International Economics 3rd Edition By Robert C. Feenstra – Test Bank

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International Economics 3rd Edition By Robert C. Feenstra – Test Bank

chapter 2

1. Which of the following is NOT a reason why countries trade goods with one another?
  A) differences in technology used in different countries
  B) differences in countries’ total amount of resources
  C) the proximity of countries to one another
  D) differences in countries’ languages and cultures
  Ans:  D     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Introduction

 

 

2. David Ricardo’s model, which provided an explanation of why nations trade, was based on:
  A) labor productivity.
  B) technology.
  C) population.
  D) government control.
  Ans:  B     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Definitional     Topic:  Introduction

 

 

3. Which of the following is the MOST likely explanation for a Detroit construction company’s imports of Canadian concrete blocks made in Windsor, Ontario?
  A) the Ricardian model
  B) offshoring
  C) technology
  D) proximity
  Ans:  D     Difficulty:  Difficult     Section:  Introduction     Skill Descriptor:  Concept-Based     Topic:  Proximity

 

 

4. What is the MOST likely reason neighboring nations engage in trade?
  A) labor availability
  B) similar tastes and preferences
  C) proximity
  D) shared membership in a free-trade area
  Ans:  C     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Proximity

 

 

5. A country’s factors of production include its:
  A) labor.
  B) capital.
  C) natural resources.
  D) labor, capital, and natural resources.
  Ans:  D     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Resources

 

 

6. Which of the following is NOT considered to be a factor of production?
  A) labor
  B) capital
  C) natural resources
  D) government
  Ans:  D     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Resources

 

 

7. When a firm in one nation purchases unfinished products internationally and adds further processing to sell in the domestic market, this is known as:
  A) barter.
  B) offshoring.
  C) factor movement.
  D) marketing arrangements.
  Ans:  B     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Resources

 

 

8. In trade, if—due to technology—a nation can produce a good (such as Germany’s  production of snowboards) with fewest resources, it is known as a(n):
  A) absolute advantage.
  B) technology advantage.
  C) comparative advantage.
  D) resource advantage.
  Ans:  A     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Absolute Advantage

 

 

9. The focus of the Ricardian model is on how:
  A) countries’ resource bases explain international trade.
  B) countries’ different technologies explain international trade.
  C) transportation costs explain international trade.
  D) different languages and cultures explain international trade.
  Ans:  B     Difficulty:  Difficult     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Absolute Advantage

 

 

10. When a country requires fewer resources to produce a product than other countries, it is said to have a(n):
  A) absolute advantage in the production of the product.
  B) comparative advantage in the production of the product.
  C) higher opportunity cost of producing the product.
  D) lower opportunity cost of producing the product.
  Ans:  A     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Absolute Advantage

 

 

11. When a country requires more resources to produce a product than other countries, it is said to have a(n):
  A) absolute disadvantage in the production of the product.
  B) comparative disadvantage in the production of the product.
  C) lower opportunity cost of producing the product.
  D) higher opportunity cost of producing the product.
  Ans:  A     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Absolute Advantage

 

 

12. The primary explanation of trade among nations is Ricardo’s theory of:
  A) offshoring.
  B) resource abundance.
  C) absolute advantage.
  D) comparative advantage.
  Ans:  D     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

13. The focus of the Ricardian model is on how differences in _________ influence international trade patterns.
  A) demand
  B) comparative costs
  C) absolute costs
  D) transportation costs
  Ans:  B     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

14. Ricardo’s theory of trade discredited the idea that inflows of gold or silver as a result of exporting helped a nation, while outflows of gold or silver as a result of importing hurt a nation; that was known as:
  A) export preference.
  B) mercantilism.
  C) monetary economics.
  D) price-specie-flow mechanism.
  Ans:  B     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Definitional     Topic:  Comparative Advantage

 

 

15. Ricardo’s theory made a number of assumptions, including which of the following?
  A) Nations had balanced trade with their partners.
  B) There were no barriers to trade (free trade).
  C) There was no transfer of gold or silver.
  D) Nations had balanced trade with their partners, and there were no barriers to trade (free trade).
  Ans:  D     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

16. According to Ricardo:
  A) all countries can gain from trade if they export goods for which they have an absolute advantage.
  B) one country can gain from trade only at the expense of another country.
  C) all countries can gain from trade if they export goods for which they have a comparative advantage.
  D) all countries lose from international trade.
  Ans:  C     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

17. According to the Ricardian principle of comparative advantage, international trade increases a nation’s total output because:
  A) the nation’s resources are used where they are most productive.
  B) the output of the nation’s trading partner declines.
  C) the nation can produce to the exterior of its production possibilities frontier.
  D) the nation is able to increase its consumption.
  Ans:  A     Difficulty:  Moderate     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

18. David Ricardo believed that:
  A) trade is a zero-sum game; that is, a country benefits at the expense of other countries.
  B) trade will benefit countries when it generates gold and silver for the national treasury.
  C) all nations can gain from free international trade.
  D) trade cannot increase the world’s output of goods.
  Ans:  C     Difficulty:  Difficult     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

19. Mercantilists believed that:
  A) exporting goods will leave fewer goods for the local economy.
  B) importing goods is beneficial for the economy.
  C) any kind of trade is a bad trade.
  D) exports are good and imports are bad.
  Ans:  D     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

20. Ricardo’s theory showed that if nations are allowed to trade freely, the result will be that:
  A) all trading nations benefit by trade.
  B) the manufacturing sector benefits but the consumers lose out.
  C) workers benefit but the government loses tax revenue.
  D) the gains from trade offset the losses from trade exactly.
  Ans:  A     Difficulty:  Easy     Section:  Reasons for Trade     Skill Descriptor:  Concept-Based     Topic:  Comparative Advantage

 

 

21. The Ricardian model can be simplified and made more explanatory by assuming that there is only one resource used in producing goods. What did Ricardo assume the resource was?
  A) capital
  B) technology
  C) labor
  D) loanable funds
  Ans:  C     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

22. What is the marginal product of labor?
  A) the average output of a unit of labor
  B) the extra output obtained by using one more unit of labor
  C) the average output obtained by using one more unit of labor
  D) the total output obtained by using one more unit of labor
  Ans:  B     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Definitional     Topic:  The Home Country

 

 

23. In the Ricardian model, the marginal product of labor:
  A) first rises, then falls, as more labor is employed to produce a good.
  B) first falls, then rises, as more labor is employed to produce a good.
  C) continuously falls, as more labor is employed to produce a good.
  D) does not change, as more labor is employed to produce a good.
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

24. The Ricardian model assumes that the marginal product of labor is:
  A) increasing.
  B) decreasing.
  C) constant.
  D) zero.
  Ans:  C     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

25. Production possibilities frontiers in the Ricardian model:
  A) are linear (i.e., straight lines), with end points showing a country’s production when it produces only one or the other good.
  B) are bowed out from the origin, with end points showing a country’s production when it produces only one or the other good.
  C) are linear and begin from the origin.
  D) are curvilinear and increase at a decreasing rate.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

26. When the production possibilities frontier is a straight line, then production occurs under conditions of:
  A) increasing costs.
  B) decreasing costs.
  C) constant costs.
  D) increasing, then decreasing, then constant costs.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

27. The Ricardian model employs the concept of alternate uses of economic resources in production. We refer to this technique as:
  A) the production possibilities frontier.
  B) the labor theory of value technique.
  C) the least-cost option.
  D) the labor productivity model.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Definitional     Topic:  The Home Country

 

 

28. With the assumption that the marginal product of labor is constant and that labor is the only variable resource, the slope of the PPF is:
  A) positive and increasing.
  B) negative and decreasing.
  C) negative and constant.
  D) unrelated to the issue at hand.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

29. Assume the MPLt = 5 tennis rackets and MPLb = 4 baseball bats. If the economy has 100 workers, then the economy can produce:
  A) a maximum of 500 tennis rackets.
  B) a maximum of 350 baseball bats.
  C) 500 tennis rackets and 400 baseball bats.
  D) either 100 tennis rackets only or 100 baseball bats only.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

30. 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
  Ans:  C     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

31. The slope of the PPF can be expressed as:
  A) the ratio of abundance of capital to labor.
  B) the preferences of consumers in terms of marginal utility.
  C) the ratio of the quantities of good 1 and good 2.
  D) the negative of the ratio of the marginal products of labor in producing each good.
  Ans:  D     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

32. If the maximum number of units of cloth produced is 300 and the maximum number of units of corn produced is 600, then with a MPLcloth = 2, what is the number of workers in the economy?
  A) 100
  B) 200
  C) 150
  D) 600
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

33. If the maximum number of units of cloth produced is 300 and the maximum number of units of corn produced is 600, then with a MPLcloth = 2, what is the MPLcorn?
  A) 4
  B) 5
  C) 6
  D) 7
  Ans:  A     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

34. To complete the model of international trade using the PPF, we must also use the idea of indifference curves. These curves represent:
  A) a set of alternate quantities of both goods (sloped negatively), whereby consumers are equally satisfied in their level of utility gained.
  B) consumers who are indifferent to everything.
  C) producers who do not care which production method is chosen.
  D) a fixed quantity of one good (such as wheat) and a varying amount of the other good.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

35. As a consumer moves down one of her indifference curves, her satisfaction:
  A) falls.
  B) rises.
  C) remains unchanged.
  D) first falls, then levels out.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

36. If a consumer moves to a higher indifference curve, her satisfaction:
  A) falls.
  B) rises.
  C) remains unchanged.
  D) first falls, then levels out.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

37. International trade allows countries to:
  A) produce outside their PPF.
  B) produce inside their PPF.
  C) consume inside their PPF.
  D) consume outside their PPF.
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

Use the following to answer questions 38-40:

 

Figure: Home Production and Consumption

 

 

 

38. (Figure: Home Production and Consumption) The figure gives Home’s international trading pattern. Point P is production with trade, and point C is consumption with trade. Which product does Home export?
  A) clothing
  B) chemicals
  C) It exports neither chemicals nor clothing.
  D) It exports both chemicals and clothing.
  Ans:  B     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

39. (Figure: Home Production and Consumption) The figure gives Home’s international trading pattern. Point P is production with trade, and point C is consumption with trade. Which product does Home import?
  A) clothing
  B) chemicals
  C) It imports neither chemicals nor clothing.
  D) It imports both chemicals and clothing.
  Ans:  A     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

40. (Figure: Home Production and Consumption) The figure gives Home’s international trading pattern. Point P is production with trade, and point C is consumption with trade. What is the international price of chemicals according to the figure?
  A) 1/2 unit of clothing per unit of chemicals
  B) one unit of clothing per unit of chemicals
  C) two units of clothing per unit of chemicals
  D) three units of clothing per unit of chemicals
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

41. Where will a nation that gains from trade find its consumption point located?
  A) inside its production possibilities frontier
  B) along its production possibilities frontier
  C) outside its production possibilities frontier
  D) at the center of its production possibilities frontier
  Ans:  C     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

42. When a nation is in autarky (a no-trade state) and maximizes its living standard, its consumption and production points are:
  A) along its production possibilities frontier.
  B) above its production possibilities frontier.
  C) beneath production possibilities frontier.
  D) along, above, or beneath its production possibilities frontier.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

43. Assume the MPLc = 2 cars and the MPLb = 5 boats. There are 150 workers in this hypothetical economy; the slope of the PPF for this economy is:
  A) 20/500.
  B) 200/50.
  C) 2/5.
  D) 1/5.
  Ans:  C     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

44. Because the marginal product of labor measures the quantity of labor required to produce a unit of a good, the slope of the PPF can also be expressed as:
  A) the ratio of abundance of labor to capital.
  B) consumer utility.
  C) the opportunity cost (in units of labor) to obtain an additional unit of good 1 in terms of what we give up of good 2.
  D) the ratio of the marginal products of labor to the marginal product of capital.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

Use the following to answer questions 45-46:

 

Figure: Home Equilibrium with No Trade

 

 

 

45. (Figure: Home Equilibrium with No Trade) Under the condition of no trade, which combination gives the nation the MOST utility?
  A) A
  B) B
  C) C
  D) D
  Ans:  A     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

46. (Figure: Home Equilibrium with No Trade) Under the condition of no trade, which combination of the following is NOT attainable?
  A) A
  B) B
  C) C
  D) D
  Ans:  B     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

47. 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.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

48. Among the indifference curves for an economy, to achieve higher utility:
  A) you must move to the indifference curve farthest away from the origin.
  B) you must move to the indifference curve closest to the origin.
  C) It is necessary to always close the borders.
  D) It does not matter which indifference curve you select; your utility is the same along every curve.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

49. If the opportunity cost is constant (the PPF is a straight line), then a country will:
  A) partially specialize in the production of its exported product.
  B) completely specialize in the production of its exported product.
  C) not benefit from importing goods from another country.
  D) benefit by raising trade barriers.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

50. Moving to a lower indifference curve means that a country is:
  A) better off.
  B) worse off.
  C) indifferent.
  D) lowering production.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

51. In order for the production possibilities frontier to be a straight line, production must exhibit:
  A) increasing costs.
  B) decreasing costs.
  C) constant costs.
  D) increasing, then decreasing, then constant costs.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

52. In the absence of trade, a nation is in equilibrium where an indifference curve:
  A) lies above its production possibilities frontier.
  B) is tangent to its production possibilities frontier.
  C) intersects its production possibilities frontier.
  D) lies below its production possibilities frontier.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

53. A country’s indifference curve describes combinations of goods that:
  A) a country can purchase.
  B) yield equal satisfaction to a country.
  C) yield satisfaction to a country.
  D) a country can produce.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Definitional     Topic:  The Home Country

 

 

Use the following to answer questions 54-59:

 

Figure: Indifference Curves

 

 

 

54. (Figure: Indifference Curves) If this economy produces no cloth, how many units of wheat are possible?
  A) 50
  B) 200
  C) 300
  D) 400
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

55. (Figure: Indifference Curves) What is the opportunity cost of cloth in terms of wheat in this example?
  A) A unit of cloth may be obtained by foregoing a unit of wheat.
  B) A unit of cloth “costs” 2 units of wheat.
  C) A unit of cloth “costs” 1/2 unit of wheat.
  D) Not enough information is given to answer.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

56. (Figure: Indifference Curves) Of the following points of consumption, which is MOST desirable for consumers?
  A) A
  B) B
  C) C
  D) D
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

57. (Figure: Indifference Curves) Of the following points of consumption, which is LEAST desirable for consumers?
  A) A
  B) B
  C) C
  D) D
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

58. (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
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

59. (Figure: Indifference Curves) Which combination of wheat and cloth is represented by point A in the diagram?
  A) 200 units of wheat and 400 units of cloth
  B) 100 units of cloth and 200 units of wheat
  C) 200 units of cloth and 100 units of wheat
  D) 300 units of cloth and 150 units of wheat
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

60. 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.
  Ans:  C     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

61. The “home” equilibrium will provide the highest level of consumer satisfaction from domestic resources whenever:
  A) the marginal products of labor are equal.
  B) capital and technology are not factors in the decision of what to produce.
  C) perfect competition in product and labor markets exists.
  D) Adam Smith’s “invisible hand” is not an interfering factor.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

62. In competitive labor markets, the wage equals:
  A) the marginal product of labor times the price of output.
  B) the marginal product of labor minus the price of output.
  C) the marginal product of labor plus the price of output.
  D) the price of output.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

63. Which of the following statements describes the way our home equilibrium reflects the concepts of competitive markets?

