Economics of International Trade and Policy Test
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Course Introduction
This course explores the fundamental theories and contemporary issues in international trade and the economic policies that influence global commerce. Students will examine why countries trade, the effects of trade on income distribution and economic growth, and the roles of comparative advantage, tariffs, quotas, and international agreements. The course also analyzes the impact of globalization, trade policies, and institutions such as the World Trade Organization, considering both developed and developing economies. Through real-world case studies and empirical data, students gain insights into how governments formulate trade policy, address trade imbalances, and respond to economic challenges in an increasingly interconnected world.
Recommended Textbook
International Economics Theory and Policy 11th Edition by Paul R Krugman
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Chapter 1: Introduction
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Q1) The balance of payments has become a central issue for the United States because
A) when the balance of payments is not balanced, society is unbalanced.
B) the U.S. economy cannot grow when the balance of payments is in deficit.
C) the U.S. has run huge trade deficits in every year since 1982.
D) the U.S. never experienced a surplus in its balance of payments.
E) the U.S. once ran a large trade surplus of about $40 billion.
Answer: C
Q2) The study of exchange rate determination is a relatively new part of international economics, since
A) for much of the past century, exchange rates were fixed by government action.
B) the calculations required for this were not possible before modern computers became available.
C) economic theory developed by David Hume demonstrated that real exchange rates remain fixed over time.
D) dynamic overshooting asset pricing models are a recent theoretical development.
E) the exchange rate never fluctuates.
Answer: A
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Chapter 2: World Trade: an Overview
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Q1) In the present, most of the exports from China are
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.
Answer: A
Q2) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United States than with many other countries.
A) This is explained by the gravity model, since these are all large countries.
B) This is explained by the gravity model, since these are all small countries.
C) This fails to be consistent with the gravity model, since these are small countries.
D) This fails to be consistent with the gravity model, since these are large countries.
E) This is explained by the gravity model, since they do not share borders.
Answer: C
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Chapter 3: Labor Productivity and Comparative Advantage: the Ricardian
Model
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Q1) When compared with China, the growth of clothing exports originating in Bangladesh is the result of
A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing for export.
Answer: A
Q2) Given the information in the table above, Foreign's opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
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Chapter 4: Specific Factors and Income Distribution
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Q1) In the four-quadrant diagram of the specific factors model, the graph in the lower right quadrant is a country's
A) production function for food.
B) production possibility frontier.
C) labor supply curve.
D) labor allocation constraint.
E) production function for cloth.
Q2) In the specific factors model, a country's production possibility frontier is ________ because of ________.
A) a straight line; diminishing marginal returns
B) a curved line; diminishing marginal returns
C) a straight line; constant marginal returns
D) a curved line; constant marginal returns
E) a curved line; a limited supply of labor
Q3) The specific factors model was developed by
A) Adam Smith and David Ricardo.
B) C.B. deMille and Gordon Willis.
C) Paul Samuelson and Ronald Jones.
D) Bill Clinton and Monica Lewinsky.
E) Richard Nixon and Robert Kennedy.
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Q1) Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin Theory
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.
Q2) If a good is labor intensive it means that the good is produced
A) using relatively more labor than goods that are not labor intensive.
B) using labor as the only input.
C) using more labor per unit of output than goods that are not labor intensive.
D) using labor such that the total cost of labor is greater than the total cost of capital.
E) using labor such that the cost of labor is more than 50% of total cost.
Q3) Trade benefits a country by
A) increasing available consumption choices.
B) reducing the relative price of the exported good.
C) increasing the wage rate.
D) increasing the real income of all resource owners.
E) reducing the need for specialization in production.
Page 7
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Chapter 6: The Standard Trade Model
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Q1) If Slovenia is a small country in world trade terms, then if it imposes a large series of tariffs on many of its imports, this would
A) decrease its marginal propensity to consume.
B) deteriorate its terms of trade.
C) increase its exports.
D) have no effect on its terms of trade.
E) improve its terms of trade.
Q2) A fall in the real interest rate, all other things held constant, will cause a country's ________ to ________.
A) current consumption: decrease B) welfare level; improve
C) current consumption: increase
D) terms of trade; worsen
E) terms of trade; improve
Q3) Describe the nature of trade between two countries based on intertemporal comparative advantage.
