International Economics

LDCs often have a comparative advantage in the production of ?

A. primary products
B. intermediate products
C. manufactured products
D. financial services
Output fell sharply in the transition economies because ?

A. banks were unable to function

B. there was little corporate control
C. vital infrastructure was missing
D. All of the above
If goods are exported for less than society’s marginal production cost
and the marginal benefit to domestic consumers, it is likely that they
benefit
from?

A. an import subsidy
B. a quota
C. comparative advantage
D. an export subsidy
A tariff causes domestic firms to ________ and consumers to?

A. overproduce, under consume

B. Overproduce, overconsume
C. underproduce, under consume
D. underproduce, overconsume
The level of the equilibrium exchange rate offsets international
differences in ?

A. comparative advantage
B. absolute advantage
C. opportunity cost
D. relative costs
International difference is opportunity costs lead to countries
acquiring ?
A. Comparative advantage
B. High exchange rates
C. trade barriers
D. trade quotas
To prevent the external value of the currency from falling the
government might ?

A. Reduce interest rates

B. Sell its own currency
C. Buy its own currency with foreign reserves
D. Increase its own spending

The marginal propensity of consume is equal to ?

A. Total spending / total consumption

B. Total consumption / total income
C. Change in consumption / change in income
D. Change in consumption / change in savings
The terms of trade measure ?

A. The income of one country compared to another

B. The GDP of one country compared to another
C. The quantity of exports of one country compared to another
D. Export prices compared to import prices
If a country can produce 10 of product A or 4 of product B the
opportunity cost of 1B is ?

A. 0.4A
B. 2.5A
C. 10A

A demand switching policy could be ?

A. Higher interest rates

B. Higher income tax
C. Tariffs
D. Reduced government spending
What is not a feature of the EU as a single market ?
A. Elimination of border controls
B. No import taxes on goods bought in another members country
C. Each country can retain its own technical standards
D. Common security arrangements
When free trade areas are set up the member countries trade with
each other grows faster than their trade with other countries This is
due to what
economist call ?

A. trade diversion
B. trade channeling
C. trade creation and trade diversion
D. trade creation
Economic integration ?

A. occurs when countries are granted most favored nation status

B. occurs when one country voluntarily agrees to reduce its exports to
another country
C. occurs when two or more nations join to form a free-trade zone
D. Occurs when countries develop an acquired comparative advantage that
makes their industries more competitive in international markets
Tariffs are used to protect infant industries these industries are those
which ?

A. employ many young or untrained workers

B. are competing with well-established overseas firms
C. are not yet large enough to achieve economies of scale
D. use a new technology
If the Uk placed a limit on the amount of steel that could be imported
into the UK in a particular period this would be an example of ?

A. a quota
B. dumping
C. a tariff
D. an export subsidy
One of the main advantages of trade economists suggest is ?

A. technological change
B. competitions with foreign suppliers
C. development of tourism
D. lower tariffs

A country has a comparative advantage in the production of a product

if the good’s _____ cost in different from the good’s _____ cost in
another
country ?

A. resource; resource
B. foreign exchange money
C. opportunity; opportunity
D. money; opportunity
A significant portion of actual world trade patterns results from ?

A. The industrial policies of governments

B. different sizes of the countries
C. different factor endowment between countries
D. the different tastes and preferences of people in different countries
The most wave of globalization which began in the 1980s has
emphasized the outsourcing of ?

A. services and white-collar jobs

B. manufacturing and blue-collar jobs
C. natural resource extraction and mining jobs
D. agriculture and farming jobs

A sudden shift from import tariffs to free trade may induce short-term
unemployment in ?

A. Import-competing industries
B. Industries that are only exporters
C. Industries that sell domestically as well as export
D. industries that neither import nor export
For the United States, commercial jetliners are ?

A. Imported, but not exported

B. Exported, but not imported
C. Imported and exported
D. Neither exported nor imported
International trade in goods and services tends to ?
A. Increase all domestic costs and prices
B. Keep all domestic costs and prices at the same level
C. Lessen the amount of competition facing home manufacturers
D. Increase the amount of competition facing home manufacturers
A feasible effect of international trade is that a (an) ?

A. Monopoly in the home market becomes an oligopoly in the world

market
B. Oligopoly in the home market becomes a monopoly in the world market
C. Purely competitive firm in the home market becomes an oligopolist
D. purely competitive firm in the home market becomes a monopolist
International trade tends to cause welfare losses to at least some
groups in a country ?

A. The less mobile the country’s resources

B. The more mobile the country’s resources
C. The lower the country’s initial living standard
The higher the country’s initial living standard
Free traders maintain that an open economy is advantageous is that it
provides all of the following except ?

A. Increased competition for world producers

B. A wider selection of products for consumers
C. The utilization of the most efficient production methods
D. Relatively high wages levels for all domestic workers
For the United states, exports plus imports are about _____ of its
gross national product?

A. 5 percent
B. 10 percent
C. 25 percent
D. 55 percent
The largest amount of trade with the United States in recent years has
been conducted by ?

A. Canada
B. Germany
C. Mexico
D. United Kingdom
Arguments for free trade are sometimes disregarded by politicians
because ?

A. Maximizing domestic efficiency is not considered imports

B. Maximizing consumer welfare may not be a chief priority
C. There exist sound economic reasons for keeping one’s economy
isolated from other economies
D. Economists tend to favor high protected domestic markets
The movement to free international trade is most likely to generate
short-term unemployment in which industries ?