I. The opportunity cost of each good is the inverse of the ratio of labor productivity.

II. Prices of each good reflect opportunity cost.

III. Wages are equal and reflect the value of the marginal product of labor (MPL ´ P) for each good.

  A) I
  B) II
  C) III
  D) I, II, and III
  Ans:  D     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

64. In the home equilibrium situation, the relative price of wheat is the same as:
  A) the relative price of cloth.
  B) the slope of the PPF.
  C) the marginal product of wheat.
  D) the cost of labor to produce wheat.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

65. In equilibrium, which of the following statements regarding the relative price of a tomato versus a book is CORRECT?

I. It is the opportunity cost of a tomato.

II. It is how much the production of books must fall in order to produce another tomato.

  A) I
  B) II
  C) Neither is correct.
  D) Both are correct.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

Use the following to answer questions 66-69:

 

SCENARIO: ABSOLUTE ADVANTAGE

The United States requires 20 hours of labor to produce a ton of steel and 30 hours of labor to produce 1,000 board feet of lumber. In Canada, 20 hours of labor are required to produce a ton of steel and 25 hours of labor to produce 1,000 board feet of lumber.

 

 

66. (Scenario: Absolute Advantage) Which country has an absolute advantage in the production of steel?
  A) the United States
  B) Canada
  C) Neither the United States nor Canada has an absolute advantage.
  D) Both the United States and Canada have an absolute advantage.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

67. (Scenario: Absolute Advantage) Which country has an absolute advantage in the production of lumber?
  A) the United States
  B) Canada
  C) Neither the United States nor Canada has an absolute advantage.
  D) Both the United States and Canada have an absolute advantage.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

68. (Scenario: Absolute Advantage) Which country has a comparative advantage in the production of steel?
  A) the United States
  B) Canada
  C) Neither the United States nor Canada has a comparative advantage.
  D) Both the United States and Canada have a comparative advantage.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

69. (Scenario: Absolute Advantage) Which country has a comparative advantage in the production of lumber?
  A) the United States
  B) Canada
  C) Neither the United States nor Canada has a comparative advantage.
  D) Both the United States and Canada have a comparative advantage.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

Use the following to answer questions 70-78:

 

SCENARIO: ABSOLUTE AND COMPARATIVE ADVANTAGE

Poland requires 4 hours of labor to produce a ton of coal and 10 hours of labor to produce 10 bushels of wheat. The Czech Republic requires 6 hours of labor to produce a ton of coal and 10 hours of labor to produce 10 bushels of wheat.

 

 

70. (Scenario: Absolute and Comparative Advantage) Which country has an absolute advantage in the production of wheat?
  A) Poland
  B) the Czech Republic
  C) Neither country has an absolute advantage.
  D) Both countries have an absolute advantage.
  Ans:  C     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

71. (Scenario: Absolute and Comparative Advantage) Which country has an absolute advantage in the production of coal?
  A) Poland
  B) the Czech Republic
  C) Neither country has an absolute advantage.
  D) Both countries have an absolute advantage.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

72. (Scenario: Absolute and Comparative Advantage) Which country has a comparative advantage in the production of coal?
  A) Poland
  B) the Czech Republic
  C) Neither country has a comparative advantage.
  D) Both countries have a comparative advantage.
  Ans:  A     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

73. (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 has a comparative advantage.
  D) Both countries have a comparative advantage.
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

74. (Scenario: Absolute and Comparative Advantage) What is the opportunity cost of coal in Poland?
  A) 0.25 hour of labor/ton of coal
  B) 2.5 bushels of wheat/ton of coal
  C) 4 hours of labor/ton of coal
  D) 0.4 bushels of wheat/ton of coal
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

75. (Scenario: Absolute and Comparative Advantage) The international price of wheat must fall between which of the following two prices?
  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
  Ans:  A     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

76. (Scenario: Absolute and Comparative Advantage) Suppose that the international price of coal is 4 1/4 bushels of wheat per ton of coal. Which country is likely to have the larger gain from trade?
  A) Poland
  B) the Czech Republic
  C) Neither country has the larger gain.
  D) Both countries have the larger gain.
  Ans:  B     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

77. (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
  Ans:  A     Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

78. (Scenario: Absolute and Comparative Advantage) In Poland, what is the marginal product of labor in coal production?
  A) 2.5 tons per hour
  B) 0.4 tons per hour
  C) 4 tons per hour
  D) 0.4 tons per bushel of wheat
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

79. To explain why some nations purchase products from abroad, even when they have an absolute advantage in production, we have to use the theory of:
  A) absolute advantage.
  B) relative pricing.
  C) comparative advantage.
  D) industrial advantage.
  Ans:  C     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Foreign Country

 

 

80. Whenever a nation has a lower opportunity cost of producing any good or service in relative terms, that nation is said to have:
  A) an absolute advantage.
  B) a comparative advantage.
  C) low labor costs.
  D) better technology to produce that good or service.
  Ans:  B     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Foreign Country

 

 

81. Comparative advantage in production of a product is reflected in:
  A) a lower relative price.
  B) a lower opportunity cost.
  C) higher labor productivity.
  D) a lower relative price and a lower opportunity cost.
  Ans:  D     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Foreign Country

 

 

Use the following to answer questions 82-83:

 

Table: Output in the United States and China

 

  U.S. Output per Worker Chinese Output per Worker
Apparel $100,000 $10,000
Wheat $200,000 $5,000

 

 

 

82. (Table: Output in the United States and China) Which of the following statements is CORRECT?
  A) The United States has an absolute advantage in both apparel and wheat and a comparative disadvantage in wheat.
  B) China has an absolute advantage in both apparel and wheat and a comparative advantage in apparel.
  C) The United States has an absolute advantage in both apparel and wheat and a comparative advantage in neither apparel nor wheat.
  D) China has an absolute disadvantage in both apparel and wheat and a comparative advantage in apparel.
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

83. (Table: Output in the United States and China) Which of the following products will the United States export to China?
  A) wheat
  B) apparel
  C) The United States will export neither wheat nor apparel.
  D) The United States will export both wheat and apparel.
  Ans:  A     Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

Use the following to answer questions 84-86:

 

Table: Production in the United States and China

 

  United States Sales/Employee China Sales/Employee
Apparel $120,000 $13,500
Textiles $40,000 $9,000

 

  Bushels/Hour Bushels/Hour
Wheat 27.5 0.1

 

 

 

84. (Table: Production in the United States and China) In the table, the productivity of workers in the textile and apparel and wheat sectors is given for the United States and China. The average worker in the United States produces _____ more apparel sales than the average worker in China.
  A) 0.88
  B) 8.8
  C) 80
  D) 10.9
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

85. (Table: Production in the United States and China) In the table, the productivity of workers in the textile and apparel and wheat sectors is given for the United States and China. The table shows that the United States has an absolute advantage in:
  A) textile manufacturing
  B) apparel manufacturing.
  C) The United States has an absolute advantage in neither textile nor apparel manufacturing.
  D) The United States has both an absolute advantage in textile and apparel manufacturing.
  Ans:  D     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

86. (Table: Production in the United States and China) Consider the productivity of workers in the table. In the United States, to produce an additional $1,000 worth of apparel sales, _____ bushels of wheat must be forgone. In China, to produce an additional $1,000 worth of apparel sales, _______ bushels of wheat must be forgone.
  A) 0.23; 7.0
  B) 0.23; 0.007
  C) 0.10; 0.7
  D) 6.9; 70
  Ans:  B     Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

87. It can be shown that differences in “before-trade” relative prices will determine:
  A) which nation has the absolute advantage.
  B) which good each nation will export or import.
  C) the quantity traded by each nation.
  D) which nation has the comparative advantage.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  Determining the Pattern of International Trade

 

 

88. A nation will export the product in which it has a comparative advantage, which results from the good being relatively ____ than in the importing nation.
  A) cheaper
  B) more expensive
  C) lower in quality
  D) less available
  Ans:  A     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

89. At some point, as the price of exported products is bid up and the price of the product imported falls, the prices of the products in both nations:
  A) become more unequal.
  B) approach zero.
  C) approach infinity.
  D) equalize.
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

90. When two nations have achieved identical relative prices of the two traded products, we have:
  A) a standoff.
  B) a stalemate.
  C) international trade equilibrium.
  D) absolute advantage once again.
  Ans:  C     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

91. Compared with constant cost production, if production occurs under increasing cost conditions, it is MORE likely that countries will:
  A) completely specialize.
  B) incompletely specialize.
  C) not engage in international trade.
  D) trade with one another.
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

92. Suppose a nation increases the quantity of a product it exports. To attract the labor resources needed to support the increased production, it must:
  A) pay higher wages.
  B) lay off workers.
  C) borrow capital abroad.
  D) find new sites for production near population centers.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

93. The Ricardian model (with constant opportunity costs) predicts that a nation will ______________ in the production of the good it exports.
  A) have a comparative disadvantage
  B) develop shortages
  C) lower the cost of production
  D) specialize completely
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

Use the following to answer question 94:

 

Output in the United States and China

 

  U.S. Output per Worker Chinese Output per Worker
Apparel $100,000 $10,000
Wheat $200,000 $5,000

 

 

 

94. (Table: Output in the United States and China) Using the data in the table, what will happen to the U.S. labor force after trade occurs with China?
  A) U.S. labor will move from apparel to agriculture, where its marginal productivity is higher.
  B) U.S. jobs in apparel will be exported to China, wheat exports will create additional jobs in agriculture, and the value of output produced by U.S. labor will increase.
  C) The value of output produced by U.S. labor will increase.
  D) U.S. labor will move from apparel to agriculture, where its marginal productivity is higher. U.S. jobs in apparel will be exported to China, wheat exports will create additional jobs in agriculture, and the value of output produced by U.S. labor will increase.
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 95-99:

 

Figure: Upperia’s Production and Consumption

 

 

 

95. (Figure: Upperia’s Production and Consumption) The graph shows Upperia’s international trading pattern. Point P is production with trade, and point C is consumption with trade. Which product does Home export?
  A) shoes
  B) shirts
  C) Home exports neither shirts nor shoes.
  D) Home exports both shirts and shoes.
  Ans:  A     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

96. (Figure: Upperia’s Production and Consumption) The graph shows Upperia’s international trading pattern. Point P is production with trade, and point C is consumption with trade. Which product does Home import?
  A) shoes
  B) shirts
  C) Home imports neither shirts nor shoes.
  D) Home imports both shirts and shoes.
  Ans:  B     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

97. (Figure: Upperia’s Production and Consumption) The graph shows Upperia’s international trading pattern. Point P is production with trade, and point C is consumption with trade. What is the international price of shoes (shirts/pair of shoes)?
  A) 125/80 shirts per unit of pair of shoes
  B) 4/3 shirts per unit of pair of shoes
  C) 5/4 shirts per unit of pair of shoes
  D) 3/4 shirt per unit of pair of shoes
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

98. (Figure: Upperia’s Production and Consumption) The graph shows Upperia’s international trading pattern. Point P is production with trade, and point C is consumption with trade. Assume that the marginal product of labor in producing shoes is one pair per hour. How many hours of labor occur in Upperia?
  A) 125
  B) 100
  C) 80
  D) 65
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

99. (Figure: Upperia’s Production and Consumption) The graph shows Upperia’s international trading pattern. What is the autarkic price of shirts in Upperia?
  A) 5/4 shirts per unit of pair of shoes
  B) 4/5 shirts per unit of pair of shoes
  C) 5/4 pair of shoes per shirt
  D) 4/5 pair of shoes per shirt
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

100. With trade, a country will maximize its economic well-being when it:
  A) moves to the highest possible indifference curve.
  B) forces the marginal rate of substitution to its lowest possible value.
  C) consumes more of both goods than it does in autarky.
  D) finds its marginal rate of substitution exceeding its marginal rate of transformation.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

101. If the international terms of trade settle at a level that is between each country’s opportunity cost:
  A) there is no basis for gainful trade for either country.
  B) both countries gain from trade.
  C) only one country gains from trade.
  D) one country gains and the other country loses from trade.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

102. Trade between two nations is NOT possible if they have:
  A) identical indifference curves but different production possibilities frontiers.
  B) identical production possibilities frontiers but different indifference curves.
  C) different production possibilities frontiers and different indifference curves.
  D) identical production possibilities frontiers and identical indifference curves.
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

103. As nations trade, their total level of utility (satisfaction from consuming goods):
  A) equalizes.
  B) levels out.
  C) decreases.
  D) increases.
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

104. The increase in total utility derived from trading products is called:
  A) trade patterns.
  B) gains from trade.
  C) comparative advantage.
  D) labor productivity.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 105-114:

 

SCENARIO: CHILE AND ARGENTINA

Chile and Argentina each produce jellybeans and peanut butter, using labor as their only resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces a pound of jellybeans and 3 hours produces a  pound of peanut butter. When they do not trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of peanut butter.