Q4) Other things being equal, a rise in a country's terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) In the presence of external economies of scale, trade
A) will unambiguously improve welfare in both countries.
B) will unambiguously worsen welfare in the exporting country and improve welfare in the importing country.
C) may or may not improve welfare in both countries.
D) will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.
E) will unambiguously worsen welfare in both countries.
Q2) The Internet has made transactions between businesses (B2B trading) fast and easy. Any business in any location can access specialized knowledge, labor, and materials. It is likely that these virtual economic communities will result in
A) consolidation of industries into a small number of powerful firms.
B) internal economies of scale.
C) suppression of innovations and collusive behavior, driving up prices.
D) government intervention and regulation.
E) external economies of scale.
Q3) Why is it that if an industry is operating under conditions of internal scale economies then the resultant equilibrium cannot be consistent with the pure competition model?
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Sample Questions
Q1) An industry is characterized by scale economies and exists in two countries. In order for consumers of its products to enjoy both lower prices and more variety of choice
A) the two countries must engage in international trade with each other.
B) each country's marginal cost must equal that of the other country.
C) the monopoly must lower prices in order to sell more.
D) they must combine to become a multinational corporation.
E) the marginal cost of this industry must equal marginal revenue in the other.
Q2) Refer to above figure. While selling exports it would also maximize its domestic sales by equating its marginal (opportunity) cost to its marginal revenue of $5. How much steel would the firm sell domestically, and at what price?
Q3) What are the consequences of outsourcing production on the welfare of countries?
Q4) A firm in long-run equilibrium under monopolistic competition will earn
A) positive oligopoly profits because each firm sells a differentiated product.
B) zero economic profits because of free entry.
C) negative economic profits because it has economies of scale.
D) positive economic profit if it engages in international trade.
E) positive monopoly profits because each sells a differentiated product.
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Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets consumed domestically?
Q2) Tariffs are NOT defended on the grounds that they
A) improve the terms of trade of foreign nations.
B) protect jobs and reduce unemployment.
C) promote growth and development of young industries.
D) prevent over-dependence of a country on only a few industries.
E) protect domestic producers from foreign low prices.
Q3) The principle benefit of tariff protection goes to
A) domestic consumers of the good produced.
B) foreign consumers of the good produced.
C) domestic producers of the good produced.
D) foreign producers of the good produced.
E) the domestic government.
Q4) Some argue that tariffs always hurt the imposing country's economic welfare, and are typically designed to shift resources from one sector to another, protected or preferred one, within an economy. Find and discuss a counter example to this argument.
Q5) Refer to above figure. In the absence of a tariff and in the presence of trade, what is the country's consumer surplus?
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Chapter 10: The Political Economy of Trade Policy
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Q1) The World Trade Organization provides for all of the following EXCEPT
A) the usage of the most favored nation clause.
B) assistance in the settlement of trade disagreements.
C) bilateral tariff reductions.
D) multilateral tariff reductions.
E) the prevention of nontariff interventions in trade.
Q2) The political wisdom of choosing a tariff acceptable to the median U.S. voter is
A) a good example of the principle of the second best.
B) a good example of the way in which actual tariff policies are determined.
C) a good example of the principle of political negotiation.
D) not evident in actual tariff determination.
E) usually evident in actual tariff determination.
Q3) The optimum tariff is most likely to apply to
A) a small tariff imposed by a small country.
B) a small tariff imposed by a large country.
C) a large tariff imposed by a small country.
D) a large tariff imposed by a large country.
E) an ad valorem tariff on a small country.
Q4) Refer to above figure. What is the revenue gain or loss for Europe as a whole (including taxpayers)?
Page 12
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Chapter 11: Trade Policy in Developing Countries
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Q1) The infant industry argument is that
A) comparative advantage is irrelevant to economic growth.
B) developing countries have a comparative advantage in agricultural goods.
C) developing countries have a comparative advantage in manufacturing.
D) developing countries have a potential comparative advantage in manufacturing.
E) developing countries have no chance to compete with industrialized countries.
Q2) Taiwan and South Korea are examples of developing nations that have recently pursued these industrialization policies:
A) import substitution.
B) export promotion.
C) commercial dumping.
D) multilateral contract.
E) trade embargoes.
