers for each country. (5) b. Which country has comparative advantage in each good? Why? (2) c. What is the range of Px/Py that will allow both countries to gain from trade. Explain. (3) 2. a. Explain who gains and who looses as a result of trade in the specific‐factor model. (8) b. Can trade make the country as a whole worse off in this model? Explain. (2) 3. Consider a Hecksher‐Ohlin model where home and foreign countries produce two goods, food and cloth. Goods are produced with land and labor. Factor substitution is not possible. The fixed unit labor(L) and land(T) requirements for both countries are: aLC = 2, aTC = 1, aLF = 1, aTF = 2. The endowments of labor and land are: L = , T = 300, L* = 300, T* = 240. a. With cloth along the horizontal and food on the vertical axis, draw the production possibility frontiers for each country. (5) b. How much food and cloth is produced in each country before trade? (3) c. Is the pattern of production consistent with the Rybczynski theorem? Explain. (2) Multiple Choice Answers: 1) A 2) B 3) B 4) D 5) C 6) C 7) A 8) E 9) C 10) D 11) A 12) E 13) B 14) B 15) A 16) A 17) D 18) B 19) E 20) B Short Answers: 1. a. Both frontiers are linear, downward‐sloping. Home (Foreign) frontier starts at 20 (30) on Y axis and meets X axis at 40 (90). b. Foreign has comparative advantage in X and home in Y. Foreign’s opportunity cost for X is 1/3 Y and Home’s is 1/2Y. c. 1/2 and 1/3 2. a. Specific factor in the export sector gains, specific factor inthe import‐competing sector loses. The mobile factor gains in terms of the import good but loses in terms of the export good. (see slide 3‐23, Fig 3.7, in the specific sector model chapter) b. The country as a whole must gain as shown in the production frontier and indifference curve graph. ( Slide 3‐ 49. Fig 3‐14 specific factor model) 3. a. Home frontier starts at 150 on the food axis and ends at 150 on the cloth axis. The kink point is where food and cloth output are both 100. Foreign frontier starts from 60 on the food axis and ends at 150 on the cloth axis. The kink point is at food = 60 and cloth = 120 b. Production is at the kink point. So home produces 100 units of each and foreign produces 60 units of food and 12o units of cloth. c. Yes home has same labor as foreign and more land. It produces more food and less cloth. ...
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This note was uploaded on 09/01/2011 for the course ECON 3150 taught by Professor Allalileeva during the Summer '09 term at York University.

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