 

 

105. (Scenario: Chile and Argentina) Which country has an absolute advantage in jellybean production?
  A) Chile
  B) Argentina
  C) Neither Argentina nor Chile has an absolute advantage.
  D) Both Argentina and Chile have an absolute advantage.
  Ans:  C     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

106. (Scenario: Chile and Argentina) Which country has a comparative advantage in jellybean production?
  A) Chile
  B) Argentina
  C) Neither Argentina nor Chile has a comparative advantage.
  D) Both Argentina and Chile have a comparative advantage.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

107. (Scenario: Chile and Argentina) What are the endpoints of Chile’s production possibilities frontier?
  A) 1,000 pounds of jellybeans and 500 pounds of peanut butter
  B) 1,000 pounds of jellybeans and 2,000 pounds of peanut butter
  C) 600 pounds of jellybeans and 200 pounds of peanut butter
  D) There are no endpoints to Chile’s production possibilities frontier.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

108. (Scenario: Chile and Argentina) What is the price of peanut butter in Argentina before the two countries begin to trade with each other?
  A) 1/3 pound of jellybeans per pound of peanut butter
  B) 1/2 pound of jellybeans per pound of peanut butter
  C) 2 pounds of jellybeans per pound of peanut butter
  D) 3 pounds of jellybeans per pound of peanut butter
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

109. (Scenario: Chile and Argentina) In order for Chile to gain from trade, the price of jellybeans must be less than:
  A) 2 pounds of peanut butter per pound of jellybeans.
  B) 3 pounds of peanut butter per pound of jellybeans.
  C) 1/3 pound of peanut butter per pound of jellybeans.
  D) 1/2 pound of peanut butter per pound of jellybeans.
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

110. (Scenario: Chile and Argentina) Argentina’s gains from trade will be largest when the price of jellybeans is:
  A) 2 pounds of peanut butter per pound of jellybeans.
  B) 3 pounds of peanut butter per pound of jellybeans.
  C) 1/3 pound of peanut butter per pound of jellybeans.
  D) 1/2 pound of peanut butter per pound of jellybeans.
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

111. (Scenario: Chile and Argentina) What is the opportunity cost of a pound of peanut butter in Chile?
  A) 2 pounds of jellybeans per pound of peanut butter
  B) 3 pounds of jellybeans per pound of peanut butter
  C) 1/3 pound of jellybeans per pound of peanut butter
  D) 1/2 pound of jellybeans per pound of peanut butter
  Ans:  A     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

112. (Scenario: Chile and Argentina)  Suppose that Chile and Argentina begin to trade with one another. Each completely specializes in the product in which it finds its comparative advantage. How many pounds of peanut butter and jellybeans do the two countries jointly produce?
  A) 1,000 pounds of jellybeans and 400 pounds of peanut butter
  B) 1,000 pounds of jellybeans and 500 pounds of peanut butter
  C) 500 pounds of jellybeans and 1,000 pounds of peanut butter
  D) 333.33 pounds of jellybeans and 500 pounds of peanut butter
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

113. (Scenario: Chile and Argentina) Suppose that Chile and Argentina begin to trade with each other. Each completely specializes in the product in which it finds its comparative advantage. How many more pounds of peanut butter and jellybeans do the two countries jointly produce compared with production before they began to trade?
  A) 1,000 pounds of jellybeans and 500 pounds of peanut butter
  B) 0 pounds of jellybeans and 500 pounds of peanut butter
  C) 1,000 pounds of jellybeans and 0 pounds of peanut butter
  D) 0 pounds of jellybeans and 100 pounds of peanut butter
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

114. (Scenario: Chile and Argentina) Which of the following groups will benefit from trade between Chile and Argentina?
  A) Chilean consumers
  B) Argentinean peanut butter producers
  C) Argentinean consumers
  D) Chilean consumers, Argentinean peanut butter producers, and Argentine consumers
  Ans:  D     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

115. Suppose there are two countries (Home and Foreign) that produce two goods. Home’s wages are 100% greater than Foreign’s wages. Will trade be possible between Home and Foreign?
  A) No, because Foreign’s wages are lower than Home’s wages.
  B) Yes, Foreign will be able to export both products to Home.
  C) Yes, as long as Home’s marginal productivity of labor in one product is at least 100% higher than Foreign’s marginal productivity of labor in the same product.
  D) No, because prices will be the same in each country.
  Ans:  C     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

116. According to the principle of comparative advantage, specialization and trade increase a nation’s total output because:
  A) resources are directed to their highest productivity.
  B) the output of the nation’s trading partner declines.
  C) the nation can produce outside its production possibilities frontier.
  D) the problem of unemployment is eliminated.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

117. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. What is Home’s price of corn in autarky?
  A) 0.5 ton of wheat per ton of corn
  B) 20 tons of wheat per ton of corn
  C) 10 tons of wheat
  D) 2 tons of wheat
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

118. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. How large is Home’s labor force?
  A) 50 workers
  B) 40 workers
  C) 30 workers
  D) 20 workers
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

119. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or a ton of wheat with a day of labor. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. Now suppose that Home has the opportunity to trade with Foreign at an international price of corn equal to a ton of wheat per ton of corn. In which product will Home find its comparative advantage?
  A) wheat
  B) corn
  C) Home will find its competitive advantage in neither corn nor wheat.
  D) Home will find its competitive advantage in both corn and wheat.
  Ans:  A     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

120. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. Suppose that Home completely specializes, and it consumes 20 tons of wheat after it begins trading with Foreign. Home trades with Foreign at a 1-to-1 ratio of corn for wheat. How many tons of corn does it consume when it trades with Foreign?
  A) 10 tons of corn
  B) 20 tons of corn
  C) 30 tons of corn
  D) 40 tons of corn
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

121. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or a ton of wheat with a day of labor. Foreign produces a ton of corn and 0.5 ton of wheat. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. At which international price will Home’s gains from trade be largest?
  A) 0.5 ton of wheat per ton of corn
  B) 1 ton of wheat per ton of corn
  C) 1.5 tons of wheat per ton of corn
  D) 2 tons of wheat per ton of corn
  Ans:  A     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

122. Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or a ton of wheat with a day of labor. Without trade (in autarky), Home’s daily production is 20 tons of wheat and 10 tons of corn. Suppose that, after trade occurs, the international price actually becomes 1.5 tons of wheat per ton of corn. Which of the following statements is TRUE?
  A) Home will gain from trade but Foreign will not.
  B) Foreign will gain from trade but Home will not.
  C) Neither home nor Foreign will gain from trade.
  D) Both Home and Foreign will gain from trade.
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

123. Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is 2/5 and MPLc/MPLb for China is 1, then Germany and China have a comparative advantage in:
  A) cloth and beer, respectively.
  B) beer and cloth, respectively.
  C) beer.
  D) cloth.
  Ans:  B     Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

124. Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is 2/5 and MPLc/MPLb for China is 1, then China should:
  A) specialize in producing beer and export beer.
  B) specialize in producing cloth and export cloth.
  C) not specialize, because China will not benefit from it.
  D) specialize in producing cloth and import cloth.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

125. Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is 2/5 and MPLc/MPLb for China is 1, then Germany should:
  A) specialize in producing beer and export beer.
  B) specialize in producing cloth and export cloth.
  C) not specialize, because Germany will not benefit from it.
  D) specialize in producing cloth and import cloth.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

126. Using the marginal product theory of wages, a worker’s “real” wage is:
  A) twice the amount of the “money” wage.
  B) what the “money” wage will purchase in terms of products.
  C) what she earns after taxes.
  D) what she would earn if her employer paid her fairly.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

127. A worker’s “real” wage is related to:
  A) his productivity in the workplace.
  B) the value of his production to his employer.
  C) the nation’s absolute advantage in production of that product.
  D) his productivity in the workplace, the value of his production to his employer, and the nation’s absolute advantage in production of that product.
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

128. Which of the following statements describe what the Ricardian model predicts as a nation improves its technology and productivity?

I. Its standard of living will rise.

II. Wages of its workers will rise.

III. It will lose its absolute advantage.

  A) I
  B) II
  C) III
  D) I and II
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

129. For China, the result of opening its economy was:
  A) a decline in its wages.
  B) an increase in wages.
  C) a reduction in the amount exported.
  D) a reduction in the amount imported.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

130. The case study of wages and productivity in the textbook demonstrates that:
  A) workers lose out when international trade occurs.
  B) internationally, worker productivity varies directly with real wages.
  C) workers who get educated get higher wages.
  D) workers become more productive, but most of the value added goes to the owners of capital.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Fact-Based     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 131-137:

 

SCENARIO: United States Versus United Kingdom

In the United States, one worker can produce 10 tons of steel per day or 20 tons of chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per day or 15 tons of chemicals per day.

 

 

131. (Scenario: United States Versus United Kingdom) The United States has the absolute advantage in the production of:
  A) steel.
  B) chemicals.
  C) The United States has the absolute advantage in neither steel nor chemicals.
  D) The United States has the absolute advantage in both steel and chemicals.
  Ans:  D     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

132. (Scenario: United States Versus United Kingdom) The United Kingdom has the absolute advantage in the production of:
  A) steel.
  B) chemicals.
  C) The United Kingdom has the absolute advantage in neither steel nor chemicals.
  D) The United Kingdom has the absolute advantage in both steel and chemicals.
  Ans:  C     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

133. (Scenario: United States Versus United Kingdom) The United Kingdom has a comparative advantage in the production of:
  A) steel.
  B) chemicals.
  C) The United Kingdom has a comparative advantage in neither steel nor chemicals.
  D) The United Kingdom has a comparative advantage in both steel and chemicals.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

134. (Scenario: United States Versus United Kingdom) If trade occurs between the United States and the United Kingdom, American firms should specialize in producing:
  A) steel.
  B) chemicals.
  C) American firms should specialize in neither steel nor chemicals.
  D) American firms should specialize in both steel and chemicals.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

135. (Scenario: United States Versus United Kingdom) International trade will occur between the United States and the United Kingdom so long as a ton of steel trades for:
  A) at least a ton of chemicals, but no more than 2 tons of chemicals.
  B) at least 2 tons of chemicals, but no more than 3 tons of chemicals.
  C) at least 0.33 ton of chemicals, but no more than 0.5 ton of chemicals.
  D) at least 0.55 ton of chemicals but no more than 0.75 ton of chemicals.
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

136. (Scenario: United States Versus United Kingdom) The United Kingdom will gain the most from trade if a ton of steel trades for:
  A) 2 tons of chemicals.
  B) 3 tons of chemicals.
  C) 0.5 ton of chemicals.
  D) 0.33 ton of chemicals.
  Ans:  C     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

137. (Scenario: United States Versus United Kingdom) Which of the following statements is CORRECT?
  A) U.S. wages will be higher than U.K. wages.
  B) U.K. wages will be higher than U.S. wages.
  C) Wages in the United States and the United Kingdom will be equal.
  D) There will be no relationship between U.S. and U.K. wages.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

138. If export prices are higher than the import prices, what can we expect the wages in the export sector to do?
  A) increase
  B) decrease
  C) stay the same
  D) The answer cannot be determined from the information provided.
  Ans:  A     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

139. What does the term value added per hour help us measure?
  A) terms of trade
  B) labor productivity
  C) volume of exports
  D) volume of imports
  Ans:  B     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

140. In the Ricardian model, wages are equal across industries because:
  A) employers care for their workers.
  B) workers prefer to work in exporting industries.
  C) workers are freely mobile between industries.
  D) workers are freely mobile between countries.
  Ans:  C     Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

141. Suppose that the introduction of computers increases the productivity of workers in the developed world. What you would expect wages to do?
  A) Rise mainly in the developed countries.
  B) Rise mainly in the developing countries.
  C) Fall mainly in the developed countries.
  D) Fall mainly in the developing countries.
  Ans:  A     Difficulty:  Easy     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

142. If a home country is exporting corn and importing bikes and if the relative price Pc/Pb is increasing, then:
  A) the home country will export less corn.
  B) the home country will export more corn.
  C) the home country will import the same number of bikes.
  D) there is no change in the trade pattern for the home country.
  Ans:  A     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  Home Export Supply Curve

 

 

143. It is possible to determine how much a nation will export over and above its domestic consumption at various international prices, other things being equal, by finding a set of equilibria. This schedule is:
  A) the import demand curve for a nation.
  B) the export supply curve for a nation.
  C) the production possibilities frontier for a nation.
  D) the “no-trade” equilibrium.
  Ans:  B     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  Home Export Supply Curve

 

 

144. The flat part of Home’s export supply curve in the Ricardian model is due to the assumption that:
  A) Home has a comparative advantage in its export.
  B) Home has an absolute advantage in its export.
  C) the marginal product of labor is constant in the export good.
  D) Home has more labor than Foreign.
  Ans:  C     Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  Home Export Supply Curve

 

 

145. It is possible to determine how much a nation will import at various international prices, other things being equal, by finding a set of equilibria. This schedule is the:
  A) import demand curve for a nation.
  B) export supply curve for a nation.
  C) production possibilities frontier for a nation.
  D) “no-trade” equilibrium.
  Ans:  A     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  Home Export Supply Curve

 

 

146. Because the PPF is a straight line in the Ricardian model, Foreign’s import demand curve is:
  A) upward sloping in parts.
  B) flat in parts.
  C) downward sloping in parts.
  D) flat everywhere.
  Ans:  B     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  Home Export Supply Curve

 

 

147. International trade equilibrium occurs where:
  A) there is no further way to increase production of any commodity.
  B) the excess supply curve intersects with the excess demand curve.
  C) the total world import demand curve intersects with the total world export supply curve.
  D) the amount produced in each nation is just equal to the amounts produced in every other nation.
  Ans:  C     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

148. The international relative price and total quantity of a traded good or service is determined by:
  A) labor shortages that occur worldwide.
  B) the World Trade Organization.
  C) the intersection of the total world import demand curve with the total world export supply curve.
  D) natural resource availability compared with the industrial demand for those products.
  Ans:  C     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

149. If prices of a nation’s exported products rise in comparison to prices paid for imports, that nation experiences a:
  A) rise in its international terms of trade.
  B) decline in its international terms of trade.
  C) reduction in its imports.
  D) reduction in its exports.
  Ans:  A     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

150. Suppose that the U.S. price index for its imports rose from 100 to 120 from 2010 to 2011 and the price index for its exports remained unchanged. Which of the following statements is CORRECT?
  A) The U.S. terms of trade worsened between 2010 and 2011.
  B) The U.S. terms of trade improved between 2010 and 2011.
  C) The U.S. terms of trade improved in 2010 and worsened in 2011.
  D) There was no change in the U.S. terms of trade between 2010 and 2011.
  Ans:  A     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

151. Suppose that there is an improvement in a country’s terms of trade between 2010 and 2011. This improvement means that:
  A) it can purchase more imports in 2011, with the same volume of exports as in 2010.
  B) it can purchase more exports in 2011, with the same volume of exports as in 2010.
  C) it needs to increase its exports in order to purchase the same volume of imports as in 2011.
  D) regarding its international trade, it is worse off in 2011 than it was in 2010.
  Ans:  A     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

152. If the foreign import demand curve intersects the home country’s export supply curve in its horizontal portion, then:
  A) the home country will suffer a loss from international trade.
  B) the home country will not gain from trade.
  C) the home country will gain from trade.
  D) the foreign country will not gain from trade.
  Ans:  B     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 153-154:

 

SCENARIO: RELATIVE PRICES AND TRADE LEVELS

Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,000 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to supply and Foreign is willing to buy at various international prices.