A. Industries in which there are neither imports nor exports

B. Imports competing industries
C. Industries that sell to domestic and foreign buyers
D. Industries that sell to only foreign buyers

If a nation has an open economy it means that the nation ?

A. Allows private ownership of capital

B. Has flexible exchange rates
C. Has fixed exchange rates
D. conducts trade with other countries
A main advantage of specialization results from ?

A. Economies of large-scale production

B. The specializing country behaving as a monopoly
C. Smaller production runs resulting in lower unit costs
D. High wages paid to foreign workers
If a country has a burden of debt it cannot sustain it can ?

A. reschedule debt
B. get a loan from an international organization
C. default on the loan
D. any of the above
Import substitution is the replacement of ____ by domestic
production _____ protection of ________?

A. exports, subsidies
B. exports, patents
C. imports, high tariffs or import quotas
D. imports, subsidies
LDCs are reluctant to pursue development through the export of
primary products because of ____ and _____ ?

A. The upward trend in commodity prices the stability of primary products

real prices
B. The upward trend in commodity prices, the volatility of primary products
real prices
C. The downward trend in commodity prices the stability of primary
products real prices
D. The downward trend in commodity prices the volatility of primary
products real prices
All of the following represent obstacles to LDC development except ?

A. resource scarcity
B. low levels of investment
C. low population
D. poor infrastructure
E. poor human capital
Economic transition involves high inflation because _____ and
______?

A. high monetary growth high wages

B. high budget deficits devaluation
C. high monetary growth devaluation
D. Prices surge from an artificially low level to their equilibrium level
the inflation tax is required a source of government revenue

An optimal tariff is one which reduces imports to the level at which

____ equals ____?

A. imports, exports
B. the balance of trade, zero
C. The demand for currency the supply of currency
D. social marginal cost, social marginal benefit
The imposition of a tariff causes consumption to _____ and imports to
_________?

A. rise, rise
B. fall, rise
C. fall, fall
D. rise, fall
The main cause of different relative costs between countries are ?

A. relative factor competition

B. relative factor mobility
C. relative factor substitution

International specialization takes place because of______________?

A. differences in technology
B. differences in factor endowments
C. scale economies
D. All of the above
If there is a balance of payments deficit then in a floating exchange
rate system ?

A. The external value of the currency would tend to fall

B. The external value of the currency would tend to rise
C. The injections from trade are greater then the withdrawals
D. Aggregate demand is increasing
In a floating exchange rate system ?

A. The government intervenes to influence the exchange rate

B. The exchange rate should adjust to equate the supply and demand
of the currency
C. The Balance of payments should always be in surplus
D. The Balance of payments will always equal the government budget
Tariffs ?

A. Decrease the domestic price of a product

B. Increase government earnings from tax
C. Increase the quantity of imports
D. Decrease domestic production
Free trade is based on the principle of ?

A. Comparative advantage
B. Comparative scale
C. Economies of advantage
D. Production possibility advantage
Which of the following is not an argument for protectionism ?

A. To protect infant industries

B. To increase the level of imports
C. To Protect strategic industries
D. To improve the balance of payments
When countries from large trading blocs like the EU, the size of the
bloc has the effect of improving them ?

A. balance of trade
B. comparative advantage
C. balance of payments
D. terms of trade
If a group of countries abolish trade barriers between them and set
same tariffs on goods coming in from other countries they are a ?

A. common market
B. free trade area
C. customs union
D. federation
Economists suggest that an optimum tariff would be one which
reduce imports to a point where___________?

A. Comparative advantage is achieved

B. Price elasticity of imports is unity and tariff revenue is maximized
C. import prices are the same as export prices
D. marginal social cost equals marginal social benefit
Government payments made to domestic firms in order to encourage
exports are called ?

A. Side payments
B. Tariffs
C. subsidies
D. export quotas

The term tariff, as used in international trade refers to ?

A. The price of goods when they leave the producing country

B. a limit on the quantity of a good that can be imported into a country
C. a tax on imports
D. a government payment to encourage exports
Term of trade for a country are the ratio of _______________ to
_____________?

A. its opportunity costs; world opportunity costs

B. export prices; import prices
C. Value of exports; value of imports
D. its currency; other currencies
David Ricardo’s theory in favor of free trade uses the ideal of ?

A. absolute advantage
B. mutual advantage
C. multilateral advantage
D. comparative advantage
The theory that states that a country has a comparative advantage in
the production of a product if that country is relatively well endowed
with
inputs used intensively in the production of that product is the?

A. Ricardo Malthus theorem

B. Heckscher Ohlin theorem
C. Lucas-Laffer theorem
D. Friedman Samuelson theorem
A reduced share of the world export market for the United States
would be attributed to?

A. Decreased productivity in U.S manufacturing

B. High incomes of American households
C. Relatively low interest rates in the United States
D. High levels of investment by American corporations
Technological improvements are similar to international trade since
they both ?

A. Provide benefits for all producers and consumers

B. Increase the nation’s aggregate income
C. Reduce unemployment for all domestic workers
D. Ensure that industries can operate at less than full capacity
The real income of domestic producers and consumers can be
increased by ?
A. Technological progress, but not international trade
B. International trade but not technological progress
C. Technological Progress and international trade
D. Neither technological progress nor international trade

For the United States automobiles are ?