Q3) The imperfect capital market justification for infant industry promotion
A) assumes that new industries will tend to have low profits.
B) assumes that infant industries will soon mature.
C) assumes that infant industries will be in products of comparative advantage.
D) assumes that banks can allocate resources efficiently.
E) assumes that developing country will reward the donor country.
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Chapter 12: Controversies in Trade Policy
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Q1) Labor standards in trade are typically opposed by most developing countries who believe that they will be used
A) to further neo-imperialist colonial exploitation.
B) to charge these countries with crimes against child-labor standards at the Hague.
C) as a protectionist tool by import-competing producers in industrial countries.
D) as a means of spreading U.S. Corporate Values and destroying local cultures.
E) to hinder investment in foreign-based multinational corporations.
Q2) The fact that articles of clothing sold in Walmart are produced by very poorly paid workers in Honduras, is a fact that if taken into account
A) would prove to economists that the Ricardian model of comparative advantage is false.
B) would prove to economists that the equal-value in trade concept summed up in the trade triangles is incorrect.
C) proves to economists that trade is a negative sum game.
D) proves to the Anti-Globalization Movement that trade is a negative sum game.
E) proves that corporations are exempt from labor standards.
Q3) What is a pollution haven?
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Chapter 13: National Income Accounting and the Balance of Payments
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Q1) In the United States over the past sixty years, the fraction of GNP devoted to consumption has fluctuated in a range of about
A) 42 to 49 percent.
B) 32 to 39 percent.
C) 22 to 29 percent.
D) 82 to 89 percent.
E) 62 to 70 percent.
Q2) Government transfer payments like social security and unemployment benefits are
A) included in government purchases.
B) not included in government purchases.
C) not included in government purchases, but they are included in the consumption component of GNP.
D) not included in government purchases, but they are part of the investment component of GNP.
E) included in government purchases but not in the GNP.
Q3) What types of international transactions are recorded in the balance of payment accounts?
Q4) "If the simple rule of double-entry bookkeeping holds true, the Balance of payments is always in balance." Discuss.
Page 15
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: an Asset Approach
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Q1) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per one British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 62.5 dollars
E) 40 British pounds
Q2) Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium.
Q3) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.50 dollars per one British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 80 dollars
E) 75 dollars
Q4) Explain what is a "vehicle currency." Why is the U.S. dollar considered a vehicle currency?
Page 16
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Chapter 15: Money, Interest Rates, and Exchange Rates
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Q1) The aggregate money demand depends on
A) the interest rate.
B) the price level.
C) real national income.
D) the interest rate, price level, and real national income.
E) the price level and the liquidity of the asset.
Q2) In Zimbabwe, the government stopped the country's hyperinflation by
A) reducing domestic monetary growth drastically.
B) returning to a gold/silver currency standard.
C) switching to foreign currencies that are relatively stable.
D) passing a law making price increases illegal.
E) implementing a new currency based on diamonds.
Q3) Explain the exchange rate over-shooting hypothesis.
Q4) What are the main functions of money?
Q5) The aggregate demand for money can be expressed by
A) Md = P × L(R,Y).
B) Md = L × P(R,Y).
C) Md = P × Y(R, L).
D) Md = R × L(P,Y).
E) Md = R × L(R, P).
Page 17
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Which of the following statements is the MOST accurate?
In general, under the monetary approach to the exchange rate
A) while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.
B) while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate.
C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.
D) the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate.
E) while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.
Q2) Discuss the relationship between PPP and the Law of One Price.
Q3) What are the predictions of the PPP theory with regards to the real exchange rates?
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) In the short run, an increase in government purchases will cause
A) a shift of the DD curve to the left and an increase in output.
B) a shift of the DD curve to the right and a decrease in output.
C) a shift of the DD curve to the left and a decrease in output.
D) a shift of the DD curve to the right and an increase in output.
E) a shift of the DD curve the left and an appreciation of the currency.
Q2) A permanent increase in the domestic money supply
A) must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must rise proportionally.
B) must ultimately lead to a proportional decrease in E, and, therefore, the expected future exchange rate must decrease proportionally.
C) must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise proportionally.
D) must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise more than proportionally.
E) must ultimately lead to a proportional rise in E, and, therefore, the expected future exchange rate must rise less than proportionally.
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) Please discuss the difference between the terms devaluation and depreciation.