 

International Price Home’s Wheat Exports Foreign’s Wheat Imports
1 yard/1 bushel 100 bushels 900 bushels
2 yards/1 bushel 200 bushels 800 bushels
3 yards/1 bushel 300 bushels 700 bushels
4 yards/1 bushel 400 bushels 600 bushels
5 yards/1 bushel 500 bushels 500 bushels
6 yards/1 bushel 600 bushels 400 bushels
7 yards/1 bushel 700 bushels 300 bushels
8 yards/1 bushel 800 bushels 200 bushels
9 yards/1 bushel 900 bushels 100 bushels

 

 

 

153. (Scenario: Relative Prices and Trade Levels) What is the international price of wheat?
  A) 1 yard/bushel
  B) 3 yards/bushel
  C) 5 yards/bushel
  D) 7 yards/bushel
  Ans:  C     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

154. (Scenario: Relative Prices and Trade Levels) How many bushels of wheat will Foreign import?
  A) 900 bushels
  B) 700 bushels
  C) 500 bushels
  D) 300 bushels
  Ans:  C     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 155-159:

 

SCENARIO: HOME’S WILLINGNESS TO TRADE WHEAT FOR CLOTH

Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to trade to acquire more cloth.

 

Home’s Wheat Exports Foreign’s Cloth Exports
 400 bushels 200 yards
 650 bushels 350 yards
 850 bushels 500 yards
1,000 bushels 600 yards
1,100 bushels 650 yards
1,150 bushels 700 yards
1,175 bushels 800 yards
 800 bushels 200 yards
 900 bushels 100 yards

 

 

 

155. (Scenario: Home’s Willingness to Trade Wheat for Cloth) If the international price of cloth is 1.5 bushels of wheat per yard, how many bushels of wheat will Home export to Foreign?
  A) 1,150 bushels
  B) 1,100 bushels
  C) 850 bushels
  D) 650 bushels
  Ans:  A     Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

156. (Scenario: Home’s Willingness to Trade Wheat for Cloth) If the international price of cloth is 1.5 bushels of wheat per yard, how many yards of cloth will Foreign export to Home?
  A) 500 yards
  B) 600 yards
  C) 700 yards
  D) 1,150 yards
  Ans:  C     Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

157. (Scenario: Home’s Willingness to Trade Wheat for Cloth) Suppose that Home’s export price rose from 0.5 bushel of wheat per yard of cloth in 2009 to a bushel of wheat per yard of cloth in 2010. What does this movement represent in terms of Home’s terms of trade?
  A) It is an improvement in Home’s terms of trade.
  B) It is a deterioration in Home’s terms of trade.
  C) There is no change in Home’s terms of trade.
  D) The answer cannot be determined based on the information provided.
  Ans:  B     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

158. (Scenario: Home’s Willingness to Trade Wheat for Cloth) Suppose that Home’s export price rose from 0.5 bushel of wheat per yard of cloth in 2009 to a bushel of wheat per yard of cloth in 2010. Which of the following statements is TRUE?
  A) Home’s situation had greatly improved in 2010.
  B) Home’s situation had deteriorated in 2010.
  C) Home’s situation was the same as it was in 2009.
  D) Home’s situation had slightly improved in 2010.
  Ans:  B     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

159. (Scenario: Home’s Willingness to Trade Wheat for Cloth) Suppose that Home’s export price rose from 0.5 bushel of wheat per yard of cloth in 2009 to a bushel of wheat per yard of cloth in 2010. We conclude that the change in Home’s export price means that Home was worse off in 2010 than it was in 2009. Which of the following statements best explains this conclusion?
  A) Home had to export twice as much wheat to obtain a yard of cloth in 2010 as it did in 2009.
  B) Home had to export half as much wheat to obtain a yard of cloth in 2010 as it did in 2009.
  C) Home had to export the same amount of wheat to obtain a yard of cloth in both 2009 and 2010.
  D) Home had to export three times the amount of wheat to obtain a yard of cloth in 2010 as it did in 2009.
  Ans:  A     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

160. In 2000, the U.S. terms of trade was one. In 2009 the U.S. export price index was 1.15 and the U.S. import price index was 1.18. Which of the following statements is the best interpretation of the change in the U.S. terms of trade between 2000 and 2009?
  A) In 2009, the United States had to export 2% more in order to obtain the same amount of imports as in 2000.
  B) In 2009, the United States could export 2% less to obtain the same of amount of imports as in 2000.
  C) Prices of U.S. exports rose more rapidly than prices of U.S. imports.
  D) The U.S. terms of trade improved between 2000 and 2009.
  Ans:  A     Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

161. With other things unchanged, a rise in the average price of imports or a fall in the average price of exports will:
  A) improve the terms of trade.
  B) worsen the terms of trade.
  C) expand the production possibilities frontier.
  D) contract the production possibilities frontier.
  Ans:  B     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

Use the following to answer question 162:

 

Table: The Prices of Ghana’s Exports and Imports

 

  2012 2013
Export price 100 120
Import price 100 110

 

 

 

162. (Table: The Prices of Ghana’s Exports and Imports) Suppose that the table gives values of price indices for Ghana’s exports and imports in 2012 and in 2013. Did Ghana’s terms of trade improve, deteriorate, or not change between 2010 and 2013?
  A) It improved.
  B) It deteriorated.
  C) It did not change.
  Ans:  A     Difficulty:  Easy     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

163. An increase in the price of imported goods will:
  A) increase the volume of imports.
  B) decrease the volume of imports.
  C) shift the production possibility frontier inward.
  D) shift the production possibility frontier outward.
  Ans:  B     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

164. The Prebisch-Singer hypothesis concludes that:
  A) due to unfair trading practices, labor in developing countries is exploited.
  B) developing countries  experience a long-run decline in their terms of trade, as the demand for primary products in higher-income countries declines relative to their demand for manufactured goods.
  C) OPEC has been responsible for a slowdown in the world’s standard of living.
  D) technology lowers the cost of manufactured products, so developing countries  should see an increase in their terms of trade.
  Ans:  B     Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

165. The textbook authors conclude that the Prebisch-Singer hypothesis:
  A) is not true.
  B) is true.
  C) is valid in some instances but showed no consistent trend and cannot be considered a general rule.
  D) is valid only since 1995, when the World Trade Organization began its operations.
  Ans:  C     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

166. Several economists have hypothesized that the terms of trade for developing countries will decline over time. Which of the following might be a cause of this decline?
  A) Technological progress in manufactured goods has caused their prices to fall.
  B) Some developing countries are able to keep the price of their exports high by restricting supplies on the world market.
  C) Increased demand for developing country exports has caused prices of developing country exports to rise.
  D) The demand for primary product exports from developing countries has not risen as fast as the demand for manufactured exports of industrialized countries.
  Ans:  D     Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

167. What are the shapes of production possibilities frontiers in the Ricardian model?
  Ans: They are linear with endpoints that give a country’s production when it completely specializes in producing only one or the other good.
  Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

168. In an autarkic situation, demonstrate that a country will be at its optimal production if it produces where an indifference curve is tangent to the production possibilities frontier.
  Ans: If the country produces where an indifference curve is tangent to its production possibilities frontier, then it is impossible to attain a point on a higher indifference curve.
  Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Concept-Based     Topic:  The Home Country

 

 

169. Why is a country able to consume outside its production possibilities frontier when it engages in international trade?
  Ans: It can completely specialize in the good in which it has a comparative advantage, export that good and import the other, and receive a higher relative price for its export and pay a lower relative price for its import.
  Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

170. If a country has a comparative advantage in producing rice and a comparative disadvantage in producing pencils, does the Ricardian model predict that the real wage in rice production will fall and the real wage in pencil production will rise as a result of international trade?
  Ans: No; the Ricardian model predicts that real wages in both rice and pencil production will increase, since the relative price of rice will increase.  If workers are paid the value of their marginal products, then labor will move into rice production with a corresponding higher real wages.  Since, in equilibrium, wages must be equal across all production, the real wage must then also increase in pencil production.
  Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Home Country

 

 

171. Assume that, in autarky, an economy has 150 workers and the MPLc is two cars and the MPLb is five boats. Demonstrate how one can derive the autarkic price of cars in this economy.
  Ans: If one worker can produce two cars or five boats, then moving a worker from boat to car production lowers boat production by five and increases car production by two.  So a single car must trade for 5/2 boats.
  Difficulty:  Difficult     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Home Country

 

 

172. Suppose that:

•     Malaysia requires an hour of labor to produce a pound of rice and 2 hours of labor to produce a pencil;

•     Indonesia requires 2 hours of labor to produce a pound of rice and 4 hours of labor to produce a pencil;

•     each country has 10,000 hours of labor to allocate between the production of rice and pencils; and

•     in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils.

Which country has an absolute advantage in rice production? In pencil production?

Which country has a comparative advantage in rice production? In pencil production?

Will trade between the two countries be mutually beneficial?

  Ans: Malaysia has an absolute advantage in both rice and pencil production. Neither country has a comparative advantage in either product, since autarkic prices are the same in each country. Trade will not occur between the two countries, since neither has a comparative advantage in either product.
  Difficulty:  Moderate     Section:  Ricardian Model     Skill Descriptor:  Analytical Thinking     Topic:  The Foreign Country

 

 

173. Why does the United States import textiles from Asian nations when it has an absolute advantage in textile production?
  Ans: The United States has a comparative disadvantage in textiles and a comparative advantage in wheat. The opportunity cost of producing a unit of textiles is greater than the same relative cost incurred by other nations, including China, in producing a unit of textiles.  Therefore, although in absolute terms, the United States has a productivity advantage in both wheat and textiles, it obtains greater gains in exporting wheat and in importing textiles.
  Difficulty:  Easy     Section:  Ricardian Model     Skill Descriptor:  Critical Thinking     Topic:  The Foreign Country

 

 

174. Use the following table to determine the absolute and comparative advantages of China and the United States in producing wheat and textiles.

 

Output Per Worker
  United States China
Textiles $165,000 $27,000
Wheat 12,260 bushels 300 bushels
  Ans: Comparison of outputs per worker between the United States and China indicates that the United States has absolute advantages in both products.  However, the United States is relatively more efficient in wheat production (the ratio of U.S. wheat production per worker to Chinese wheat production per worker is 41), and China is relatively less inefficient in textile production (the similar ratio for textile production is 6.1).  Hence, the United States has a comparative advantage in wheat production, and China has a comparative advantage in textile production.
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

175. In the Ricardian model, what is expected to happen to real wages in each country as trade occurs?
  Ans: Real wages (the purchasing power of exports) will increase in both countries.  Use the following table to see this result.  Country A has a comparative advantage in cloth; Country B has a comparative advantage in wheat.  When trade occurs, Country A can obtain more wheat (3/2 bushel) for each yard exported and Country B can obtain more cloth (2/3 yard) for each bushel exported.  The purchasing power of wages in each country will increase.

 

  Country A Country B
MPL in wheat 1 bushel 2 bushels
MPL in Cloth 1 yard 1 yard
Autarkic prices 1 bushel = 1 yard 2 bushels = 1 yard
Trade prices 3/2 bushel = 1 yard 3/2 bushel = 1 yard
Real wage with trade 3/2 bushel = 1 yard 2/3 yard = 1 bushel
  Difficulty:  Difficult     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

Use the following to answer questions 176-189:

 

Figure: International Trade Equilibrium

 

 

 

176. (Figure: International Trade Equilibrium) Which is the “before trade” point of production and consumption?
  Ans: point A
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

177. (Figure: International Trade Equilibrium) Which line shows the “before trade” relative price in this nation?
  Ans: Line P
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

178. (Figure: International Trade Equilibrium) Which point shows the “after trade” point of consumption?
  Ans: point C
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

179. (Figure: International Trade Equilibrium) Which line shows the new equilibrium “world” price determined by trade?
  Ans: Line Q
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

180. (Figure: International Trade Equilibrium) Before trade, how many units of wheat will this nation produce?
  Ans: 210
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

181. (Figure: International Trade Equilibrium) Before trade, how many units of wheat will this nation consume?
  Ans: 210
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

182. (Figure: International Trade Equilibrium) Before trade, how many units of cloth will this nation produce?
  Ans: 90
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

183. (Figure: International Trade Equilibrium) Before trade, how many units of cloth will this nation consume?
  Ans: 90
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

184. (Figure: International Trade Equilibrium) Assume that the country specializes in the good in which it has comparative advantage. After trade, how many units of wheat will this nation produce?
  Ans: 400
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

185. (Figure: International Trade Equilibrium) After trade, how many units of wheat will this nation consume?
  Ans: 225
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

186. (Figure: International Trade Equilibrium) Assume that the country specializes in the good in which it has comparative advantage. After trade, how many units of cloth will this nation produce?
  Ans: 0
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

187. (Figure: International Trade Equilibrium) After trade, how many units of cloth will this nation consume?
  Ans: 150
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

188. (Figure: International Trade Equilibrium) How many units of wheat will this nation export or import?
  Ans: It will export 175 units of wheat.
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

189. (Figure: International Trade Equilibrium) How many units of cloth will this nation export or import?
  Ans: It will export 150 units of wheat.
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

190. Compare the absolute advantages in U.S. and Chinese wheat and textile production to explain why the U.S. imports textile products from China ,even though the typical U.S. textile worker is 7 to 16 times more productive than the typical Chinese textile worker.
  Ans: The United States has a comparative disadvantage in textiles and a comparative advantage in wheat. The typical U.S. wheat farmer is 275 times more productive than the typical Chinese wheat farmer. The absolute advantage of the United States is relatively much higher in wheat production than textile production. So, even though the United States has absolute advantages in both textiles and wheat, its comparative advantage is found in wheat production.
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

191. Suppose that:

•     Malaysia requires an hour of labor to produce a pound of rice and 2 hours of labor to produce a pencil;

•     Indonesia requires 2 hours of labor to produce a pound of rice and 3 hours of labor to produce a pencil;

•     each country has 10,000 hours of labor to allocate between the production of rice and pencils; and

•     in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils.

•     when trade occurs, the international price of rice becomes 3/5 pencils per pound of rice.