A. Imported, but not exported

B. Exported, but not imported
C. Exported and imported
D. Neither imported not exported
Recent pressures for protectionism in the United States have been
motivated by all of the following except ?

A. U.S firms shipping component production overseas

B. High profit levels for American corporations
C. Sluggish rates of productivity growth in the United States
D. High unemployment rates among America workers
Major trading partners of the United States including all of the
following countries except ?

A. Canada
B. Mexico
C. China
D. North Korea

Increased foreign competition tend to ?

A. Intensify inflationary pressure at home

B. Induce falling output per worker-hour for domestic workers
C. Place constraints on the wages of domestic workers
D. Increase profits of domestic import competing industries
Which American industry has least been affected by import
competition in recent years ?

A. Automobiles
B. Steel
C. Radios and TVs
D. Computer software
International trade is based on the idea that ?
A. Exports should exceed imports
B. imports should exceed exports
C. Resources are more mobile internationally than are goods
D. Resources are less mobile internationally than are goods
International trade forces domestic firms to become more competitive
in terms of ?

A. The introduction of new products

B. Product design and quality
C. Product price
D. All of the above
International trade in goods and services is sometimes used as a
substitute for all of the following except ?

A. International movements of capital

B. International movements of labor
C. International movements of technology
D. Domestic production of different goods and services
A primary reason why nations conduct international trade is
because ?

A. Some nations prefer to produce one thing while others produce another
B. Resources are not equally distributed to all trading nations
C. Trade enhances opportunities to accumulate profits
D. interest rates are not identical in all trading nations

1.  Which of the following is international trade:

Trade between
A. B. Trade between regions
provinces

Trade between
C. D. (b) and (c) of above
countries

2.  Theory of comparative advantage was presented by:

A. Adam Smith B. Ricardo
 C. Hicks D. Arshad

3.  Which is NOT an advantage of international trade:

Export of surplus Import of defence
A. B.
production material

Dependence on Availability of cheap

C. D.
foreign countries raw materials

4.  If Japan and Pakistan start free trade, difference in wages in

two countries will:
A. Increase B. Decrease

C. No effect D. Double

5.  Trade between two countries can be useful if cost ratios of

goods are:
A. Equal B. Different

C. Undetermined D. Decreasing

6.  Modern theory of international trade is based n the views of:

Adam Smith and
A. Robbins and Ricardo B.
Marshall

C. Heckcsher and Ohlin D. Saleem and Kareem

7.  Foreign trade creates among countries:

A. Conflicts B. Cooperation

C. Hatred D. Both (a) & (b)

8.  Net exports equal:
A. Exports x Imports B. Exports + Imports

C. Exports - Imports D. Exports of services only

9.  A tariff:
Increases the volume of Reduces the volume
A. B.
trade of trade

Has no effect on
C. D. (a) and (c) of above
volume of trade

10. A tariff is:

A restriction on the Limit on the amount of
A. B.
number of export firms imported goods

C. Tax and imports D. (b) and (c) of above

11. Dumping refers to:
Buying goods at low
prices abroad and Expensive goods selling
A. B.
selling at higher prices for low prices
locally

Sale of goods abroad

at low a price, below
C. Reducing tariffs D.
their cost and price
in home market

12. According to Hecksher and Ohlin basic cause of international

trade is:
A. Difference in factor B. Difference in markets
 endowments

Difference in political
C. D. Difference in ideology
systems

13. All are advantages of foreign trade EXCEPT:

People get foreign
A. B. Nations compete
exchange

Optimum utilisation of
C. Cheaper goods D.
country's resources

14. Two countries can gain from foreign trade if:

Cost ratios are Tariff rates are
A. B.
different different

Price ratios are

C. D. (a) and (c) of above
different

15. International trade and domestic trade differ because of:

A. Trade restrictions B. Immobility of factors

Different government
C. D. All of the above
policies

16. Terms of trade of developing countries are generally

unfavourable because:
They export primary They import value
A. B.
goods added goods

C. They export few goods D. (a) and (b) of above

17. Term of trade of a country show:
Ratio of goods
A. B. Ratio of import duties
exported and imported

Ratio of prices of
C. D. (a) and (c) of above
exports and imports

18. In a free trade world in which no restrictions exist,

international trade will lead to:
Reduced real living
A. B. Decreased efficiency
standard

C. Increased efficiency D. Reduced real GDP

19. Govt. policy about exports and imports is called:

A. Monetary policy B. Fiscal policy

C. Commercial policy D. Finance policy

20. What would encourage trade between two countries:

A. Different tax system B. Frontier checks

C. National currencies D. Reduced tariffs

21. "Terms of trade" between two countries refer to a ratio of:
Export prices to
A. B. Currency values
import prices

Balance of trade to
C. Exports to imports D.
balance of payments

22. What would encourage trade between two countries?

 A. Different tax system B. Quality control

C. Reduced tariffs D. Fixing import quotax

23. It is drawback of protection:

Consumers have to pay Producerrs get higher
A. B.
higher prices profits

Quality of goods may

C. D. All of the above
be affected

24. It is drawback of free trade:

A. B. Government looses
Prices of local goods
income from custom
rise
duties

National resources are

C. D. (a) and (b) of above
underutilized

25. Gold standard means:

Currency of the Paper currency is not
A. B.
country is made of gold used

C. Currency of the D. (a) and (c) of above

country is freely
convertible into gold

26. Terms of trade of a country:

Mean the trade Is another name of
A. agreement between B. exchange ratio of two
trading countries currencies
 Show the ratio Are determined by
between total export the price index of
C. D.
earnings and import export and import
bill of a country goods