Q2) Under fixed exchange rate, in general which one of the following statements is the MOST accurate?
A) The following condition should hold for domestic money market equilibrium: M /P = L(R*, Y).
B) The following condition should hold for domestic money market equilibrium: M /P = L(R*, Y).
C) The following condition should hold for domestic money market equilibrium: M = L(R*, Y).
D) The following condition should hold for domestic money market equilibrium: P = L(R*, Y).
E) The following condition should hold for domestic money market equilibrium: R*M /P = L(Y).
Q3) Please define and give an example of sterilized foreign exchange intervention.
Q4) Under fixed exchange rate, in general
A) the domestic and foreign interest rates are equal, R = R*.
B) R = R + (E - E)/E.
C) the foreign and domestic interest rates are unequal.
D) the expected rate of domestic currency depreciation is high. E) the expected rate of currency depreciation is one.
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Chapter 19: International Monetary Systems: an Historical Overview
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Q1) A person holding dollar deposits during the devaluation of the dollar would
A) enjoy a monetary gain.
B) see the foreign currency value of dollar assets increase by the amount of the exchange rate change.
C) shift their wealth into domestic investments.
D) suffer a monetary loss and see the foreign currency value of dollar assets decrease by the amount of the exchange rate change.
E) see no change in their investments.
Q2) Under the fixed rate regime foreign countries could hold their dollar exchange rates constant by
A) using tight monetary policy.
B) using expansionary fiscal policy.
C) negotiating with the central bank of the United States.
D) setting their domestic interest rate equal to the U.S. interest rate.
E) holding their exchange rates constantly pegged to the euro and yen.
Q3) What is a convertible currency?
Q4) Imagine a world with two large countries, Home and Foreign. Evaluate how Home's macroeconomic policies affect Foreign. Compare the small and the large country cases; consider both permanent monetary and fiscal policies.
Page 21
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Q1) Suppose the two countries can trade shares in the ownership of their perspective assets. Further assume that a Home owner owns a 25 percent share in Foreign land. He will receive 25 percent share in Foreign land and thus receives 25 percent of the annual Foreign kiwi fruit harvest. Further assume also that a Foreign owner of a 25 percent share in Home land is permitted. In this case, a Foreigner is entitled to 25 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor.
Q2) Offshore banking can take place at which institution?
A) agency office only
B) subsidiary bank only
C) foreign bank only
D) subsidiary bank and foreign bank
E) agency office, subsidiary bank, and foreign branch
Q3) What do you expect would be the effects of 9/11 on the size of the Eurocurrency markets?
Q4) Suppose that trade in asset is not allowed but the two countries sign a treaty that guarantees the sending of 25 tons of kiwi in good time by the high output country in that season. What will the outcome be of such a treaty? Explain why.
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) An inflation-prone country
A) gains from vesting its monetary policy decisions with a "conservative" central bank.
B) loses from vesting its monetary policy decisions with a "conservative" central bank.
C) gains from vesting its fiscal policy decisions with a "conservative" central bank.
D) loses from vesting its fiscal policy decisions with a "conservative" central bank.
E) remains constant when vesting its fiscal policy decisions with a "conservative" central bank.
Q2) Explain why the EMS countries decided to fix their exchange rates against the German DM.
Q3) The European Central Bank has its headquarter in
A) London.
B) Berlin.
C) Frankfurt.
D) Paris.
E) Brussels.
Q4) What event in 2009 ignited the euro crisis?
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) The term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used to describe what?
A) low-income economy
B) developing countries' inability to borrow in their own currencies
C) a sin that is part of the Ten Commandments
D) borrows not able to receive loans
E) not diversifying economies portfolios
Q2) How would you define exchange control?
A) The government allocates foreign exchange through decree rather than through the market.
B) a country NOT pegging its exchange rate
C) a country pegging its exchange rate
D) a country buying up excess current account so that CA=0
E) a country restricting all foreign exchange
Q3) Explain the basic macroeconomic policy trilemma for open economies.
Q4) "Developing countries should delay opening the capital account until the domestic financial system is strong enough to withstand the sometimes violent ebb and flow of world capital." Discuss.
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Q5) How was South Korea able to become one of the East Asian Economic Miracles?
Q6) What factors lie behind capital inflows to the developing world?
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