A) In Malaysia, what are the marginal productivities of labor in rice and pencil production?
B) In Indonesia, what are the marginal productivities of labor in rice and pencil production?
C) What are the autarkic prices of rice and pencils in each country?
D) In which product will each specialize?
E) What happens to wages in each country when trade occurs?
  Ans:
A) The MPL in rice is 1/2 pound; the MPL in pencils is 1/3 pencil.
B) The autarkic prices of rice and pencils in Malaysia are 1/2 pencil/pound and 2 pounds per pencil. In Indonesia, the autarkic prices are 2/3 pencils per pound and 3/2 pounds per pencil.
C) Malaysia will specialize in rice production and Indonesia will specialize in pencil production.
D) Prior to trade, wages were the same in the production of each product in each country. For example, in Malaysia, Wrice/Wpencils = PriceMPLrice/PpencilsMPLpencils = (1/2 pencil per pound)(1 pound/hour)/(2 pounds per pencil)(1/2 pencil per hour) = 1/2 pencil per hour/1 pound per hour. The wage in rice production is 1/2 pencil per hour and the wage in pencil production is 1 pound per hour. When trade occurs with an international price of 3/5 pencil per pound of rice, then the ratio of wages in Malaysia becomes (3/5 pencils per pound)(1 pound per hour)/(5/3 pounds per pencil)(1/2 pencil per hour) = (3/5 pencils per hour)/(5/6 pounds per hour). The wage in rice production rises from 1/2 to 3/5 pencils per hour and the wage in pencil production falls from 1 to 5/6 pounds of rice per hour. The higher wage in rice production will induce Malaysian labor to move from pencil to rice production.
E) The MPL in rice is 1 pound; the MPL in pencils is 1/2 pencil.
  Difficulty:  Moderate     Section:  Determining the Pattern of International Trade     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

192. Suppose that the following table gives export and import price indexes for Zimbabwe in 1990, 2000, and 2010. (The base year is 1990, so all values are 100 in that year.)

 

Year 1990 2000 2010
Export price index 100 110 100
Import price index 100 90 110

 

A) How did Zimbabwe’s terms of trade change between 1990 and 2000? Between 2000 and 2010? Between 1990 and 2010?
B) Do these changes represent a deterioration or improvement in Zimbabwe’s terms of trade?
C) What are the implications of a terms of trade deterioration for the Zimbabwean economy?
  Ans:  

A) Zimbabwe’s terms of trade rose from 100/100 to 110/90 between 1990 and 2000, fell from 110/90 to 100/110 between 2000 and 2010, and fell over the entire period from 100/100 to 110/110.
B) The movement in the terms of trade between 1990 and 2000 represented an improvement in Zimbabwe’s terms of trade. The movement in the terms of trade between 2000 and 2010 represented a deterioration in Zimbabwe’s terms of trade. The movement in the terms of trade over the entire period represented a deterioration in Zimbabwe’s terms of trade.
C) A deterioration in Zimbabwe’s terms of trade means that it needed to export greater volumes of goods in order to obtain the same volume of imports in previous years.
  Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Concept-Based     Topic:  International Trade Equilibrium

 

 

193. Suppose that China and the United States only trade wheat and textiles with each other. The following graph gives the U.S. supply curve for its exports of wheat to China and the Chinese demand curve for its imports of wheat from the United States.

 

 

 

A) How many tons of wheat did the United States produce prior to trade with China?
B) How many tons of wheat did China produce prior to trade with the United States?
C) What is the international price of wheat in U.S.–Chinese trade?
D) What will happen to the international price of wheat and Chinese imports from the United States if there is a severe drought that reduces the size of the U.S. wheat harvest?
E) What will happen to the international price of wheat and Chinese imports if there is a severe drought in China that reduces the size of its wheat harvest?
  Ans:  

A) The United States produced 200,000 tons of wheat prior to trade with China.
B) China produced 100,000 tons of wheat prior to trade with the United States.
C) The international price of wheat is 2,400 yards of textiles/ton of wheat.
D) A drought in the United States will most likely cause an upward shift throughout the U.S. supply curve and probably cause the kink in the curve to shift leftward to, say, 150,000 tons of wheat. These changes will cause a higher international price of wheat, lower U.S. exports, and lower Chinese wheat consumption.
E) A drought in China will cause an upward shift throughout the Chinese import demand curve and probably cause the kink in the curve to shift leftward. These changes will cause a higher international price of wheat, probably larger U.S. wheat exports to China, and reduced Chinese consumption of wheat.
  Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

194. Suppose that the following table shows autarkic production and consumption in Country A and in Country B.

 

  Country A Country B
Production of wheat 100 bushels 100 bushels
Production of cloth 100 yards 100 yards

 

A)  What are the autarkic prices of wheat and cloth in each country?

B)  Suppose the indifference curves of the two countries are identical.  Will trade occur?

C)  Suppose the indifference curves of the two countries are NOT identical, with A showing a marked preference for wheat and B a marked preference for cloth.  Under these conditions, will trade occur?

  Ans: A) 1 bushel = 1 yard or 1 yard = 1 bushel

B)  No, since any change in relative prices will cause one country to move to a higher indifference curve and the other country to move to a lower curve.

C) Yes; Country A will be willing to trade more than 1 yard of cloth per unit of wheat and Country B will be willing to accept more than 1 yard of per unit of wheat.

  Difficulty:  Difficult     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

 

195. The authors provide evidence that wages rose at roughly the same rates as labor productivity in seven countries between 1973 and 2011. In China, many observers believe that wages have been increasing faster than labor productivity in recent years.  If true, what are some implications for Chinese trade patterns?
  Ans: 1) Chinese comparative advantages are changing over time, perhaps to sectors with higher labor productivities; 2) China may be losing its comparative advantages in low-productivity sectors, with resulting production shifts to other Asian countries that have lower labor costs; 3) some foreign FDI in China may be returning to their home countries (on-shoring) as Chinese labor costs per unit of output rise.
  Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Critical Thinking     Topic:  International Trade Equilibrium

 

 

196. Consider the following table.

 

  Country A Country B
Hours per bushel of wheat 5 8
Hours per yard of cloth 5 5

 

A)  Which country has an absolute advantage in wheat production?

B)  Which country has an absolute advantage in cloth production?

C)  Which country has a comparative advantage in wheat production?

D)  Which country has a comparative advantage in cloth production?

E)  In what range must the international price of wheat fall?

F)  Which country is likely to gain more from trade if the international price of wheat is 7/5 bushel per yard of cloth?

  Ans: A)  Country A

B)  neither Country A nor Country B

C)  Country A

D)  Country B

E)  1 yard/bushel < international price of wheat < 8/5 yard/bushel

F)  Country A is likely to gain more, since the international price diverges more from its autarkic price than it does for Country B.

  Difficulty:  Moderate     Section:  Solving for International Prices     Skill Descriptor:  Analytical Thinking     Topic:  International Trade Equilibrium

 

chapter 10

1. Which of the following was a major disagreement during the Doha Round?
  A) tariffs in developed countries
  B) agricultural subsidies
  C) production subsidies to agriculture in land-poor developing countries
  D) tariffs on agricultural imports in developed countries
  Ans:  B     Difficulty:  Moderate     Section:  Introduction     Skill Descriptor:  Fact-Based     Topic:  Introduction

 

 

2. The term used to describe a tax on exports is an:
  A) export tariff.
  B) export stipend.
  C) export restriction.
  D) export quota.
  Ans:  A     Difficulty:  Easy     Section:  Introduction     Skill Descriptor:  Definitional     Topic:  Introduction

 

 

3. A payment to a firm for every unit exported is called an:
  A) export tariff.
  B) export stipend.
  C) export restriction.
  D) export subsidy.
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Definitional     Topic:  Agricultural Export Subsidies

 

 

4. In general, an export subsidy:
  A) discourages foreign sales exporters in favor of domestic sales.
  B) encourages firms to export rather than sell domestically.
  C) penalizes producers that export.
  D) justifies government involvement in helping firms export.
  Ans:  B     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

5. In Europe, the Common Agricultural Policy is a form of:
  A) tax on domestic production of agricultural products.
  B) regulation and supervision by the WTO in assuring that it is applied fairly.
  C) a purchase program whereby government buys unusable products.
  D) export subsidy, because farmers in the European Union can sell domestically at very high prices.
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

6. The European agricultural export subsidy program is known as the:
  A) European Subsidy System.
  B) European Agricultural System.
  C) Common Agricultural Policy.
  D) Common European Policy.
  Ans:  C     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Definitional     Topic:  Agricultural Export Subsidies

 

 

7. In Europe, the Common Agricultural Policy:
  A) taxes European agricultural products sold in Europe.
  B) allows European farmers to sell their output at above world prices in the European market.
  C) is a form of export subsidy, since prices of European farm products sold on the world market are below prices charged in the European market.
  D) is a form of export subsidy, since it allows European farmers to sell output at above world prices in the European market and at world prices in the export market.
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

8. Where are subsidies on agricultural products particularly high?
  A) the European Union
  B) the United States
  C) Japan
  D) In the European Union, the United States, and Japan
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

9. The European Common Agriculture Policy has resulted in a(n):
  A) increase in European imports from the rest of the world.
  B) decrease in European exports of sugar to the rest of the world.
  C) increase in world agriculture exports to Europe.
  D) increase in European agriculture exports.
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

10. Under rules of the GATT, exporting countries can expect importing countries to impose _______ to offset their export subsidies.
  A) antidumping duties
  B) countervailing duties
  C) safeguard duties
  D) quotas
  Ans:  B     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

11. Under the GATT, which trade remedy can importing countries use to offset export subsidies?
  A) antidumping duties
  B) safeguard duties
  C) quotas
  D) countervailing duties
  Ans:  D     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

12. Most nations in the WTO would like to see agricultural subsidies:
  A) abolished.
  B) expanded into less-developed nations.
  C) regulated by the United Nations Committee on Economics.
  D) become more market oriented.
  Ans:  A     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

13. Food aid is a(n):
  A) in-kind gift of food.
  B) benefit concert to support the third world.
  C) type of export subsidy.
  D) type of countervailing duty.
  Ans:  A     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Definitional     Topic:  Agricultural Export Subsidies

 

 

14. Why is food aid to poor nations seen to be an “indirect subsidy” by the WTO?
  A) It always has to be brokered by a third party.
  B) Poor nations have to pay for it in other ways.
  C) It enables firms to increase exports, partially paid for by the government.
  D) It only works with small farmers rather than large agribusiness.
  Ans:  C     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Agricultural Export Subsidies

 

 

15. Why do economists disparage food aid and export subsidies for low-income nations?
  A) They really have to pay in other ways.
  B) It always involves middlemen who profit from the transactions.
  C) The aid must be paid for by the governments of the poor nations.
  D) It prevents their own firms from producing the same products because they cannot compete with foreign low prices; therefore, the most efficient producer is not the seller of the product.
  Ans:  D     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Critical Thinking     Topic:  Agricultural Export Subsidies

 

 

16. Which of the following contributes to the low price of food on world markets?

I. export subsidies by developed countries

II. food aid to developing countries

III. tariffs on food imports in some large countries

  A) I
  B) II
  C) III
  D) I, II, and III
  Ans:  D     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  Agricultural Export Subsidies

 

 

17. Recently the WTO heard complaints about the United States and Europe in the areas of ______ production and ______ production, which were being subsidized by their governments.
  A) cotton; sugar
  B) tires; dairy products
  C) wheat and other grain; wine
  D) industrial steel; jute
  Ans:  A     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

18. Which two products are among the MOST heavily subsidized in the United States?
  A) sugar and cotton
  B) corn and honey
  C) oranges and tomatoes
  D) wine and beer
  Ans:  A     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

19. WTO negotiations in 2005 covered agricultural subsidies. What progress was made at these meetings in Hong Kong?
  A) Higher-income nations pushed for an end to agricultural subsidies, but did not get them.
  B) No progress was made on lower-income nations’ demands for an end to agricultural subsidies, but some concessions were made in light manufactured goods imports from poor nations.
  C) The Hong Kong meetings were disrupted by protesters and had to be called off.
  D) The WTO members agreed to eliminate all subsidies for every nation.
  Ans:  B     Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Other Matters from the Hong Kong WTO Meeting

 

 

20. What do developing nations expect from wealthy nations in exchange for gradually opening their market to services exports?
  A) food aid
  B) eased immigration regulations
  C) higher agricultural export subsidies
  D) higher tariffs on industrial goods
  Ans:  B     Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Other Matters from the Hong Kong WTO Meeting

 

 

21. An export subsidy works to _______________ the price of exported products for producers to encourage _______________ production.
  A) lower; less
  B) lower; more
  C) raise; more
  D) raise; less
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

22. Which of the following will happen when a small country enacts an export subsidy?

I. The country will be able to sell more abroad.

II. The domestic price of the subsidized export will increase.

III. The country’s demand for the subsidized product will increase.

  A) I
  B) I and II
  C) I and III
  D) I, II, and III
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

23. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then the world price of sugar will:
  A) rise to $150 per ton.
  B) fall to $50 per ton.
  C) remain at $100 per ton.
  D) first rise to $150 per ton, then fall to $100 per ton.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Subsidy

 

 

24. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then its exporters will receive:
  A) $150 per ton.
  B) $50 per ton.
  C) $100 per ton.
  D) first $150 per ton, then $100 per ton.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Subsidy

 

 

25. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then its domestic price of sugar will:
  A) fall by $50 per ton.
  B) rise by $50 per ton.
  C) remain unchanged at $100 per ton.
  D) first fall to $50 per ton, then rise to $100 per ton.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

26. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then domestic consumption of sugar will:
  A) fall.
  B) rise.
  C) remain unchanged.
  D) first fall, then rise.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

Use the following to answer questions 27-29:

 

SCENARIO: SUGAR TRADE IN BIRDONIA

In autarky, suppose that equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation. Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per ton.

 

 

27. (Scenario: Sugar Trade in Birdonia) What will happen to the domestic price of sugar in Birdonia?
  A) It will rise to $125 per ton.
  B) It will fall by $25 per ton.
  C) It will remain $100 per ton.
  D) It will first rise to $125 per ton, then fall to $100 per ton.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

28. (Scenario: Sugar Trade in Birdonia) Now suppose that the government of Birdonia gives an export subsidy of $50 per ton to its sugar producers.  What will happen to the domestic price of sugar in Birdonia?
  A) It will not change.
  B) It will rise to $175 per ton.
  C) It will rise to $150 per ton.
  D) It will rise to between $125 and $175 per ton.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

29. (Scenario: Sugar Trade in Birdonia) What action must the government of Birdonia take to ensure that Birdonians do not import sugar at the world price of $125?
  A) It must place a $25 per ton tax on Birdonian sugar exports.
  B) It must levy a countervailing duty of $50 a ton on Birdonian sugar exports.
  C) It must agree to voluntarily restrain its exports to $125 per ton.
  D) It must levy a tariff of $50 per ton on imported sugar.
  Ans:  D     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Critical Thinking     Topic:  Impact of an Export Subsidy

 

 

Use the following to answer questions 30-35:

 

SCENARIO: DEMAND AND SUPPLY FOR IRON ORE

The table supplied represents a demand and supply schedule for a small-country producer of iron ore. It sells output in its home market and on the world market at the world price of $70 per ton.