27. Pakistan's terms of trade:

Have risen over past Have fallen over past
A. B.
few years few years

Always remain above Are determined by

C. D.
100 federal govt.

28. Exchange value of Pak rupee against other currencies has

fallen because:
Our total exports are Our imports are
A. B.
smaller more than exports

Exports are more than Pakistan does not

C. D.
imports produce gold

29. This is an advantage of foreign trade:

We can preserve our New technology
A. B.
natural resources comes to the country

People need not go We can get foreign

C. D.
abroad currencies

30. This is NOT an advantage of foreign trade:

We can get gold New technology comes
A. B.
from abroad to the country

C. We can import goods D. We can made best use

which are in short
 supply in Pakistan of natural resources
31. Foreign trade:
Increases employment Increases international
A. B.
opportunities mobility of labor

C. Increases competition D. All of the above

32. Foreign trade:
A. B. Benefits
Benefits developed
underdeveloped
countries
countries

Benefits democratic
C. D. Benefits all countries
countries

33. Foreign trade has the advantage:

Trading countries get Can import scarce raw
A. B.
foreign exchange materials

Can import machinery

C. D. (b) and (c) of above
and technology

34. In foreign trade, Protection policy means:

Restriction on transfer
A. Restrictions on exports B.
of foreign exchange

Restrictions on
C. D. All of the above
imports

35. If a country decreases the external value of its currency, it

will affect:
 A. Volume of exports B. Volume of imports

C. General price level D. All of the above

36. The theory explaining trade between two countries is called:

Comparative
A. B. Comparative bargain
advantage

C. Comparative trade D. Comparative returns

37. The theory explaining trade between two countries is called:

Comparative Comparative cost
A. B.
disadvantage theory theory

Comparative trade
C. D. None of the above
theory

38. Trade between two countries takes place when:

A. B. Cost ratios of
Cost ratios of
commodities are
commodities are equal
different

Cost ratios of Cost ratios of

C. D.
commodities are high commodities are low

39. David Ricardo presented the theory of international trade

called:
Theory of
Theory of absolute
A. B. comparative
advantage
advantage

C. Theory of equal D. Theory of total

 advantage advantage

40. Rich countries have deficit in their balance of payments:

A. Sometimes B. Never

C. Alternate years D. Always

41. Balance of payments means:
The balance of receipts The balance of receipts
A. and payments of all B. and payments of State
banks Bank

The balance of
receipts and
The balance of govt.
C. payments of foreign D.
receipts and payments
exchange by a
country

42. Pakistan is not a member of:

A. IMF B. ECO

C. OPEC D. World Bank

43. International trade is possible primarily through:

Generalization in Specialization in
A. B.
production of all goods production of one good

C. Specialization in D. All of the above

production of a few
goods

44. Pakistan imports some goods and exports other goods

primarily because of:
 Comparative
A. Free goods B.
advantage

C. Unemployment D. Self sufficiency

45. A country that does not trade with other countries is called:
A. Developed economy B. Closed economy

C. Independent economy D. None of the above

46. To increase exports, Pakistan must:

Improve quality of Decrease the value of
A. B.
goods its currency

C. Import cheap labour D. (a) and (b) of above

47. Policy of Protection in trade:

Protects foreign
A. Facilitates trade B.
producers

Protects local
C. D. Protects exporters
producers

48. Pakistan's exports mainly consists of products:

A. Semi-manufactured B. Primary goods
and manufactured
goods

C. Manufactured goods D. Food products

49. Pakistan's exports mainly consists of products:

A. Semi-manufactured B. Machinery
 C. Minerals D. Services

50. The largest item in our import list is:

A. Consumer goods B. Machinery

C. Petroleum D. Computers
51. Select the correct statement:
Pakistan's largest Pakistan's exports
A. item of import is B. mainly consist of low-
machinery value goods

Direction of trade Imports must be

C. means what goods are D. reduced as far as
being exported possible

52. Commercial policy means:

Policy about money
A. Policy about markets B.
supply

Policy about imports Policy for controlling of

C. D.
and exports prices of goods

53. Import of petroleum makes up Pakistan's total import bill:

A. 15% B. 25%

C. 35% D. 45%

54. The largest item of Pakistan's exports is:

A. Cotton B. Rice
 Ready made
C. Cotton yarn D.
garments

55. Largest share of Pakistan's exports go to:

A. China B. Japan

C. England D. USA

56. Pakistan's share in the world for cotton textiles is:

A. Less than 3% B. 10%

C. 20% D. 30%

57. Pakistan's:
A. Exports and increasing B. Imports and increasing

Exports and imports

C. D. All are true
are increasing

58. In Pakistan's foreign trade:

Exports are equal to Exports and greater
A. B.
imports than imports

Exports are less than Imports are three

C. D.
imports times of exports

59. Since 2005, custom duties have been reduced because of

international agreement under:
A. WTO B. IMF

C. World Bank D. (a) and (b) of above

60. Pakistan's exports mainly go to:
A. China B. Japan

C. Saudi Arabia D. USA

 importing competing sector may suffer from opening of trade due to
[Link] loss [Link] loss [Link]

 The only exception to the law of comparative advantage is when one

nation’s absolute disadvantage with respect to other nation is:
[Link] [Link] [Link]-directional

 A nation’s PPT and consumption frontier is…in the absence of trade:

[Link] [Link] out [Link]

 BOP provides a statistical summary of the size of int trade and int
Assets ownership for a country.
 Bulged nature of offer curve towards a specific commodity shows
an…………commodity???
 For a nation exporting Y and importing X,PX increased from Rs.100 to
[Link] terms of trade have:
[Link] [Link] [Link] effect

 A country can produce 10 units of watches(W) or 4 units of

cups(C) per day per [Link] terms of trade Pw/Pc is
equal to----?? 10/4

 Mercantilists advocated a strict …….control on economic activity for

purely benefiting from trade.

[Link] [Link] [Link]

 If a nation’s MRT is more than equilibrium relative commodity

price,this nation should------production to benefit from international
trade?
 [Link] [Link]

 A nation’s gains from trade can be broken down into?Exchange and

specialization
 According to Adam smith,trade b/w two nations is based on----------??
Absolute Advantage
 When one nation is more efficient than another in the production of
one commodity it has----------?? Absolute Advantage
 in the absolute advantage method the output of both commodities
will-----?? Rise
 Classical Economists believed that all nations would gain from free
trade and strongly advocated a policy of---------?? Laissez-
Faire(little govt interference with the economic system as possible)
 US UK

Wheat 6/h 1/h

Cloth 4/h 5/h

if the USA exchanges 6W for 6C,the USA gains--------??? 2C or saves ½

man-hour or 30 mint of labour.

 Who presented the law of comparative advantage-------?? David

Ricardo
 Wealth of Nations is written by---------?? Adam Smith
 if one nation is less efficient than the other nation in the production of
both commodities, there is still a basis for mutually beneficial trade.
This law is called-----??? Law of comparative Advantage
 One nation should export the commodity in which its Absolute
disadvantage is Smaller and import the commodity in which its
absolute disadvantage is Greater.
 The models of Absolute and Comparative Advantage show that the
gains from trade are increased consumption gained through
specialization in production and trade.
 Since payment for exports is made with precious metals, exporting
causes precious metals to flow into a country
 Since payment for imports is also made with precious metals,
importing causes precious metals to flow out of country.
 To Mercantilists, economic system as consisting of 3 components: a
manufacturing sector, a rural sector (domestic hinterland), and
the foreign colonies (foreign hinterland).
 a labor theory of value ; that is, commodities were valued relatively
in terms of their relative labor content.

Exports<Imports Exports>Imports
Net outflow of specie Net inflow of specie
Decrease in money supply Increase in money supply
Decrease in price and wages Increase in prices and wages
Decrease in imports and increase in Increase in imports and decrease in
exports exports

 Quantity theory of money when full employment is assumed:

MsV = PY

 Specialization and trade advantage both countries

#Implications of comparative advantage:

 Laissez-faire still holds
 Gains need not be equal
 Hours of work traded need not be equal but the
 advantage still exists
 Trade is based on the existence of relative – not absolute –
production advantages

 Opportunity cost holds that the cost of an item is the amount of

another item that must be given up to release sufficient resources to
produce one more unit of the first item.

 The production possibility frontier (PPF) identifies the maximum

combinations of two products that a nation can produce by fully
utilizing all factors of production with the best technology available.
A primary reason why nations conduct international trade is because:
a. Some nations prefer to produce one thing while others produce
another
*b. Resources are not equally distributed to all trading nations
c. Trade enhances opportunities to accumulate profits
d. Interest rates are not identical in all trading nations

A main advantage of specialization results from:

*a. Economics of large scale production
b. The specializing country behaving as a monopoly
c. Smaller production runs resulting in lower unit costs.
d. High wages paid to foreign workers

International trade in goods and services is sometimes used as a

substitute for all of the following except:
a. International movements of capital.
b. International movements of labor.
c. International movements of technology
*d. Domestic production of different goods and services

If a nation has an open economy it means that the nation:

a. Allows private ownership of capital.
b. Has flexible exchange rates
c. Has fixed exchange rates
*d. Conducts trade with other countries

International trade forces domestic firms to become more competitive

in terms of:
a. The introduction of new products
b. Product design and quality
c. Product price
*d. All of the above

The movement to free international trade is most likely to generate

short-term unemployment in which industries:
a. Industries in which there are neither imports nor exports
*b. Import-competing industries.
c. Industries that sell to domestic and foreign buyers
d. Industries that sell to only foreign buyers
International trade is based on the idea that:
a. Exports should exceed imports
b. Imports should exceed exports
c. Resources are more mobile internationally than are goods
*d. Resources are less mobile internationally than are goods

Arguments for free trade are sometimes disregarded by politicians

because:
a. Maximizing domestic efficiency is not considered important
*b. Maximizing consumer welfare may not be a chief priority
c. There exist sound economic reasons for keeping one’s economy
isolated from other
economies.
d. Economists tend to favor highly protected domestic markets

Which American industry has least been affected by import

competition in recent years:
a. Automobiles
b. Steel
c. Radios and TVs
*d. Computer software

The largest amount of trade with the United States in recent years
has been conducted by:
*a. Canada
b. Germany
c. Mexico
d. United Kingdom

Increased foreign competition tend to:

a. Intensify inflationary pressure at home
b. Induce falling output per worker-hour for domestic workers
*c. Place constraints on the wages of domestic workers
d. Increase profits of domestic import-competing industries