 

Table: Demand and Supply for Iron Ore

 

 Price/Ton Quantity semanded (tons) Quantity supplied (tons)
$100  10 100
$90  20  90
$80  30  80
$70  40  70
$60  50  60
$50  60  50
$40  70  40
$30  80  30
$20  90  20
$10 100 10

 

 

 

30. (Scenario: Demand and Supply for Iron Ore) At the world price of $70 per ton, how many units will be sold domestically?
  A) 80 tons
  B) 70 tons
  C) 40 tons
  D) 30 tons
  Ans:  C     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

31. (Scenario: Demand and Supply for Iron Ore) At the world price of $70 per ton, how many units will it export?
  A) 80 tons
  B) 70 tons
  C) 40 tons
  D) 30 tons
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

32. (Scenario: Demand and Supply for Iron Ore) Suppose that the country’s government offers its iron ore producers an export subsidy of $10 per ton. How many tons will the country now export?
  A) 80 tons
  B) 70 tons
  C) 60 tons
  D) 50 tons
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

33. (Scenario: Demand and Supply for Iron Ore) How many tons will be sold domestically when exporters receive a $10-per-ton export subsidy?
  A) 10 tons
  B) 20 tons
  C) 30 tons
  D) 40 tons
  Ans:  C     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

34. (Scenario: Demand and Supply for Iron Ore) What price will domestic iron ore consumers pay for their iron ore purchases when there is a $10-per-ton export subsidy?
  A) $10 per ton
  B) $60 per ton
  C) $70 per ton
  D) $80 per ton
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

35. (Scenario: Demand and Supply for Iron Ore) What is the total value of the export subsidy that exporters receive?
  A) $500
  B) $800
  C) $400
  D) $100
  Ans:  A     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

Use the following to answer questions 36-41:

 

Figure: Home’s Exporting Industry I

The  graph shows information about a home exporter.

 

 

 

36. (Figure: Home’s Exporting Industry I) According to the graph, how many units of the product will domestic consumers demand when the world price is $125?
  A) 120
  B) 100
  C) 20
  D) 40
  Ans:  D     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

37. (Figure: Home’s Exporting Industry I) According to the graph, at the world price there is a ________ of ____ in the home market, which is ____ .
  A) surplus; 60; imported
  B) shortage; 60; imported
  C) surplus; 60; exported
  D) shortage; 100; exported
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

38. (Figure: Home’s Exporting Industry I) According to the graph, when the home country provides a subsidy of _______, exports will increase by _____ units.
  A) $50; 40
  B) $175; 120
  C) $125; 100
  D) $175; 100
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

39. (Figure: Home’s Exporting Industry I) According to the graph, an export subsidy of $50 per unit results in a(n) ________ of government revenue by the amount of ______.
  A) increase; $5,000
  B) increase; $2,500
  C) decrease; $5,000
  D) decrease; $21,000
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

40. (Figure: Home’s Exporting Industry I) According to the graph, an export subsidy of $50 results in a(n) ________ in producer surplus by the amount of ______.
  A) reduction; $6,500
  B) reduction; $5,000
  C) increase; $5,500
  D) increase; $4,000
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

41. (Figure: Home’s Exporting Industry I) According to the graph, the deadweight loss from the $50 export subsidy is:
  A) $500.
  B) $1,000.
  C) $1,500.
  D) $2,500.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

42. When assessing the welfare effect of an export subsidy on a small nation, it can be shown that the subsidy:
  A) increases national welfare.
  B) can be paid for out of increased revenues.
  C) hurts producers and helps consumers.
  D) is just the same as a tariff on imports: it raises domestic price, increases domestic production, and involves the same efficiency and consumption losses.
  Ans:  D     Difficulty:  Moderate     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Subsidy

 

 

Use the following to answer questions 43-48:

 

SCENARIO: FREEDONIAN EXPORTS

In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the home supply of widgets is represented by P = 1Q.

 

 

43. (Scenario: Freedonian Exports) In the absence of trade, what is the equilibrium price and quantity in Freedonia’s widget market?
  A) $25 and 75 units
  B) $75 and 25 units
  C) $25 and 25 units
  D) $75 and 75 units
  Ans:  C     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

44. (Scenario: Freedonian Exports) Freedonia engages in international trade in widgets. The world price is $40. How many widgets will be consumed domestically and how many will be exported?
  A) It will consume 20 domestically and export 20.
  B) It will consume 20 domestically and export 40.
  C) It will consume 40 domestically and export 20.
  D) It will consume zero domestically and export 20.
  Ans:  A     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

45. (Scenario: Freedonian Exports) Now let the government of Freedonia give a $15 per unit subsidy on each widget exported.  What will be the new price and quantity consumed in the Freedonia domestic market?
  A) $20 and 60 units
  B) $55 and 15 units
  C) $40 and 15 units
  D) $25 and 25 units
  Ans:  B     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

46. (Scenario: Freedonian Exports) Calculate the value of the deadweight losses associated with the $15 per unit export subsidy.
  A) $37.50
  B) $75.00
  C) $112.50
  D) $150.00
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

47. (Scenario: Freedonian Exports) What is the value of total subsidy payments to Freedonia’s widget exporters?
  A) $825
  B) $600
  C) $225
  D) $125
  Ans:  B     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Subsidy

 

 

48. (Scenario: Freedonian Exports) Is the subsidy paid to Freedonias’s widget exporters considered part of the deadweight losses of the subsidy?
  A) Yes: they are a payment to Freedonian exporters.
  B) Yes: they are paid by Freedonian exporters that supply the domestic market.
  C) No; they are a redistribution of income within the Freedonian economy.
  D) No; consumers of Freedonian widget exports pay the subsidies.
  Ans:  C     Difficulty:  Difficult     Section:  Export Subsidies in a Small Home Country     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Subsidy

 

 

49. Suppose that the world price of sugar is $100 per ton. If a small-country exporter gives its sugar exporters a subsidy of $50 per ton, then the country will:
  A) suffer deadweight production and consumption losses.
  B) enjoy deadweight production and consumption gains.
  C) suffer deadweight production losses only.
  D) suffer deadweight consumption losses only.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Subsidy

 

 

50. If a large nation subsidizes its exports, it will increase its supply to the world and:
  A) will prosper through increased jobs for workers and profits for its firms.
  B) the world price will fall.
  C) consumers in the home nation will benefit through lower prices.
  D) the nation will increase its imports as well.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

51. A large nation’s export subsidy ____ a small trading partner nation’s terms of trade.
  A) improves
  B) does not affect
  C) worsens
  D) strengthens its bargaining power for improving
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

52. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then the world price of sugar will:
  A) fall by less than $50 per ton.
  B) fall by $50 per ton.
  C) remain at $100 per ton.
  D) rise to $50 per ton.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

53. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then its exporters will receive:
  A) $150 per ton.
  B) $50 per ton.
  C) more than $100 but less than $150 per ton.
  D) $100 per ton.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

54. What happens to the large country’s domestic price of widgets when a large country gives a subsidy of X dollars for each unit exported?
  A) The domestic price will rise by X dollars.
  B) The domestic price will rise by more than X dollars
  C) The domestic price will rise by less than X dollars.
  D) The domestic price will not change.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

55. Suppose that the U.S. federal government decides to increase its cigarette excise tax by $1 per pack and also apply the increase to U.S. cigarette exports. What will happen to the price of cigarettes in the U.S. and abroad?
  A) They will both rise by $1 per pack.
  B) The U.S. price will rise by $1 per pack, and the foreign price will rise by less than $1 per pack.
  C) The foreign price will rise by $1 per pack, and the U.S. price will rise by less than $1 per pack.
  D) Both will rise by less than $1 per pack.
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

56. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then its domestic price of sugar will:
  A) fall by $50 per ton.
  B) rise by $50 per ton.
  C) remain unchanged at $100 per ton.
  D) rise by less than $50 per ton.
  Ans:  D     Difficulty:  Difficult     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

57. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then domestic consumption of sugar will:
  A) fall.
  B) rise.
  C) remain unchanged.
  D) first fall, then rise.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

Use the following to answer questions 58-63:

 

Figure: Home’s Exporting Industry II

The graph shows the effect of a subsidy on a large country.

 

 

 

58. (Figure: Home’s Exporting Industry II) According to the figure, if the world price of the product is $100, the home demand for the product is _____ and the exports are ______.
  A) 25; 125
  B) 25; 25
  C) 50; 75
  D) 25; 75
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

59. (Figure: Home’s Exporting Industry II) According to the graph, if the home country provides a subsidy of $100, the large country will cause the world price to:
  A) increase by $50.
  B) increase by $150.
  C) decrease by $50.
  D) decrease by $150.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

60. (Figure: Home’s Exporting Industry II) According to the graph, what happens to the nation’s consumer surplus as a result of the $100 export subsidy?
  A) It increases by $2,500.
  B) It decreases by  $1,875.
  C) It increases by $1,875.
  D) It decreases by $2,500.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

61. (Figure: Home’s Exporting Industry II) According to the graph, what is the revenue cost for the government from the export subsidy?
  A) $1,250
  B) $12,500
  C) $150
  D) $1,500
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

62. (Figure: Home’s Exporting Industry II) According to the graph, what is the deadweight loss due to the subsidy?
  A) $12,500
  B) $625
  C) $1,250
  D) $5,000
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

63. (Figure: Home’s Exporting Industry II) According to the graph, which of the following will help the large country avoid the deadweight loss from the subsidy?
  A) Impose a tariff.
  B) Impose a quota.
  C) Provide cash to developing countries to purchase the product from the home country.
  D) Impose trade restrictions.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

64. An export subsidy has a similar effect as a tariff for a small nation. What is the effect of an export subsidy for a large nation?
  A) Losses are greater for the large nation than for the small nation because of the cost of the subsidy to the home government.
  B) Losses are lower for the large nation than for the small nation.
  C) It is beneficial for the large nation but not for the small nation.
  D) It is beneficial for consumers but harmful for firms in the large nation.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

65. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then there will be:
  A) no change in its consumer surplus.
  B) a loss in consumer surplus.
  C) a gain in consumer surplus.
  D) an increase in domestic consumption.
  Ans:  B     Difficulty:  Difficult     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

66. What is the primary difference between a subsidy in a small country and a large country?
  A) The large country is the only buyer of the product in the world market.
  B) The small country does not produce any of the product.
  C) The large country is able to influence the world price of the product.
  D) There is no difference between the large country and small country.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Concept-Based     Topic:  Effect of the Subsidy

 

 

67. A large nation’s export subsidy ________ importing countries’ terms of trade; a small nation’s export subsidy _________ importing countries’ terms of trade.
  A) improves; worsens
  B) worsens; improves
  C) improves; improves
  D) improves; does not affect
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

68. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then it will:
  A) enjoy a gain in its total welfare.
  B) have neither a loss nor a gain in its total welfare.
  C) suffer a loss in its total welfare.
  D) have an increase in its consumer surplus only.
  Ans:  C     Difficulty:  Difficult     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

69. Is an export subsidy a good way for a large nation to help a poor nation by exporting products to them at lower prices?
  A) Yes, and it is a method recommended by the WTO.
  B) It can help in some cases.
  C) No; it creates inefficiency in production, and it hurts firms (especially small farmers) who cannot compete.
  D) Yes; but it can get tricky when the importers demand even more quantity at lower prices.
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

70. Suppose that a large country decides to reduce its agricultural export subsidies by 50%. Will the country gain or lose?
  A) The country will always gain by reducing its subsidies.
  B) The country will always lose by reducing its subsidies.
  C) The country will gain if the reduction in its deadweight losses exceeds its terms-of-trade gains.
  D) The country will gain if its terms-of-trade gains exceed the reduction in its deadweight losses.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

71. Export subsidies applied by a large country create ___________for importing countries in the rest of the world by _________ their import prices.
  A) losses; increasing
  B) gains; increasing
  C) gains; decreasing
  D) losses; decreasing
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

72. Are deadweight losses of an export subsidy of X dollars per unit different between a large nation and a small nation?
  A) Yes; deadweight losses of the subsidy are smaller for the large nation than for the small nation.
  B) Yes; deadweight losses of the subsidy are larger for the large nation than for the small nation.
  C) No; deadweight losses of the subsidy are the same in both nations.
  D) No; there are no deadweight losses for either nation.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Analytical Thinking     Topic:  Effect of the Subsidy

 

 

73. Because of the harm caused to low-income nations from subsidized exports of food, high-income nations are looking at other ways to help. The preferred way is:
  A) free food, because this does not involve any payments.
  B) cash, because cash does not distort market prices.
  C) low-interest loans.
  D) technical aid that helps poor nations increase their own production.
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

74. If agricultural subsidies are eliminated by the WTO’s target date, which nations will benefit the most?
  A) agricultural exporters in smaller nations without subsidy programs because world food prices will rise
  B) agricultural consumers all over the world because more farmers will find it profitable to produce
  C) agricultural importing nations, which will be able to import more food
  D) governments of rich nations, which will no longer have to pay the subsidies
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

75. Which nations will be harmed the most if the WTO eliminates agricultural subsidies?
  A) agricultural exporters in smaller nations without subsidy programs because world food prices will rise
  B) agricultural consumers all over the world because prices will be higher
  C) agricultural producers in nations that subsidize their production
  D) governments of rich nations that will have to provide support to farmers who are hurt
  Ans:  C     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

76. Who will gain if WTO members agree to eliminate or to substantially reduce agricultural export subsidies?
  A) consumers in industrialized countries who import agricultural products
  B) farmers in developing countries who currently do not receive export subsidies
  C) farmers in industrialized countries who currently receive export subsidies
  D) consumers in developing countries who import agricultural products
  Ans:  B     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

77. Who will lose if WTO members agree to eliminate agricultural export subsidies?
  A) consumers in industrialized countries who import agricultural products
  B) farmers in developing countries who currently do not receive export subsidies
  C) governments of rich nations, which will have to prop up farmers who are hurt
  D) None of these will lose if agricultural subsidies are eliminated.
  Ans:  A     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