For the United States, exports plus imports are about ______ of its
gross nationalproduct:
a. 5 percent b. 10 percent
*c. 25 percent d. 55 percent
Major trading partners of the United States including all of the
following countries except:
a. Canada b. Mexico
c. China *d. North Korea

Free traders maintain that an open economy is advantageous in that

it provides all of the following except:
a. Increased competition for world producers
b. A wider selection of products for consumers
c. The utilization of the most efficient production methods
*d. Relatively high wages levels for all domestic workers

Recent pressures for protectionism in the United States have been

motivated by all of the
following except:
a. U.S. firms shipping component production overseas
*b. High profit levels for American corporations
c. Sluggish rates of productivity growth in the United States
d. High unemployment rates among American workers

International trade tends to cause welfare losses to at least some

groups in a country
*a. The less mobile the country’s resources
b. The more mobile the country’s resources
c. The lower the country’s initial living standard
d. The higher the country’s initial living standard

For the United States, automobiles are:

a. Imported, but not exported b. Exported, but not imported
*c. Exported and imported d. Neither imported not
exported

A feasible effect of international trade is that a (an):

*a. Monopoly in the home market becomes an oligopoly in the
world market
b. Oligopoly in the home market becomes a monopoly in the world
market
c. Purely competitive firm in the home market becomes an oligopolist
d. Purely competitive firm in the home market becomes a monopolist
International trade in goods and services tends to:
a. Increase all domestic costs and prices
b. Keep all domestic costs and prices at the same level
c. Lessen the amount of competition facing home manufacturers
*d. Increase the amount of competition facing home
manufacturers

The real income of domestic producers and consumers can be

increased by:
a. Technological progress, but not international trade
b. International trade, but not technological progress
*c. Technological progress and international trade
d. Neither technological progress nor international trade

For the United States, commercial jetliners are:

a. Imported, but not exported
b. Exported, but not imported
*c. Imported and exported
d. Neither exported nor imported

Technological improvements are similar to international trade since

they both:

a. Provide benefits for all producers and consumers

*b. Increase the nation’s aggregate income
c. Reduce unemployment for all domestic workers
d. Ensure that industries can operate at less than full capacity

A sudden shift from import tariffs to free trade may induce short-term
unemployment in:
*a. Import-competing industries
b. Industries that are only exporters
c. Industries that sell domestically as well as export
d. Industries that neither import nor export

A reduced share of the world export market for the United States
would be attributed to:
*a. Decreased productivity in U.S. manufacturing
b. High incomes of American households
 c. Relatively low interest rates in the United States
d. High levels of investment by American corporations

The most recent wave of globalization, which began in the 1980s, has
emphasized the outsourcing of:
*a. services and white-collar jobs
b. manufacturing and blue-collar jobs
c. natural resource extraction and mining jobs
d. agriculture and farming jobs

A country’s openness to international trade can be measured by the

formula:
a Exports + Imports + GDP
b. Exports – Imports – GDP
c. (Exports + Imports) / GDP
d. (Exports + Imports) X GDP

Foundations of Modern Trade Theory

#Use the information in the table below to answer the next six questions.
Country Tons of steel DVDs
South Korea 80 40
Japan 20 20

The opportunity cost of one DVD in Japan is:

*a. One ton of steel b. Two tons of steel
c. Three tons of steel d. Four tons of steel

The opportunity cost of one DVD in South Korea is:

a. One-half ton of steel
b. One ton of steel
c. One and one-half tons of steel
*d. Two tons of steel
According to the principle of absolute advantage; Japan should:
a. Export steel
b. Export DVDs
c. Export steel and DVDs
*d. There is no basis for gainful specialization and trade
According to the principle of comparative advantage:
*a. South Korea should export steel
b. South Korea should export steel and DVDs
c. Japan should export steel
d. Japan should export steel and DVDs

With international trade, what would be the maximum amount of steel that
South Korea would
be willing to export to Japan in exchange for each DVD
a. One-half ton of steel
b. One ton of steel
*c. Two tons of steel
d. Two and one-half tons of steel

With international trade, what would be the maximum number of DVDs that
Japan would be
willing to export to South Korea in exchange for each ton of steel:
*a. One DVD b. Two DVDs
c. Three DVDs d. Four DVDs

The earliest statement of the principle of comparative advantage is

associated with:
a. Adam Smith
*b. David Ricardo
c. Eli Heckscher
d. Bertil Ohlin

If Hong Kong and Taiwan have identical production possibilities curves that
are subject to increasing opportunity costs:
*a. Trade would depend on differences in demand conditions
b. Trade would depend on economies of large-scale production
c. Trade would depend on the use of different currencies
d. There would be no basis for gainful trade

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

International trade is based on the notion that:

a. Different currencies are an obstacle to international trade
*b. Goods are more mobile internationally than are resources
c. Resources are more mobile internationally that are goods
d. A country’s exports should always exceeds its imports

Mercantilism
a. Is the philosophy of free international trade.
*b. Was a system of export promotion and barriers to imports
practiced by governments.
c. Was praised by Adam Smith in The Wealth of Nations.
d. Both (a) and (c).

The classical trade theories of Smith and Ricardo predict that

a. Countries will completely specialize in the production of export goods.
b. Considerable trade will occur between countries with different levels of
technology
c. Small countries could obtain all of the gains from trade when trading with
large countries
*d. All of the above.

The gains from international trade are closely related to:

a. The labor theory of value
*b. How much the autarky price differs from international terms of
trade change
c. The fact that a country must lose from trade.
d. All of the above

According to the classical theory of international trade:

a. Only countries with low wages will export
b. Only countries with high wages will import
c. Countries with high wages will have higher prices
*d. All the above are false

In the classical model of Ricardo, the direction of trade is determined by:

a. absolute advantage
*b. comparative advantage
c. physical advantage
d. which way the wind blows

Absolute advantage is determined by:

*a. actual differences in labor productivity between countries.
b. relative differences in labor productivity between countries.
c. both (a) and (b)
d. neither (a) nor (b)

Comparative advantage is determined by:

a. actual differences in labor productivity between countries.
*b. relative differences in labor productivity between countries.
c. both (a) and (b)
d. neither (a) nor (b)

#Answer the next five questions based on the production table below.
Country: Output per Labor Hour
A B
Product X 3 9
Product Y 4 2
Country A has an absolute advantage in
a. Product X
*b. Product Y
c. Neither X nor Y
d. Both X and Y
Country B has an absolute advantage in
*a. Product X
b. Product Y
c. Neither X nor Y
d. Both X and Y

If the countries were to trade along the lines of absolute advantage:

a. A would export X to B
*b. B would import Y from A
c. Neither country would want to trade

If countries were to trade along the lines of comparative advantage:

a. A would export X to B
*b. A would export Y to B
c. Neither country would want to trade
In autarky, the relative price of X, in terms of Y, in A would be:
a. 1/2 Y b. 3/4 Y
c. 1 Y *d. 4/3 Y

#Answer the next five questions based on the production table below.
Country: Output per Labor Hour
A B
Beer 3 9
Wine 1 2
Country A has an absolute advantage in:
a. Beer b. Wine
c. Both products *d. Neither products

In autarky, the relative price of wine, in terms of beer, in Country A is:

a. 1W = 1B b. 1W = 2B
*c. 1W = 3B d. 1W = 1/3B

In autarky, the relative price of wine, in terms of beer, in Country B is:

a. 1W = 3B *b. 1W = 4 1/2 B
c. 1W = 5B d. 1W = 6B

Country A has the comparative advantage in:

*a. Wine b. Beer
c. Both wine and beer d. Neither wine nor beer

Country B has the comparative advantage in:

a. Wine
*b. Beer
c. Both wine and beer
d. Neither wine nor beer

#Answer the next four questions based on the production possibilities

diagram below:
The relative price (MRT) of S in terms of T i:
a. 2 *b. ½
c. 00 d. 1000

The relative price (MRT) of T in terms of S is:

*a. 2 b. ½
c. 500 d. 1000

If the relative price (MRT) of S were to increase, then the price line would:
a. shift out in a parallel fashion.
b. shift in a parallel fashion.
*c. Become steeper.
d. Become flatter.

If the relative price (MRT) of T were to increase, then the price line would:
a. shift out in a parallel fashion.
b. shift in a parallel fashion.
c. become steeper.
*d. become flatter.

If a country has a bowed out (concave to the origin) production possibility

frontier, then
production is said to be subject to:
a. constant opportunity costs.
b. decreasing opportunity costs.
c. first increasing and then decreasing opportunity costs.
*d. increasing opportunity costs.
If a country has a linear (downward sloping) production possibilities frontier,
then production is said to be subject to:
*a. constant opportunity costs.
b. decreasing opportunity costs.
c. first increasing and then decreasing opportunity costs.
d. increasing opportunity costs.

The terms of trade is given by the prices:

a. Paid for all goods exported by the home country.
b. Received for all goods exported by the home country.
*c. Received for exports and paid for imports.
d. Of primary products as opposed to manufactured products.

#Given the terms of trade information in the table below, answer the
next three questions:
Export Price Index Import Price Index
Nation 1990 2000 1990 2000
Mexico 100 220 100 200
Sweden 100 160 100 150
Spain 100 155 100 155
France 100 170 100 230
Denmark 100 120 100 125

Which countries’ terms of trade improved between 1990 and 2000.

a. Mexico and Denmark
b. Sweden and Denmark
c. Sweden and Spain
*d. Mexico and Sweden

Given free trade, small nations tend to benefit the most from trade since
they:
a. Are more productive than their large trading partners.
b. Are less productive than their large trading partners.
c. Have demand preferences and income levels lower than their large
trading partners.
*d. Realize terms of trade lying near the MRTs of their large trading
partners.

In autarky, when a community maximizes its standard of living, its

production and consumption point is:
a. below the production possibility frontier.
*b. on the production possibility frontier.
c. above the production possibility frontier.
d. can’t tell without more information.

In autarky equilibrium,
a. production equals consumption.
b. exports equal imports.
c. there is no trade.
*d. all of the above.

In autarky, when a community maximizes its standard of living, its

production point is:
a. below the production possibility frontier.
*b. on the production possibility frontier.
c. above the production possibility frontier.
d. can’t tell without more information.

If the autarky price of S were lower in country A than in country B, then if

trade were allowed:
*a. A would likely export S to B.
b. A would likely import S from B.
c. neither country would want to trade.
d. none of the above.

Under free trade, Canada would not realize any gains from trade with
Sweden if Canada:
*a. Trades at Canada’s marginal rate of transformation.
b. Trades at Sweden’s marginal rate of transformation.
c. Specializes completely in the production of its export good.
d. Specializes partially in the production of its export good.