78. Why do countries subsidize exports when they suffer net welfare losses from these subsidies?
  A) Exporters receiving the subsidy engage in rent-seeking activities.
  B) Exports generate positive externalities.
  C) Exports provide foreign currency.
  D) Exports provide jobs.
  Ans:  A     Difficulty:  Difficult     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

79. What are reasons why U.S. food aid may actually hurt recipient nations?
  A) Their farmers are put out of business and food production is decreased.
  B) Local prices are depressed.
  C) It may cause food shortages, as these nations become dependent on food aid.
  D) All of these are reasons why U.S. food aid may actually hurt recipient nations.
  Ans:  D     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

80. The G8 group of industrialized countries recently announced a change in its focus on food aid to farming in developing countries. What is this change?
  A) G8 countries agreed to double their food aid to developing countries.
  B) G8 countries agreed to eliminate direct subsidies on agricultural exports to developing countries.
  C) G8 countries agreed to eliminate indirect subsidies on agricultural exports to developing countries.
  D) G8 countries agreed to shift their focus from food aid to long-term investments in increasing agricultural output in developing countries.
  Ans:  D     Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Fact-Based     Topic:  G8 Shifts Focus from Food Aid to Farming

 

 

81. How is a production subsidy different from an export subsidy?
  A) It is applied only to production sold within the nation.
  B) It is applied to all production and imports—everything consumed in the nation.
  C) It is a payment from government to all domestic production—not only to units exported.
  D) It kicks in when the export subsidy runs out.
  Ans:  C     Difficulty:  Easy     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Production Subsidies

 

 

82. What is the difference between an agricultural export subsidy and an agricultural production subsidy?
  A) There is no difference between an agricultural export subsidy and an agricultural production subsidy.
  B) An agricultural export subsidy applies only to exports, whereas an agricultural production subsidy applies to production sold at home and in the export market.
  C) An agricultural export subsidy applies only to production sold in the home market, whereas an agricultural production subsidy applies to production sold in the export market.
  D) Both agricultural export subsidies and production subsidies apply to production sold in the home market and in the export market.
  Ans:  B     Difficulty:  Easy     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Production Subsidies

 

 

83. The WTO/GATT provides that production subsidies be:
  A) eliminated at all costs.
  B) increased in low-income nations and decreased in high-income nations.
  C) disregarded in making trade decisions.
  D) disclosed to trading partners and reduced to a minimum.
  Ans:  D     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Fact-Based     Topic:  Production Subsidies

 

 

84. The WTO/GATT:
  A) prefers that countries use export subsidies rather than production subsidies on its agricultural production.
  B) prefers that countries use production subsidies rather than export subsidies on its agricultural production.
  C) has no preference between export subsidies and production subsidies on countries’ agricultural production.
  D) wants export subsidies to replace production subsidies.
  Ans:  B     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Fact-Based     Topic:  Production Subsidies

 

 

85. For a small nation employing a production subsidy, domestic producers get a payment for every good produced, and domestic consumers:
  A) purchase the product at the world price the same as before the subsidy.
  B) pay a higher price for the product.
  C) pay a reduced price for the product.
  D) purchase more of the product.
  Ans:  A     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

86. For a small nation employing a production subsidy, if the consumers face the same price as before, the additional production generated by the subsidy will be purchased by:
  A) new domestic consumers.
  B) the export sector.
  C) the financial sector.
  D) the government.
  Ans:  B     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

87. When a country provides a home producer a subsidy, it:
  A) causes the consumer surplus to decline.
  B) causes the producer surplus to decline.
  C) causes government cost to decline.
  D) causes no change in the consumer surplus.
  Ans:  D     Difficulty:  Difficult     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

88. Compared with an export subsidy, for a small nation, a production subsidy increases exports by:
  A) the same amount as an export subsidy.
  B) less than with an export subsidy.
  C) more than with an export subsidy.
  D) undercutting world price.
  Ans:  B     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

89. Because consumer decisions have not been affected, the production subsidy causes a _______ net loss than the export subsidy.
  A) somewhat larger
  B) significantly larger
  C) smaller
  D) similar
  Ans:  C     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

90. To improve the outcome of helping producers in a small nation, the targeting principle says to use the technique:
  A) that is least costly.
  B) that achieves the objective most directly.
  C) that hurts the fewest consumers.
  D) that does not involve government intervention.
  Ans:  B     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

91. To improve the outcome of helping producers in a small nation by the targeting principle, the nation should:
  A) use a production subsidy.
  B) do nothing.
  C) allow the market to work on its own.
  D) use export subsidies.
  Ans:  A     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Small Home Country

 

 

92. If a large nation imposes a production subsidy, the production subsidy:
  A) has more impact on world prices than an export subsidy.
  B) increases exports by more than the export subsidy.
  C) has no measurable effect on prices or exports for a large country.
  D) changes world prices by less and increases exports by less than an export subsidy.
  Ans:  D     Difficulty:  Moderate     Section:  Production Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Production Subsidy in a Large Home Country

 

 

93. An export tariff is:
  A) a tax applied by the country importing the product.
  B) a tax applied by the country exporting the product.
  C) a limitation on the quantity of exports applied by the country exporting the product.
  D) a limitation on the quantity of exports applied by the country importing the product.
  Ans:  B     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Definitional     Topic:  Export Tariffs

 

 

94. The main purpose of an export tariff is to:
  A) raise revenue for the government.
  B) protect domestic producers competing with exporter.
  C) increase profits of exporters.
  D) decrease profits of exporters.
  Ans:  A     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Concept-Based     Topic:  Export Tariffs

 

 

95. In a small country, an export tariff will cause exports to ___________ and domestic consumption to ________.
  A) rise; fall
  B) rise; rise
  C) fall; rise
  D) fall; fall
  Ans:  C     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Small Country

 

 

96. In a small country, an export tariff will cause a(n) _______ in the domestic price of the export and _______ in the world price of the export.
  A) increase; a decrease
  B) decrease; a decrease
  C) decrease; no change
  D) increase; no change
  Ans:  C     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Small Country

 

 

97. Who gains from an export tariff in a small country?
  A) consumers because consumer surplus increases and exporters because they can increase their prices
  B) exporters because they can increase their prices
  C) the government because it collects tariff revenues and consumers because consumer surplus increases
  D) exporters because they can increase their prices and the government because it collects tariff revenues
  Ans:  C     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Small Country

 

 

98. In a small country, an export tariff will result in:
  A) a consumption deadweight loss but no production deadweight loss.
  B) a production deadweight loss but no consumption deadweight loss.
  C) no production and consumption deadweight losses.
  D) both production and consumption deadweight losses.
  Ans:  D     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Small Country

 

 

99. How might an export tariff in a large country improve the country’s economic welfare?
  A) The export tariff will always improve the country’s welfare, since there are no deadweight consumption and production losses.
  B) The export tariff will improve the country’s welfare if terms of trade gains are larger than deadweight consumption and production losses.
  C) The export tariff will never improve the country’s welfare, since deadweight consumption and production losses always outweigh terms of trade gains.
  D) The export tariff will improve the country’s welfare if deadweight consumption and production losses are greater than terms of trade gains.
  Ans:  B     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Large Country

 

 

100. What will happen to domestic and world prices when a large country imposes an export tariff?
  A) The world price will increase and the domestic price will decrease.
  B) Both the world price and the domestic price will increase
  C) The world price will decrease and the domestic price will increase.
  D) Both the domestic price and world price will decrease.
  Ans:  A     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Concept-Based     Topic:  Impact of an Export Tariff in a Large Country

 

 

101. Compare the effects on world prices for an export tariff in a small country with an export tariff in a large country.
  A) An export tariff in a small country and an export tariff in a large country both increase the world price by the amount of the tariff.
  B) An export tariff in a small country does not change the world price, while an export tariff in a large country increases the world price.
  C) An export tariff in a small country increases the world price, while an export tariff in a large country has no effect on the world price.
  D) Neither an export tariff in a small country nor an export tariff in a large country has any effect on the world price.
  Ans:  B     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Large Country

 

 

102. What is the effect of an export tariff in a large country on the importing country?
  A) The importing country loses, since it pays a higher price for the product.
  B) The importing country gains, since it pays a lower price for the product.
  C) The importing country neither gains nor loses, since the world price does not change.
  D) The importing country will gain from the terms of trade effect.
  Ans:  A     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Large Country

 

 

103. Compare the effects on the importing country of an export subsidy and an export tariff imposed by a large country.
  A) The importing country will gain from both an export subsidy and an export tariff imposed by a large country.
  B) The importing country will lose from both an export subsidy and an export tariff imposed by a large country.
  C) The importing country will gain from an export tariff and lose from an export subsidy imposed by a large country.
  D) The importing country will gain from an export subsidy and lose from an export tariff imposed by a large country.
  Ans:  D     Difficulty:  Moderate     Section:  Export Tariffs     Skill Descriptor:  Analytical Thinking     Topic:  Impact of an Export Tariff in a Large Country

 

 

104. An export quota is:
  A) a tax imposed by the exporting country on products exported.
  B) a limit imposed by the exporting country on the amount that its firms are allowed to export.
  C) a limit imposed by the importing country on the amount that its consumers are allowed to import.
  D) a limit on exports agreed on by both the exporting and importing country.
  Ans:  B     Difficulty:  Easy     Section:  Export Quotas     Skill Descriptor:  Definitional     Topic:  Export Quotas

 

 

105. Which of the following is the MOST well-known system of export quotas?
  A) export quotas established by the Organization of Iron Ore Exporters (OIOE)
  B) export quotas established by the International Cocoa Cartel (ICC)
  C) export quotas established by the International Bauxite Organization (IBO)
  D) export quotas established by the Organization of Petroleum Exporting Countries (OPEC)
  Ans:  D     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Fact-based     Topic:  Export Quotas

 

 

106. How will an export quota imposed by a small exporting country affect the world price?
  A) It will cause an increase in the world price.
  B) It will cause a decrease in the world price.
  C) It will not affect the world price.
  D) It will first cause an increase, then a decrease the world price.
  Ans:  C     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Concept-Based     Topic:  Export Quotas

 

 

107. How will an export quota imposed by a large exporting country affect the world price?
  A) It will cause an increase in the world price.
  B) It will cause a decrease in the world price.
  C) It will have no effect upon the world price.
  D) It will first cause an increase, then a decrease the world price.
  Ans:  A     Difficulty:  Easy     Section:  Export Quotas     Skill Descriptor:  Concept-Based     Topic:  Export Quotas

 

 

108. How will an export quota imposed by a large exporting country affect the country’s domestic price?
  A) It will cause an increase in the domestic price.
  B) It will cause a decrease in the domestic price.
  C) It will have no effect upon the domestic price.
  D) It will first cause an increase, then a decrease in the domestic price.
  Ans:  B     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

109. How will an export quota imposed by a large exporting country affect the total quantity sold by the country’s firms?
  A) It will cause an increase in the total quantity sold by the country’s firms.
  B) It will cause a decrease in the total quantity sold by the country’s firms.
  C) It will have no effect upon the total quantity sold by the country’s firms.
  D) It will an indeterminate effect on the total quantity sold by the country’s firms.
  Ans:  B     Difficulty:  Difficult     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

110. How will an export quota imposed by a large exporting country affect the domestic price?
  A) It will cause an increase in the domestic price.
  B) It will cause a decrease in the domestic price.
  C) It will have no effect upon the domestic price.
  D) It will first cause an increase, then a decrease in the domestic price.
  Ans:  B     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

111. How will an export quota imposed by a large exporting country affect the country’s welfare?
  A) It will cause an increase in the country’s welfare if the terms of trade gain exceed consumption and production deadweight losses.
  B) It will always a decrease in the country’s welfare.
  C) It will always cause an increase in the country’s welfare.
  D) It will not change the country’s welfare.
  Ans:  A     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

112. Are domestic consumers better or worse off after a large exporting country imposes an export quota?
  A) Domestic consumers are better off, since there is a gain in consumer surplus.
  B) Domestic consumers are worse off, since there is a loss of consumer surplus.
  C) Domestic consumers are neither better nor worse off, since gains in consumer surplus are offset by losses of producer surplus.
  D) Domestic consumers may be better or worse off, depending on the magnitude of terms of trade gains.
  Ans:  A     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

113. Are domestic firms better or worse off after a large exporting country imposes an export quota?
  A) Domestic firms are worse off, since there is a loss of producer surplus.
  B) Domestic firms are better off, since producer surplus rises.
  C) Domestic firms are better off, since there is an increase in the rents they earn.
  D) Domestic firms are neither better nor worse off, since their higher export price is offset by a lower price in the domestic market.
  Ans:  C     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Analytical Thinking     Topic:  Export Quotas

 

 

114. Does GATT allow export restrictions such as export quotas?
  A) No; Article XI bans all export quotas.
  B) Yes; Article XI places no restrictions on export quotas.
  C) Yes; Article XI allows export quotas on trade in military equipment.
  D) Yes; Article XI allows temporary export quotas to prevent critical shortages of products essential to the exporting country.
  Ans:  D     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Fact-Based     Topic:  Chinese Export Policies in Mineral Products

 

 

115. What did China recently change its export quota policy on exports of rare earth minerals?
  A) A WTO dispute settlement panel ruled that China’s export quotas violated the GATT.
  B) It found that export tariffs were more successful than export quotas in maintaining high world prices.
  C) Processing of rare earth minerals leads to low grade radioactive waste by-products.
  D) It found that these export quotas were not having the desired effect of maintaining high world prices.
  Ans:  D     Difficulty:  Moderate     Section:  Export Quotas     Skill Descriptor:  Fact-Based     Topic:  Chinese Export Policies in Mineral Products

 

 

116. What kinds of subsidies do developed nations such as the United States and Europe provide for high-technology exports?
  A) low-interest loans
  B) grants for research and development
  C) direct subsidies for export performance
  D) Developed nations use all of these subsidies for high-technology exports.
  Ans:  D     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  High-Technology Export Subsidies

 

 

117. In the United States, which of the following is a subsidy provided for Boeing?
  A) free utility service to production facilities
  B) tax breaks for Boeing
  C) loans to Boeing’s customers through the Export-Import Bank
  D) loans to Boeing for production assistance
  Ans:  C     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  High-Technology Export Subsidies

 

 

118. A “strategic” use of high-tech subsidies would involve:
  A) assistance to help firms compete with other domestic firms.
  B) loans or other assistance to make it possible for high-tech firms to take market share from international competitors.
  C) making sure the firm makes extra profits, so it will be strong and provide jobs.
  D) assistance to help firms compete with other domestic firms, loans or other assistance to make it possible for high-tech firms to take market share from international competitors, and making sure the firm makes extra profits, so it will be strong and provide jobs.
  Ans:  B     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