John Stuart Mill was the founder of the

*a. Theory of reciprocal demand
b. Theory of absolute advantage
c. Theory of comparative advantage
d. Theory of mercantilism

Dynamic gains from trade could result from

a. The stimulus of additional investment spending as markets open
b. Economies of large scale production as markets open
c. Additional competition made possible by the opening of markets
*d. All of the above

G. MacDougall compared export ratios and labor productivity ratios for the
United States and the United Kingdom in order to test the
*a. Ricardian theory of comparative advantage
b. Heckscher Ohlin theory of comparative advantage
c. Linder theory of overlapping demand
d. all of the above

G. MacDougall showed in his tests that

a. relatively higher U.S. labor productivity was associated with relatively
higher U.K.
export ratios
*b. relatively higher U.K. labor productivity was associated with
relatively higher U.K.
export ratios
c. labor productivity ratios and export ratios were not associated with each
other.
d. none of the above

G. MacDougall’s empirical results can be interpreted as

a. evidence against the classical model
b. evidence against the Heckscher-Ohlin model
*c. support for the Ricardian model
d. support for the Heckscher-Ohlin model

IMF An organization set up in 1944 to lower trade

barriers between countries and to
stabilize currencies by monitoring the foreign
exchange systems of member countries,
and lending money to developing nations.

The Heckscher-Ohlin theory explains comparative advantage as the result

of differences in countries’:
a. Economies of large-scale production.
*b. Relative abundance of various resources.
c. Relative costs of labor.
d. Research and development expenditures.
The factor endowment model of international trade was developed by
a. Adam Smith b. David Ricardo
c. John Stuart Mill *d. Eli Heckscher and Bertil Ohlin

Should international transportation costs decrease, the effect on

international trade would include a (an):
*a. Increase in the volume of trade
b. Smaller gain from trade
c. Decline in the income of home producers.
d. Decrease in the level of specialization in production
.
Dynamic comparative advantage theory:
*a. helps explain why some nations use industrial policy to support
potentially competitive
new firms
b. cannot explain strategic competition between firms such as Boeing and
Airbus
c. is another name for Ricardo’s comparative advantage theory

The NAFTA is a:
a. monetary union
*b. free trade area
c. common market
d. customs union

NAFTA stands for-------??? The North American Free Trade

Agreement

NAFTA was implemented in order to promote trade between the U.S.,

Canada, and Mexico.(1994-2008)

The European Union is an example of a/an

a. customs union
b. economic union
*c. common market
d. free trade area

 iphone is an example of---------??? international trade

 International economics is about how nations interact through trade
of goods and services, through flows of money and through
investment.

 Foreign stock ownership, Automobile assembly plants,Toyota,US

government debt are examples of----??? International ownership
of assets
 The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade between
nations. 

 The International Economy generates Interdependence.

 The international trade theory Analyzes the basis of and the gains
from international trade,Focuses on the microeconomic aspects of
the international economy.
 Examines the reasons for and the effects of restrictions on
international trade--------?? International Trade Policy
 A summary statement of all the international transactions of the
residents of a nation with the rest of the world during a particular
period of time, usuallya year-------??? BOP

 The institutional framework for the exchange of one national currency

into another-----??Foreign Exchange Markets

 High Structural Unemployment and Slow Growth in Europe and

Stagnation in Japan.

 Increasing international economic connections----??Globalization

 Exports goods which use abundant resources and imports goods

which use scarce resources.
 Trade may therefore have effects on the distribution of income
within a country.
 Trade under tariffs, though worse than free trade, is better than
autarky

 Free Trade is best. Export Subsidy is better (worse)than Autarky

when G is bigger (smaller) than D.
 Interindustry trade depends on differences across countries.

 Intraindustry trade depends on market size and occurs among

similar countries.

 Advanced countries’ policies engage in industrial targeting.

 Developing countries’ policies promote industrialization:

 tariffs: a tax on imports or exports,

 quotas: a quantity restriction on imports or exports,
 export subsidies: a payment to producers that export,

 transactions usually involve a physical movement of goods or a

commitment of tangible resources like labor services.

 Increasing cost production possibilities frontier is concave to the

origin

 The marginal rate of transformation is another name for opportunity

cost.

 A community indifference curve shows combinations of two

commodities that yield equal satisfaction to the community or nation.

 The MRS of X for Y in consumption is the amount of Y that a nation

could give up for one extra unit of X and still remain on the same
indifference curve.

 The equilibrium-relative commodity price in isolation = slope of

tangency between PPF and indifference curve at autarky point of
production and consumption.

 Each nation should specialize in the commodity they can produce at

the lowest relative price.
 Specialization will continue until relative prices equalize between
nations.

 Equilibrium-relative commodity price with trade = common

relative price at which trade is balanced.

 Balanced trade: quantity of X (Y) Nation 1(2) wants to export =

quantity of X(Y) Nation 2(1)wants to import.

 Under constant cost conditions, specialization is complete.

 Under increasing cost conditions, specialization is incomplete:

 Nation with relatively smaller demand for X will have a lower autarky
relative price for, and comparative advantage, in X.

 A value of less than unity implies that the country has a revealed
comparative disadvantage in the product.

 Similarly, if the index exceeds unity, the country is said to have a

revealed comparative advantage in the product