119. Which of the following is the MOST important reason why some countries subsidize high-tech industries (such as wide-body airplanes)?
  A) Their political influence generates rent-seeking payoffs from their governments.
  B) Their governments believe that high-tech industries should receive infant industry protection.
  C) Their governments believe that high-tech industries create positive externalities to other industries.
  D) High-tech industrial imports are often dumped and subject to antidumping duties.
  Ans:  C     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

120. What is the name given to a market in which a home monopoly firm and a foreign monopoly firm are producing very similar products (such as wide-body airplanes)?
  A) duopoly
  B) dual monopoly
  C) dual monopolistic competitive industry
  D) duopolistic competitive industry
  Ans:  A     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Definitional     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

121. If a government subsidizes its firm’s efforts and increase sales and profits from international operations by more than the cost of the subsidy:
  A) it will be viewed as a strategic policy success.
  B) we have to discount any success because of the environmental degradation that always occurs.
  C) there will be a negative effect because the government should not and does not subsidize to gain international position for private firms.
  D) there could be increased costs in the future.
  Ans:  A     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

122. Economists use game theory to analyze:
  A) different exclusive options whose payoffs depend on the choices and actions of another entity with the same goals.
  B) how people behave with a limited set of options.
  C) economic decisions by consumers when income rises.
  D) the tax consequences of various investment decisions.
  Ans:  A     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

123. Game theory analyzes:
  A) strategic interaction between governments.
  B) strategic interaction between firms.
  C) typical interaction between governments and firms.
  D) strategic interaction between both governments and firms.
  Ans:  D     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

124. The grid that organizes the results of various decisions based on what each entity does under different circumstances is known as the:
  A) meridian grid.
  B) payoff matrix.
  C) choice bundles.
  D) Malthusian dilemma.
  Ans:  B     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Definitional     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

125. Economist John Nash analyzed game theory and came up with a most likely outcome based on the best net benefit to each party. Such an outcome is called the:
  A) production possibilities matrix.
  B) payoff matrix.
  C) foursquare decision algorithm.
  D) Nash equilibrium.
  Ans:  D     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Definitional     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

126. One way to describe the Nash equilibrium is as a:
  A) mutual best response.
  B) first-mover advantage.
  C) quid pro quo.
  D) unilateral deviation.
  Ans:  A     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

127. In a two-firm industry, a Nash equilibrium occurs whenever:
  A) each firm makes decisions without consideration of the other firm’s actions.
  B) the first firm makes decisions without consideration for the second firm’s actions, whereas the second firm does consider the first firm’s actions.
  C) the second firm makes decisions without consideration for the first firm’s actions, whereas the first firm does consider the second firm’s actions.
  D) each firm considers all possible actions by other firms and then chooses the best strategy.
  Ans:  D     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

Use the following to answer question 128:

 

Figure: Payoff Matrix for Airbus and Boeing

 

 

128. (Figure: Payoff Matrix for Airbus and Boeing) Considering the payoff matrix in the figure, which of the following options is a Nash equilibrium?
  A) Boeing produces and Airbus does not produce.
  B) Boeing does not produce and Airbus produces.
  C) Boeing does not produce and Airbus does not produce.
  D) Boeing produces and Airbus does not produce; Boeing does not produce and Airbus produces.
  Ans:  D     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

Use the following to answer questions 129-132:

 

SCENARIO: PAYOFF MATRIX FOR AIRBUS AND BOEING

The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in response to action on the part of the other company. This payoff matrix describes actions in developing so-called super-jumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce super-jumbo jets.

 

 

Payoff Matrix for Airbus and Boeing

 

 

129. (Scenario: Payoff Matrix for Airbus and Boeing) Which elements are a Nash equilibria?
  A) D and B
  B) A and C
  C) B and D
  D) B and C
  Ans:  D     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

130. (Scenario: Payoff Matrix for Airbus and Boeing) Boeing has decided not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. Which elements represent this decision?
  A) A and B
  B) B and C
  C) C and D
  D) A and D
  Ans:  C     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

131. (Scenario: Payoff Matrix for Airbus and Boeing) Boeing has decided not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce super-jumbo jets. Which element represents their joint decisions?
  A) A
  B) B
  C) C
  D) D
  Ans:  C     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

132. (Scenario: Payoff Matrix for Airbus and Boeing) Boeing has decided not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce super-jumbo jets. Is Boeing’s decision correct?
  A) Yes; because it would lose profits if it produced a super-jumbo jet.
  B) No; because it could earn more profits by not producing a super-jumbo jet.
  C) Yes; because it would neither lose nor earn more profits by producing a super-jumbo jet.
  D) No; because it would lose more profits if it produced a super-jumbo jet.
  Ans:  A     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

133. In game theory, it is often uncertain what the other party will do, so there could be more than one “best” outcome. In that case, often, there is an advantage called:
  A) risk-avoidance advantage.
  B) first-mover advantage.
  C) circular advantage.
  D) parameter testing.
  Ans:  B     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Definitional     Topic:  “Strategic” Use of High-Tech Export Subsidies

 

 

Use the following to answer question 134:

 

Net return to Europe

(Airbus) if:

Europe subsidizes Airbus Europe doesn’t subsidize Airbus
United States subsidizes Boeing +$5 million +$2 million
United States does not subsidize Boeing +$10 million +$8 million
Net return to United States (Boeing) if: Europe subsidizes Airbus Europe doesn’t subsidize Airbus
United States subsidizes Boeing +$5 million +$10 million
United States does not subsidize Boeing +$2 million +$8 million

 

 

 

134. (Figure: Payoff Matrix for Airbus and Boeing) One could use game theory to analyze government subsidies. Using the payoff matrix, what will each nation do if it is a 50–50 guess what the other side will do?
  A) Europe will subsidize Airbus and the United States will subsidize Boeing.
  B) Europe will not subsidize Airbus and the United States will not subsidize Boeing.
  C) Europe will subsidize Airbus and the United States will not subsidize Boeing.
  D) Europe will not subsidize Airbus and the United States will subsidize Boeing.
  Ans:  A     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  Effect of a Subsidy to Airbus

 

 

Use the following to answer questions 135-136:

 

This payoff matrix describes actions in developing so-called super-jumbo jets that can carry 600 or more passengers. In each element, the lower- left value gives the outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce super-jumbo jets.

 

Payoff Matrix for Airbus and Boeing

 

 

135. (Scenario: Payoff Matrix for Airbus and Boeing) Now suppose that the U.S. government decides to provide a $50 million subsidy to Boeing in order to encourage it to produce super-jumbo jets. Boeing decides to take the subsidy. Using the payoff matrix, what is Airbus’s best strategy?
  A) continue to produce super-jumbo jets because its profits will not be affected
  B) continue to produce super-jumbo jets even though its profits will fall
  C) discontinue producing super-jumbo jets because its losses are lower than if it produced super-jumbo jets
  D) discontinue producing super-jumbo jets because it would neither lose nor earn more profits by producing super-jumbo jets
  Ans:  C     Difficulty:  Difficult     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  Effect of a Subsidy to Airbus

 

 

136. (Scenario: Payoff Matrix for Airbus and Boeing) Which element in the payoff matrix describes the best choices of Airbus and Boeing when Boeing receives a $50 million subsidy?
  A) A
  B) B
  C) C
  D) D
  Ans:  B     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  Effect of a Subsidy to Airbus

 

 

137. If we choose whether or not it is a good idea to subsidize, we must compare the present value of the net gain in profits with the:
  A) taxes paid by the producers on those profits.
  B) cost of the subsidy.
  C) reduced profits in other nations.
  D) timeliness of making the decision.
  Ans:  B     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Effect of a Subsidy to Airbus

 

 

Use the following to answer question 138:

 

Figure: Payoff Matrix for Airbus and Boeing with a Subsidy

 

 

 

138. (Figure: Payoff Matrix for Airbus and Boeing with a Subsidy) Using the payoff matrix, if the European Union provides Airbus a subsidy, Airbus will ______airplanes and Boeing will _________airplanes.
  A) produce; produce
  B) not produce; produce
  C) produce; not produce
  D) not produce; not produce
  Ans:  C     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Analytical Thinking     Topic:  Effect of a Subsidy to Airbus

 

 

139. An important factor to consider when a nation considers subsidies for export promotion is whether:
  A) the firms will follow through on their plans.
  B) costs will rise or fall.
  C) the subsidy and continued support will force foreign firms out of the market.
  D) the government can afford to do it.
  Ans:  C     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Critical Thinking     Topic:  Subsidy with Cost Advantage for Boeing

 

 

140. Subsidization of aircraft industries in the United States and Europe has become a competitive situation and very costly due to escalation. Therefore, in 1992:
  A) the United States and the European Union agreed to merge Boeing, Airbus, and McDonnell-Douglas and share the profits.
  B) the United States and the European Union agreed to limit subsidies on aircraft by about 7.5 to 12.5% of the production costs.
  C) the United States refused to budge because of its heavy defense needs.
  D) Airbus needed more help because it is run by a consortium of firms in three European nations.
  Ans:  B     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Subsidy with Cost Advantage for Boeing

 

 

141. Which of the following was a result of the 1992 agreement between the United States and the European Union to reduce subsidies to their aircraft industries?

I.  higher prices for aircraft

II. cost savings for the affected governments.

III. some hardships for firms in other nations that purchase aircraft.

  A) I
  B) I and II
  C) II and II
  D) I, II, and II1
  Ans:  D     Difficulty:  Difficult     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Subsidy with Cost Advantage for Boeing

 

 

142. In 2005 both the United States and Europe filed complaints with the WTO:
  A) about illegal copying of pharmaceuticals by drug sellers in lower income nations.
  B) about the high levels of greenhouse gases each accused the other of creating.
  C) over illegal immigration from Europe to Canada and then to the United States.
  D) against each other over violations of the agreed 1992 limit on subsidies.
  Ans:  D     Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Subsidy with Cost Advantage for Boeing

 

 

143. Europe’s subsidy for the _______ may have been a profitable strategic move because Boeing had not planned to produce that type of aircraft.
  A) Bell helicopter
  B) Blackhawk jet
  C) Lear jet
  D) the double-decker Airbus 380
  Ans:  D     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Subsidy with Cost Advantage for Boeing

 

 

144. The largest passenger jet ever developed is the:
  A) double-decker Airbus 380.
  B) Boeing 787 Dreamliner.
  C) MD400 Skyship.
  D) Chinese 899 Blue Jet.
  Ans:  A     Difficulty:  Easy     Section:  High-Technology Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Subsidies to Commercial Aircraft

 

 

145. When the United States subsidizes Boeing for export, who benefits and who pays the bill?
  A) Foreign consumers, Boeing workers, and Boeing stockholders benefit; U.S. taxpayers foot the bill.
  B) Foreign producers benefit; foreign consumers pay the bill.
  C) Domestic consumers benefit; foreign firms pay the bill.
  D) There is only a deadweight loss—everyone wins in this situation.
  Ans:  A     Difficulty:  Moderate     Section:  Conclusions     Skill Descriptor:  Critical Thinking     Topic:  Conclusions

 

 

146. What is the difference between a direct and an indirect agricultural export subsidy?
  Ans: A direct subsidy is a payment to firms for every unit exported. Indirect subsidies increase agricultural exports through less visible means and include actions as food aid from developed to poor countries, which lower agricultural prices in poor countries, and lower incentives to agricultural production.
  Difficulty:  Easy     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

147. Developing countries are divided over “special safeguards” for agricultural products. What are safeguards and why are they contentious?
  Ans: The safeguard provision allows a country to temporarily protect a domestic agricultural activity. By declaring products special, a country can shield them from WTO-negotiated full tariff cuts in the interests of food or livelihood security or rural development.

 

The special safeguard mechanism might also allow developing countries to hike farm tariffs temporarily—in some cases to above their rates—to counter a sudden influx of imports or collapse in prices. Exporters fear they could actually lose market access, depending on the terms, as the new tariffs for special products are enacted by countries like India that do not currently enjoy such protection.

 

Food-exporting developing countries wish to restrict the use of special safeguards; food-importing countries with domestic production want to exempt as many products as possible. For example, China might declare rice, cotton, and sugar special products. That would hurt rice exporters like Thailand and cotton exporters from West Africa.

  Difficulty:  Moderate     Section:  WTO Goals on Agricultural Export Subsidies     Skill Descriptor:  Fact-Based     Topic:  Agricultural Export Subsidies

 

 

148. Suppose that a large country decides to cut its agricultural export subsidies by 50%. Will the country gain or lose?
  Ans: The country will always gain by reducing its subsidies because it reduces its deadweight losses and reduces losses from a worsened terms of trade.
  Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Concept-Based     Topic:  Effect of the Subsidy

 

 

149. Explain why importing countries benefit from export subsidies given by large nations.
  Ans: Importing countries gain by lower prices of the import and through improved terms of trade.
  Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Concept-Based     Topic:  Effect of the Subsidy

 

 

150. Suppose that the U.S. federal government decides to increase its cigarette excise tax by $1 per pack and also apply the increase to U.S. cigarette exports. What will happen to the price of cigarettes in the United States and abroad?
  Ans: Both will rise by less than $1 per pack because the demand curves for U.S. cigarettes are less than perfectly elastic in the United States and abroad.
  Difficulty:  Moderate     Section:  Export Subsidies in a Large Home Country     Skill Descriptor:  Critical Thinking     Topic:  Effect of the Subsidy

 

 

151. What is the difference between an agricultural export subsidy and an agricultural production subsidy?
  Ans: An agricultural export subsidy applies only to exports, whereas an agricultural production subsidy applies to production sold at home and in the export market. As a result, home prices do not change and there is no consumption deadweight loss.
  Difficulty:  Easy     Section:  Production Subsidies     Skill Descriptor:  Fact-Based     Topic:  Production Subsidies

 

 

152. The WTO recently ruled in favor of Boeing’s claim that the European Union subsidized the production of the Airbus A380. What was the form of subsidy received by Airbus?
  Ans: The WTO ruled that Airbus received $4 billion in subsidized low-interest loans to cover the development costs of the A380, which did not meet the terms of a previous agreement in which loans were to be repaid at government rates (or the government rate plus 1%—close to commercial interest rates).
  Difficulty:  Moderate     Section:  High-Technology Export Subsidies     Skill Descriptor:  Concept-Based     Topic:  Subsidies to Commercial Aircraft

 

 

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